Selling a Food and Beverage Manufacturer

What a buyer is paying for

The first thing a buyer looks at is the product line and what each item earns. They will want sales and gross margin by product, by customer and by sales channel, because a line that looks healthy in total can hide a best seller carrying several items that lose money once ingredients, packaging, freight and promotions are counted. Gross margin here means what is left after the direct cost of making and shipping the product. Buyers ask for it item by item, and many owners find they have never seen it that way.

Next they look at where the product sells. Grocery chains, natural food stores, club stores, restaurants and food service distributors, direct to consumer through a website, and private label for another brand all behave differently. Retail accounts usually come with fees to get on the shelf, promotions that cost margin and chargebacks for deliveries that miss a window. Food service accounts are steadier and thinner. A buyer reads how much of your revenue comes from the largest accounts and how long each has been buying. A single chain that accounts for most of your sales can leave when its buyer changes, and the buyer of your business will price that risk. Our post on customer concentration covers it.

Brand matters in a different way for each kind of maker. A recognized brand with loyal repeat buyers, a following online and a place in the cooler or on the shelf is worth more than a similar product with no name behind it. A company that makes product under contract for other brands is valued more on its plant, its capacity and its certifications than on a brand at all.

The recipe, the formula and who knows it

Formulas are an asset, and a buyer will ask where they are written and who holds them. If the recipe lives with the owner or a single head of production, the business has a risk that no price will fix. Document formulas, process steps, ingredient specifications and the approved suppliers for each. Write down the tests that confirm a batch is right. If you use a co-manufacturer for part of your production, a buyer will read that agreement to see whether the formulas belong to you and what happens to your capacity if the co-manufacturer is sold or changes terms.

Trademarks, trade names, packaging designs and any patents or trade secrets should be registered or documented in the company's name. A common finding in diligence is that the brand name was registered by the founder personally, or a designer who made the label never signed anything transferring the artwork. Fix those before a buyer finds them.

The plant and the audit record

Food and beverage plants are inspected, and the record of those inspections is a major part of the file. A buyer will ask for inspection reports from the agencies that cover your product, third-party audit certificates if your customers require them, your food safety plan, sanitation records, allergen controls, pest control logs, temperature logs, supplier approvals and records of any recall or withdrawal. A clean history tells a buyer that the plant is run the way you say it is. A history with repeated findings tells them to bring a lawyer and a budget for fixes.

Equipment gets its own list. Mixers, kettles, fillers, labelers, ovens, freezers, conveyors, packaging lines, boilers and refrigeration, with age, condition, capacity and any loans against them. Buyers want to know how much of the plant's capacity you use today. A plant running at nearly full capacity may need new investment to grow, while a plant with room to spare gives a buyer a path to grow the revenue without new equipment. They also need to know which machines are specialized to your products and which could run something else.

If the building is leased, the term and renewal options matter as much as in any other business, because a food plant cannot be moved easily. It has drains, power, refrigeration and sometimes permits tied to that exact address. Our post on the lease as part of the deal explains how landlord consent tends to go.

Costs that move the earnings

Ingredient prices, packaging, freight and energy swing year to year, and a buyer will study how your margin held up when costs rose. Did you pass increases on to customers, and how fast? Do you buy under contract or on the open market? Do you rely on one supplier for a key ingredient? A sound answer is a supplier list with backups. A weak one is a single farm or distributor with no written terms.

Inventory counts for a lot in this industry. Raw ingredients, packaging, work in process and finished goods all sit on the balance sheet, and some of them expire. A buyer will check the age of inventory, the write-offs you have taken and the method you use to value it. Inventory counted at closing becomes part of the price, so agree early on how it will be counted and what will be excluded as expired or damaged. See our post on earnouts, holdbacks and working capital for how that adjustment is usually set.

Add-backs, the personal or one-time expenses an owner can show are not part of normal operations, are common in food companies. Product samples, a vehicle, family on payroll and trade show travel are examples. Our post on add-backs lists what a buyer tends to accept.

What has to transfer

Operating permits and registrations from food safety agencies are usually tied to the facility and the operator, and a new owner often has to apply or notify. Third-party audit certificates may need to be reissued. Retail and distributor agreements frequently require consent or a new vendor setup, and a retailer's buyer may use that moment to renegotiate. Supplier accounts, co-manufacturer agreements, equipment leases, software licenses and the lease on the building all need review for assignment clauses. Rules vary by state and your attorney confirms what applies to your products and your plant.

Employees matter in a plant. A production manager, a quality lead and the maintenance person who keeps the line running are people a buyer wants to keep. Think about how and when to tell them, and read our post on when to tell employees.

What tends to sink these sales

In most of the manufacturer deals we see, the problems are familiar. A retail chain announces that it is dropping the product line during the sale process. An audit turns up findings that nobody fixed. The books show margins the buyer cannot reproduce from product level data. Inventory is worth less than the book value. The founder's name is on the trademark. A co-manufacturer will not agree to keep the same terms. Or the owner is the recipe, the salesperson and the face of the brand at once, and the buyer cannot see how the business works without them.

Getting ready

Build a product level margin report and be prepared to defend each number. Write the formulas and process documents. Put trademarks and artwork in the company's name. Collect inspection reports and audit certificates in one place and fix open findings. Review your largest accounts for terms and contacts. Count inventory honestly and write off what has expired.

We value food and beverage companies from their own numbers, prepare the file that a lender will ask for and screen buyers for capital and industry experience. If you want to see how buyers look at selling a food and beverage manufacturing business, our industry page is a good place to start, and a call with us is the next step.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.