Business, Mid-Market & Industrial

How to Underwrite a Food & Beverage Manufacturer

Underwrite a food and beverage manufacturer by normalizing EBITDA for commodity swings and trade spend, then testing how much margin survives a raw material spike before price increases reach the shelf. The metrics that matter most are gross margin stability across input cycles, top-customer concentration at retail or co-man accounts, and plant utilization against maintenance capex.

What makes food & beverage manufacturing underwriting different

Food and beverage manufacturing combines thin, volatile gross margins with heavy fixed plant costs and a customer base dominated by a handful of large retailers, distributors or brand owners. Value comes from defensible shelf placement, proprietary formulations, certified capacity that is hard to replicate, and the ability to pass commodity inflation through on a reasonable lag. Risk comes from the same places: a lost planogram, a recall, a failed SQF or BRC audit, or a quarter where flour, dairy, protein or packaging costs rise faster than contracted pricing can reset. Co-manufacturers add a second layer of risk because their volumes depend on brand customers who can insource or move production.

Lenders focus on the downside: whether the plant and receivables support an asset-based borrowing base, how quickly gross margin recovers after a commodity shock, and whether recall and product liability insurance would keep the business solvent through a bad event. They size leverage off trough EBITDA and want inventory appraised with spoilage and obsolescence haircuts. Equity investors care more about growth levers: new retail doors, private label wins, capacity expansion, and mix shift toward higher margin SKUs. They will underwrite to run-rate EBITDA after pricing actions and pay for spare capacity that can absorb new volume without a new building.

Key metrics

How to underwrite it, step by step

1. Map revenue by customer, channel (retail, foodservice, co-man, private label) and SKU, and reconcile gross sales to net sales after trade spend and deductions.
2. Rebuild monthly gross margin for three or more years and overlay key commodity indices to measure pass-through lag and pricing power.
3. Review food safety history: GFSI audit scores, FDA or USDA inspection reports, recalls, withdrawals and customer complaints.
4. Tour each plant to assess line condition, sanitation, allergen segregation, capacity by line and deferred maintenance.
5. Diligence customer agreements, co-man contracts and supply agreements for pricing mechanisms, volume commitments and termination rights.
6. Normalize EBITDA for one-time commodity windfalls or losses, owner costs and trade spend timing in a quality of earnings review.
7. Size the borrowing base on eligible receivables and appraised inventory, then stress the model for a commodity spike and loss of the top customer.
8. Confirm recall, product contamination and product liability insurance limits are adequate for the SKU count and customer requirements.

Due diligence checklist

• SQF, BRC or other GFSI certification audit reports for the last three years
• FDA and USDA inspection reports, Form 483s and responses
• Recall and market withdrawal history with root cause analyses
• Customer list with revenue, gross margin and trade spend by account
• Retailer vendor agreements, planogram commitments and deduction reports
• Co-manufacturing and co-packing agreements with pricing and volume terms
• Raw material and packaging supply contracts and commodity hedge positions
• SKU-level costed bill of materials and standard cost rollforwards
• Plant capacity studies by line, downtime logs and maintenance records
• Inventory aging by SKU with code date and shelf life detail
• Product liability, recall and contamination insurance policies
• Environmental permits including wastewater discharge permits

Key risks and mitigants

Typical financing and deal structure

Mid-market food manufacturers are usually financed with an asset-based revolver secured by receivables and inventory, paired with a term loan sized off machinery and equipment appraisals and EBITDA. Sponsor-backed deals frequently add a unitranche or second lien to reach total leverage that the asset base alone will not support. Smaller plants and co-packers often use SBA 7(a) or SBA 504 financing when an owner-occupied building is included. Seller notes and earnouts are common where a major customer contract is up for renewal. Covenants typically include a fixed charge coverage test, a springing availability trigger on the revolver, and capex limits. Representation and warranty insurance usually excludes known food safety issues, so specific indemnities or escrows are used.

Red flags

• A recall, FDA warning letter or failed GFSI audit in the last two years without a documented corrective action plan
• Gross margin that never recovered after the last commodity spike, implying weak pricing power
• A single retailer or brand customer above a third of revenue with no contract or a short notice termination right
• Deductions and chargebacks growing faster than sales, or large unreconciled deduction balances
• Maintenance capex well below depreciation for several years alongside rising downtime or sanitation findings

Frequently asked questions

Related terms

Educational content, not investment, credit, legal or tax advice. Benchmarks are common practitioner rules of thumb and vary by lender, market and cycle.