Buying a co-packer: diligence on customer contracts, specs and records

Why co-packer diligence starts with what the plant does not own#

Co-packer diligence starts with what the plant does not own, because a contract manufacturer's revenue depends on brand customers who usually control the formulas, specifications, packaging artwork and often the approved ingredient suppliers. The plant owns its equipment, people, process know-how and the records it creates while running other companies' products.

That split shapes the whole review. A plant can look excellent on capacity and audit scores and still be fragile if its largest customers can leave on a change of control, or if the know-how a buyer expects to acquire actually sits in customer-owned specifications.

A useful first request is a register of every active customer with its governing documents attached: manufacturing or supply agreement, quality agreement, NDA, specification sign-offs and amendments. Gaps in that register are a finding in themselves, because a plant that cannot produce its customer agreements may be running on purchase orders and informal understandings.

Which customer contract clauses decide the deal?#

The customer contract clauses that decide a co-packer deal are assignment, change of control, term and termination, exclusivity, specification ownership and quality obligations. Read every manufacturing or supply agreement with a top customer, plus quality agreements and NDAs, because important terms often sit outside the main contract.

In an asset purchase, assignment clauses apply directly. In a stock purchase, change-of-control language may still give customers a right to consent or exit. Counsel should map each top customer's position before signing so the buyer can plan customer conversations rather than discover them after close.

Who owns the recipes, specs and process improvements?#

Recipes and specifications in a co-packing relationship usually belong to the brand customer, while process know-how developed on the plant's lines may belong to the plant, the customer or both, depending on the agreement. Co-developed formulas and line-specific process improvements are where ownership disputes tend to arise.

Formulas are often protected as trade secrets. Federal law sets two conditions for trade secret status: the owner must take reasonable steps to keep the information confidential, and the information must draw economic value from staying out of general knowledge. A co-packer holding customer formulas is part of those reasonable measures, so diligence should confirm access controls, NDAs and how specifications are stored and shared on the floor.

• 1Which formulas did the plant develop, and under which agreement?
• 2Do contracts assign process improvements to the customer?
• 3Where are specifications stored, and who can access them?
• 4Are NDAs in place with every customer and with key employees?
• 5Has any customer disputed ownership of a formula or process?

Reading the audit history#

The audit history shows how a co-packer behaves under scrutiny, drawn from three sources: third-party food safety certification audits such as SQF or BRCGS, customer audits and regulatory inspections. Read the findings and the corrective actions, not just the grades or scores.

Ask for nonconformance records, corrective action logs, hold and release records, consumer complaint files and any recall or withdrawal history. A plant that closes findings with documented root causes is a safer platform than one with high scores and thin records. Customer audit reports may be confidential to the customer, so confirm what can be shared in the data room.

Regulatory obligations that apply to the plant, including FDA food safety requirements, are reviewed with regulatory counsel. The commercial question for the buyer is whether the records show habits that will survive new ownership and the departure of a long-serving quality manager.

Changeover and line records show real capacity#

Changeover and line records show a co-packer's real capacity, because a plant running many short runs spends much of its time on changeovers, sanitation and allergen cleanouts rather than production. Nameplate line speeds overstate what the plant can sell.

These records often sit in an MES, in spreadsheets or in paper batch records scanned into a document system. Where they are paper, sample them before relying on any capacity claim in the confidential information memorandum.

Customer concentration: reading the contracts behind the revenue#

Customer concentration in a co-packer is read customer by customer, combining each customer's share of volume with its remaining term, exit rights and the cost of switching to another plant. A large customer tied to dedicated equipment and a long qualification process is very different from one that could move production quickly.

Build a grid for the top customers with volume share band, contract term, change-of-control position, exclusivity and specification ownership. Then test the downside: which customers could leave after close, and what the plant's schedule and margin would look like without them. Customer calls, arranged with the seller before signing, often reveal more than the contracts alone.

Illustrative: a holding company reviews a beverage co-packer#

Illustrative: a fictional food holding company is reviewing a beverage co-packer with hot-fill and cold-fill lines. Two brand customers account for most of the volume, and both supply agreements include change-of-control consent rights.

Diligence shows the plant developed several formulas for smaller customers under agreements that assign improvements to the customer. Changeover logs reveal that one line spends much of its time on short runs. The buyer arranges consent conversations with both large customers before signing, values only the formulas the plant clearly owns, and plans a scheduling change to group short runs.

After close, the plant's own changeover logs, nonconformance and corrective action files and maintenance history are preserved in an indexed archive, kept separate from customer specifications and artwork.

How SourceX treats co-packer records#

SourceX treats a co-packer's own operating records, such as changeover logs, quality decisions and maintenance history, separately from customer-owned formulas and specifications, which are excluded from any license. The SourceX five-step transaction, Supply, Rights, Preparation, Approval and Delivery, starts with a metadata-only fit check and a rights review against each customer agreement.

If a package proceeds, the SourceX Evidence Packet documents provenance, licensing rights, permitted use, the privacy record and release authorization, giving the owner and any future acquirer a clear record of what left the plant and under which terms.