How FSMA Accelerated Merger and Acquisitions Activity for Small Food Manufacturers

Under FSMA, food product recalls have significantly increased and, because FDA has the authority to assess and collect fees for activities associated with a food recall order, small food manufacturers carry greater potential financial risks as they may not have the funds readily in reserve.

FDA issues a warning letter when it finds FSMA violations during a facility inspection. Warning letters are public records and are published on FDA’s website. While this can be damaging for any food manufacturer from a public relations and consumer confidence perspective, loss of an already-small market share can be devastating for smaller businesses.

Companies are normally given 15 days to respond to the warning letter. FDA may re-inspect the plant to assure the non-compliant issues are resolved. The agency is authorized to collect fees to reimburse FDA costs related to re-inspection, resulting in an even higher financial burden for small food manufacturers.

Also under FSMA, FDA has new powers to suspend the registration of food facilities when there is a reasonable probability of causing serious adverse health consequences or death. This may lead to temporary or permanent shut down of the facility, such as with the bankruptcy in 2009 of Peanut Corporation of America, a food manufacturer with $25 million in annual revenue and 90 employees, after a massive outbreak of illnesses linked to Salmonella were identified across 46 states. Damage to brand reputation and loss of market share like this are simply unrecoverable for many smaller food manufacturers.

Options

There are options for small food manufacturers that are found to have FSMA compliance issues other than being acquired by a larger company. An infusion of capital by an investor can ensure that all the consequences of FSMA are adequately addressed and that the growth trajectory of the business is strong; this could build the stable underpinnings of a $5 million company to make it a $50 million company, for example. If the business is fast-growing, consumer driven, and stands out in the marketplace, investors will see the merit of mitigating FSMA risks to ensure the company’s resources are capturing market share and profitability.

However, what’s trending now is the acquisition of smaller food manufacturers that already have the regulatory compliance role well handled by larger food and related companies that are looking to expand their product offerings. Buying several innovative food companies grows the product offerings under their brand without the food quality and safety issues. If you own a small food production business and would like to retire at some point, you may want to consider FSMA compliance as a lucrative exit strategy.

Brunelle is founder of Accelerated Manufacturing Brokers, Inc., and specializes in the sale of lower middle market manufacturing companies nationally. Additionally, she hosts the WAM Podcast (Women and Manufacturing). Reach her at [email protected].