When it comes to investments in Food & Beverage companies, in addition to Quality of Operations® Due Diligence analysis private equity firms should diligence critical elements of Food Safety Programs (Food Safety, Regulatory Compliance & Quality) at the target company. Determining early on whether or not a target company is compliant with Food & Drug Administration (FDA) and other industry regulations is critical to mitigating downside risk. While no production facility is ever deemed “perfect,” it is important that investors consider gaps that exist in the target companies’ food safety programs. Also, it is critical to understand the potential liability and probability of a FDA audit, shutdown or mandatory product recall – either of which occurrences could dramatically impact an investment. With the recent changes in regulations, and the advent of the Food Safety Modernization Act (a.k.a. FSMA), food safety diligence is more important than ever.
So, what should you look for? Below we outline the four key areas we look at when conducting Food Safety Due Diligence:
Certain ingredients and processes are inherently more risky than others. Whats more, approximately 15% of US food products are imported. Ensuring that the target company has a robust understanding of ingredient and supply source risk is key. In addition, FSMA has a special Foreign Supplier Verification Program (a.k.a. FSVP) which puts direct responsibility on US food manufacturers to perform disciplined assessments on their global suppliers and mandates they have plans to prevent contamination. This is a real struggle for many small/mid sized companies – assessing this risk during diligence is key.
Make sure the company has strong food safety programs. We recommend assessment of Good Manufacturing Practices (GMPs), assessing their compliance with GFSI initiatives (SQF, BRC, etc.) is also key. Its important to note, just because a target is SQF or BRC certified, doesn’t mean they meet compliance requirements. Any company can pass an audit, determining whether they truly live a food safety culture day in and day out, not just when an announced auditor is going to tour the factory is the only way to maximize risk prevention.
We always recommend conducting a labeling review as part of your Food Safety Due Diligence process. Many companies, especially with the advent of recent snacking and health food trends, have new niche products, and lots of labeling claims like healthy, natural, GMO, gluten free, etc. Significant liability exists if the company can’t actual back up those claims. In addition, questions like – Do you have allergens properly labeled? Are you following all the FDA and USDA guidelines?
Is the target management focused on quality, or are they truly enthusiastic about food safety? You want Senior Management’s positive food safety attitude to trickle down throughout the entire organization and deliver exceptional Food Safety Culture. We always check to make sure all employees are empowered to make sure the product is safe.