September 19, 2023

Ten Issues to Consider When Acquiring a Food Business

The food industry is generally considered recession-resistant and less susceptible to economic downturns than other sectors, making it an attractive investment for private equity firms seeking stable returns. The increasing global demand for food products presents opportunities for private equity firms to invest in food businesses with international reach and growth potential. Moreover, the food industry has experienced consolidation, with smaller businesses seeking capital and expertise to help them grow and expand.

With evolving consumer preferences toward healthier and more sustainable food options, private equity firms have had opportunities to invest in food businesses that align with these trends. Notably, private equity investors have shown interest in companies with products that cater to health-conscious consumers, including organic, plant-based, and functional food products. Investments in food businesses that demonstrate a commitment to sustainability and eco-friendly practices and that prioritize food safety and traceability have gained attention as consumers become more concerned about the origin and quality of their food.

Private equity investors have also been drawn to food businesses that embrace innovation and technology, such as companies involved in food tech, e-commerce, and supply chain optimization. For example, the rise of food delivery services and meal kit companies has attracted private equity investment because of the convenience they offer to consumers. Food businesses adopting e-commerce and direct-to-consumer models have become attractive targets for private equity firms looking to capitalize on the growing online food market.

Acquiring a food business involves several legal considerations to help ensure a smooth and successful transaction. Here are some important legal aspects to keep in mind:

  1. Due diligence. Conducting thorough due diligence is crucial in assessing the target food business’s financial, operational, and legal aspects. This process helps identify any potential risks, liabilities, or legal issues associated with the business. It is essential to review existing contracts with suppliers and customers to understand ongoing relationships, obligations, and any potential risks. Buyers should also consider the target business’s brand reputation, any history of legal disputes, or pending litigations that could affect the acquisition.
  2. Purchase agreements. Drafting a comprehensive purchase agreement is essential to outline the terms and conditions of the acquisition. This agreement should cover the purchase price, payment terms, assets included in the acquisition, representations, warranties, and indemnification provisions. Buyers might consider a noncompete clause that prevents the seller from engaging in similar food businesses within a defined geographic area for a specified period after the sale.
  3. Regulatory compliance. Food businesses are subject to various regulations, including health and safety, food labeling, and licensing requirements. Ensure that the target business complies with all applicable laws and obtain necessary permits and licenses during the acquisition process. It is imperative to understand the licensing process in your jurisdiction. Different states and localities have their own rules and requirements for obtaining certain licenses. The process may involve submitting applications, paying fees, and obtaining approvals from various regulatory bodies.
  4. Intellectual property and data privacy. If the food business has intellectual-property assets, such as trademarks, patents, or trade secrets, it’s essential to verify ownership, validity, and any potential infringement issues. If the food business collects customer data, ensure compliance with data privacy laws and assess any potential cybersecurity risks. This should be an area of focus particularly for food businesses that involve direct-to-consumer e-commerce.
  5. Employment and labor matters. Buyers must review the target business’s employment contracts, labor relations, and compliance with employment laws to understand potential liabilities and obligations related to employees. Not understanding and complying with employment and labor laws can expose the acquirer to costly labor disputes and legal liabilities. Managing legal risks in this area begins with implementing policies that are in compliance with employment and labor laws, including hiring practices, wage and hour laws, and workplace safety regulations. During the acquisition phase, buyers might identify key talent from the target. If that is the case, it is essential to develop a strategy to retain said talent during the integration process, such as providing incentives and clear career development opportunities.
  6. Leases and real estate. If the target business operates from leased premises, buyers should review the lease agreements to understand the terms, transferability, and any potential liabilities related to the property. This is common especially among agricultural food businesses or targets that involve plants and factories as part of their operations.
  7. Tax considerations. Assess the tax implications of the acquisition, including capital gains taxes, sales taxes, and any potential tax benefits or risks associated with the transaction. Ignoring tax implications during the letter of intent, acquisition, or post-acquisition phases can result in unexpected tax liabilities and affect investor returns. Consulting with legal and tax professionals who have experience in structuring M&A transactions can be helpful in making an informed decision.
  8. Environmental compliance. If the food business involves food production or processing, consider any environmental regulations that may apply and verify compliance. Safeguarding the acquirer’s interests involves proactive planning, thorough due diligence, and ongoing compliance efforts. Buyers who are successful at mitigating risks tend to regularly review and audit legal and compliance matters to identify any issues and address them promptly. 
  9. Integration and transition. Plan for the integration of the acquired food business into the existing operations, addressing any legal and regulatory challenges that may arise during the transition. Planning for the integration of a company post-acquisition is crucial for a successful and smooth transition. It involves aligning people, processes, and systems from both companies to maximize synergies and achieve the intended benefits of the acquisition.
  10. Franchise issues. Acquiring a franchise within a larger franchise business can be a significant undertaking, but it also presents a valuable opportunity for growth and entrepreneurship. When considering becoming a franchisee, the acquirer should request detailed information about the franchisor’s franchise program, including costs, support, training, and requirements. The franchisor will likely provide a Franchise Disclosure Document (FDD), which contains essential information about the franchise opportunity, including financial details and fees (not only the initial franchise fee but also ongoing royalties, marketing fees, and any additional costs associated with operating the franchise), obligations, restrictions, and other important terms. Generally, an application process is required for an acquisition of a franchised business. The requisite materials often include a business plan, investment thesis, financial documentation, and a general application. Franchisors may also conduct interviews as part of their assessments. 

It is essential to work with experienced legal professionals, including attorneys familiar with the food industry, to navigate the complexities of the acquisition process and ensure legal compliance at every stage.