Assessing Risks and Decisions in a Food Manufacturing Acquisition

An investment group was evaluating a food manufacturing company for acquisition. The target facility, nearly 30 years old, had raised significant operational concerns, including negative EBITDA.

The group was uncertain about the plant’s efficiency, the condition of its equipment, and its overall operational health. They were considering multiple options, such as relocating the facility, outsourcing production to a co-manufacturer, or continuing operations as-is. However, they lacked clarity on the risks and benefits associated with each option, including potential hidden costs and the true state of the facility.

To identify the associated risks, the HPS team conducted an on-site assessment, starting with a plant tour that covered operational processes, warehouse, and maintenance areas. The advisors used a systematic approach focused on the client’s concerns, evaluating the processes, facility infrastructure, and condition of the operational equipment.

Considering potential relocation, the team also assessed equipment numbers and their locations to gauge the feasibility of moving the equipment. Additionally, informal meetings with plant leaders helped identify key areas of concern and success in quality, safety, customer satisfaction, employee morale, and operational efficiency.

The HPS team provided a report showing that the decline in EBITDA was due to new leasing terms and reduced product demand, making staying in the facility unviable. Relocating to a smaller, more affordable facility wouldn’t generate a positive NPV due to high closing and transportation costs, making relocation unfeasible. With a strong maintenance program in place, the equipment was in sellable condition and recommended for sale to offset closing costs. Finally, HPS provided estimated move-out and decommissioning costs to help the client negotiate terms with the current owner to offset upfront costs incurred after the acquisition.

Identified an additional $1.5MM in move-out costs not included in the original decommissioning estimate.