Before you close on a co-packer or food manufacturer, verify regulatory compliance, equipment condition, customer contracts, and food safety certifications — or risk inheriting costly surprises.
Acquiring a food manufacturing or co-packing business in the $1M–$5M revenue range requires a disciplined due diligence process that goes well beyond standard financial review. These businesses operate under FDA and USDA oversight, depend on third-party food safety certifications like SQF and HACCP to win and retain contracts, and often carry significant customer concentration risk when one or two CPG brands represent the majority of co-packing volume. Equipment is capital-intensive, specialized, and frequently undervalued or overvalued by sellers. This checklist organizes the five most critical due diligence categories for food manufacturing buyers — regulatory and compliance history, customer and contract analysis, equipment and facility condition, food safety certifications, and financial quality of earnings — with specific items, red flags, and priority ratings to guide your pre-close investigation.
Assess the facility's FDA and USDA inspection record, FSMA compliance posture, and any history of warning letters, recalls, or enforcement actions that could create post-close liability.
Request all FDA 483 observation letters and establishment inspection reports from the past five years.
483 observations signal systemic food safety deficiencies that buyers inherit at close.
Red flag: Multiple unresolved 483 observations or a formal FDA warning letter in the past three years.
Confirm FSMA compliance including written Food Safety Plan, hazard analysis, and preventive controls.
Non-compliant facilities face costly remediation and potential regulatory shutdown post-acquisition.
Red flag: No documented Food Safety Plan or evidence FSMA requirements were never formally implemented.
Review any product recall history, voluntary withdrawals, or consumer complaint logs.
Prior recalls indicate process control failures and create future liability exposure for buyers.
Red flag: Any Class I recall within the past five years with unresolved root cause documentation.
Verify state and local health department inspection records and environmental compliance permits.
State violations or lapsed permits can halt operations and delay integration timelines.
Red flag: Expired operating permits or outstanding state health department corrective action orders.
Analyze co-packing agreements, renewal terms, and revenue distribution across the customer base to assess concentration risk and revenue durability post-close.
Obtain all co-packing agreements and review term lengths, renewal options, and termination clauses.
Short-term or at-will contracts create revenue cliff risk immediately after ownership transfer.
Red flag: No written contracts with top customers — relationships maintained solely on handshake agreements.
Calculate revenue concentration by customer for the trailing three years.
High concentration means one lost account can materially impair business value and debt service.
Red flag: Any single customer exceeding 40% of trailing twelve-month co-packing revenue.
Identify which contracts are assignable to a new owner without customer consent.
Non-assignable contracts may require renegotiation or customer approval that delays or kills a deal.
Red flag: Key co-packing agreements with change-of-control clauses that allow client termination at close.
Review pricing structures and whether contracts include commodity cost pass-through provisions.
Fixed-price contracts without pass-throughs expose buyers to margin compression during ingredient inflation.
Red flag: Multi-year fixed-price contracts with no inflation adjustment or pass-through mechanisms.
Evaluate the age, condition, maintenance history, and replacement cost of all processing and packaging equipment, plus the physical state of the production facility.
Obtain a complete equipment inventory with age, manufacturer, and estimated replacement value for each asset.
Understated replacement costs create hidden capital expenditure requirements post-close.
Red flag: No organized equipment inventory or significant discrepancies between listed and actual asset values.
Review preventive maintenance logs and service records for all major processing lines.
Deferred maintenance on food processing equipment creates unplanned downtime and safety risks.
Red flag: Absence of maintenance records or multiple pieces of equipment operating beyond useful life.
Engage an independent equipment appraiser with food processing industry experience.
Seller valuations on specialized equipment are frequently inaccurate without third-party verification.
Red flag: Seller refuses third-party equipment appraisal or restricts access to production areas.
Inspect the facility for cold chain integrity, sanitary design compliance, and deferred capital needs.
Facility deficiencies can trigger FDA corrective actions or require immediate post-close capital investment.
