Face it, everyone has to eat. Food is key to our survival. If we do not have enough sustenance, we will cease to exist. Most consumers in the U.S. eat three meals a day — not including snacks. As a result, given the inherent and never-ending demand for food, it also stands to reason that companies which sell safe and wholesome food typically do very well. Those same companies do really well when they sell food that looks and tastes better than the competition.

Because food is so integral to consumers, it is also lucrative to investors. When a small food company introduces a new food product which gains popularity with the consuming public, potential investors often see opportunity. Examples can range wildly, from new styles of pizza to a newly minted brands of grass-fed beef. And, potential investors under these circumstances could range from small investment groups to established food companies looking to expand their offerings. In many cases, those investors will move in, make an offer, negotiate a price, purchase the company, invest in its growth, and then begin sharing in the almost-guaranteed profits.

While such opportunities often appear lucrative on paper, there virtually always hidden risks. The company being sought after could lack the sophistication, resources or programs needed to consistently produce a safe product. The company could also be operating in such a way that does not materially comply with the relevant FDA or USDA regulations. This could sound disaster for investors if, following the purchase, the relevant governmental agencies conducted an inspection which then resulted in a Warning Letter or Notice of Intended Enforcement threatening to shut the company down.

For this reason, potential investors should be careful to conduct extensive due diligence into any company they are looking to purchase. From a food safety and regulatory standpoint, extreme focus should be placed on: (1) the existence, quality and compliance of food safety programs; (2) the education, training and sophistication of the company’s food safety and regulatory personnel; (3) the overall food safety culture; (4) the microbiological profile of the food processing environment; (5) the quality of the company’s ingredient suppliers; (6) the existence of adequate supplier agreements; (7) the existence and adequacy of recall and commercial general liability insurance; (8) the company’s overall compliance history with FDA, USDA and/or state regulators; (9) the company’s performance during past audits; and (10) the overall compliance of the company’s product labels.

If the company’s food product labels are not in compliance with the relevant regulations, for example, there could be a potential class action lawsuit waiting on the horizon. If the company’s environmental sampling plan calls only for sampling immediately following sanitation (as opposed to during operations), there could be yet undiscovered niche organisms residing in the environment and unknowingly contaminating product. In turn, if a food safety or serious quality problem is discovered following the sale, and a recall is required, the absence of insurance could force the company to shutter its doors. These are all mere examples of the extraordinary risk that accompanies the purchase of any food company.

So, if you’re looking to invest in a new food company or brand, be sure to conduct extensive due diligence. Ask the right questions, and make sure, before you close, you know exactly what you’re buying.

Do you really know what you’re buying?

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