Red flag: Visible sanitation or structural deficiencies that would fail a third-party food safety audit.
Verify the status, scope, and audit history of all food safety certifications that underpin the facility's ability to win and retain co-packing contracts with CPG brands.
Confirm current SQF, BRC, or HACCP certification status and the scope of each certification.
Certifications are table stakes for CPG co-packing contracts — lapsed certs can trigger client loss.
Red flag: Certifications expired, suspended, or awarded at a lower level than represented during marketing.
Review the last three years of third-party audit reports including all non-conformances and corrective actions.
Recurring non-conformances reveal systemic quality failures that a new owner will be responsible for.
Red flag: Major non-conformances in consecutive audit cycles with no documented corrective action closure.
Verify specialty certifications such as organic, kosher, allergen-free, or non-GMO if marketed to buyers.
Specialty certs command premium pricing and differentiate the facility — losing them erodes value.
Red flag: Specialty certifications in jeopardy due to supplier changes or undisclosed process modifications.
Assess annual cost to maintain certifications including audit fees, consultant support, and staff training.
Buyers frequently underestimate ongoing certification costs when modeling post-acquisition EBITDA.
Red flag: No budget line item for certification maintenance and no internal staff trained as PCQI or SQF practitioner.
Scrutinize the income statement for accurate add-backs, margin sustainability, ingredient cost exposure, and owner-related normalizations that affect true EBITDA.
Review three years of CPA-prepared or audited financial statements alongside tax returns for consistency.
Discrepancies between financials and tax returns are a leading indicator of inaccurate representations.
Red flag: Significant unexplained gaps between reported EBITDA and taxable income across multiple years.
Analyze gross margin by product line and customer to identify profitability concentration.
Blended margins can mask unprofitable contracts that a buyer would unknowingly inherit.
Red flag: Negative or sub-5% gross margins on contracts representing more than 20% of total revenue.
Identify all owner add-backs and validate each with supporting documentation.
Unsupported add-backs artificially inflate adjusted EBITDA and lead to overpaying on a multiple.
Red flag: Add-backs exceeding 30% of stated EBITDA without clear documentation or business justification.
Assess raw material cost history and evaluate exposure to commodity price volatility.
Oils, grains, and proteins can swing 20–40% annually, compressing margins without pass-through protections.
Red flag: No commodity hedging, no supplier agreements with price locks, and no contractual pass-through provisions.
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Most buyers should budget 60–90 days for thorough due diligence on a food manufacturing acquisition. The extended timeline reflects the complexity of reviewing FDA inspection history, validating food safety certifications, commissioning an independent equipment appraisal, and analyzing co-packing contracts for assignability. Rushing this process in a competitive deal is one of the most common and costly mistakes food manufacturing buyers make.
Customer concentration is the single highest-impact risk in co-packing acquisitions. If one CPG brand represents more than 35–40% of revenue and holds a short-term or easily terminable contract, the business's cash flow and debt service coverage can be materially impaired by a single client decision. Always request three years of revenue broken out by customer and cross-reference against the actual contract terms before making an offer.
No — food safety certifications are facility-specific but are tied to the certified entity's quality management system and ownership structure. A change of ownership typically triggers a certification body notification requirement and may require a recertification audit or at minimum a confirmation review. Buyers should contact the certification body directly during due diligence to understand transition requirements, timelines, and any associated costs to avoid a lapse that could jeopardize co-packing contracts.
Yes. Food manufacturing and co-packing businesses are generally SBA 7(a) eligible, making this one of the most accessible financing structures for entrepreneurial buyers. Typical deal structures involve 10–20% buyer equity, an SBA 7(a) loan covering the majority of the purchase price, and sometimes a seller note bridging any gap. Lenders will scrutinize regulatory compliance history, equipment condition, and customer contract durability as part of underwriting, so resolving major due diligence issues before finalizing your loan application is essential.
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