Business model – A business model determines whether a company will make money over time. It addresses all dimensions of the business as a cohesive whole. A fundable business model is optimized to maximize the likelihood that a business will achieve positive and above-average financial returns. B-Corps allow business model optimization to address a wider range of outcomes; the best do this without sacrificing financial results. A business model that works gets you to minimum efficient scale (MES) as fast as possible. It’s a business model not a product that determines whether a company makes money. Most food, beverage and value-added farm entrepreneurs need a lot of help understanding what this really means.
Understood market – Understood markets already have a dominant business model that determines how business is done and profits are made. Food and beverage is largely an understood market.
Wholesale brand – A wholesale brand is a type of business model for a company that sells food products at wholesale prices to retail, foodservice, or ingredient customers. These brands can be local, regional, or national and typically local brands cannot survive without a retail component. These brands are sometimes referred to as Consumer Packaged Goods, or CPG, companies.
Defensibly unique value proposition – Also known as a unique selling proposition (USP), a defensibly unique value proposition in its simplest terms is a positioning statement that describes what you do for whom uniquely well. It describes your target buyer, the problem you solve and why you’re distinctly better than the alternatives. The following things can make your food business defensibly unique:
Minimum Efficient Scale (MES) – The minimum amount of annual sales needed to reach breakeven status on a cash basis.
Retail – Retail means that you, the product manufacturer or producer, sell your product directly to the consumer.
Wholesale – Selling wholesale means you typically sell your product in bulk quantities to a retailer who in turn sells it to the consumer. You might often work with a distributor or broker to reach the retailer.
Value-Added Farms- Value-added farms and producers are those that provide a change in the physical state or form of the product, such as milling wheat into flour, making strawberries into jam or turning milk into cheese.
Raising Capital For Food Businesses
Value-Added Producer Grant (VAPG) – From the USDA – “The Value Added Producer Grant (VAPG) program helps agricultural producers enter into value-added activities related to the processing and/or marketing of new products. The goals of this program are to generate new products, create and expand marketing opportunities, and increase producer income. Applicants may receive priority if they are a beginning farmer or rancher, a socially-disadvantaged farmer or rancher, a small or medium-sized farm or ranch structured as a family farm, a farmer or rancher cooperative, or are proposing a mid-tier value chain. Grants are awarded through a national competition. Each fiscal year, applications are requested through a notice published in the Federal Register and through an announcement posted on gov.”
Crowdfunding – Crowdfunding is a way to raise capital for a business by accepting investments of small dollar amounts from a larger number of people, typically via the internet. There is both donation or rewards-based crowdfunding (like Kickstarter), as well as equity-based crowdfunding.
Community Development Financial Institution (CDFI) – CDFIs are financial institution that provides credit and financial services to underserved markets and populations. CDFIs can be banks, credit unions, loan funds, microloan funds or venture capital providers. CDFIs are certified by the Community Development Financial Institutions Fund at the U.S. Department of the Treasury.
Small Business Administration (SBA) 7a Loan Program – The 7(a) Program allows entrepreneurs to access loan amounts up to $5 million to fund startup costs, working capital, inventory and equipment purchases. The SBA 7a Express program provides a quicker turnaround than the traditional 7a, allowing for loans up to $350,000. Businesses must be able to show that they will be profitable within 6-9 months to qualify for SBA 7a programs. Learn more on the SBA’s website.
Small Business Administration (SBA) 504 Loan Program – An SBA 504 loan is a special product that can only be offered by a Certified Development Company (CDC) in partnership with a local lender. The 504 loan is designed to help small businesses grow and create jobs by financing fixed assets like real estate and equipment. Qualified borrowers receive long terms (20 years for real estate, 10 years for equipment); low, fixed rates and lower down payments (10%). The 504 cannot be used to do working capital but can be used in refinancing other loans under certain circumstances as well as for the “soft costs” associated with the project like appraisal, contingency, attorney fees, engineering, title, bank fees and inspection. Learn more on the SBA’s website.
Farm Services Agency (FSA) Programs – The FSA has many loan programs for family-sized farmers and ranchers to start, improve, expand, transition, market, and strengthen family farming and ranching operations as well as beginning farmers, racial and ethnic minority farmers and women producers. In addition, non-tradtional farming operations like value-added, direct sale, organic, specialty crop operations, hydroponics, aeroponics, vertical farming, and freight container farming are also considered. Learn more on the FSA’s website.
Farm Credit System – Farm Credit is a nationwide network of 77 independent, cooperatively-owned institutions lend to farmers, ranchers, farmer-owned cooperatives and other agribusinesses, rural homebuyers and infrastructure providers throughout rural America. Learn more on the Farm Credit Network’s website.
Strategic Investors – A strategic investor is a business that is already strategically interested in your business and subsequently makes an investment. Common strategic investors in food and beverage businesses include co-packers, suppliers of a key ingredients and distributors. In the beer business, distributors buy exclusive rights to distribute your product. In the food business, key ingredient suppliers could be interested if you represent an important sales opportunity for them. Co-packers and processors could also be interested in strategic investments as well, particularly if you will represent a large portion of their business.
Private Equity – Private equity are funds and investors that directly invest in private companies. Private Equity is most often used in food or beverage businesses to fund national wholesale brands.
Debt – Debt is a contractual obligation to pay back funds lent to the company under a specific set of terms with specified recourse should the obligation not be met.
Equity – Equity is a claim to residual profits after all of the rest of the company’s obligations are met. It’s also ownership that carries with it a bundle of rights and responsibilities.
Due Diligence – Due diligence is an investigation or audit of a potential investment to confirm and understand all aspects of the business deemed material to making that decision. This includes, but is not limited to:
The Founder’s track record and character.
Founder’s vision and business goals.
Business model strength.
Rights in the operating agreement or shareholder agreements.
Signed contracts with all key relationships.
Legal actions outstanding – business and personal
Mergers and Acquisitions (M&A) – A merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. An acquisition is when one company takes over another and clearly established itself as the new owner.
Financial plan – A financial plan documents how much debt, equity or other sources of financing a business needs over time.
Capital structuring – Capital structuring is the process of identifying the best sources and uses of capital for a business in each phase of its financial plan.
Co-packer – A contract packer, or co-packer, is a company that manufactures and packages food or beverages for other businesses under terms outlined in a contract. There is QA dependence and risk with co-packers, and while unique manufacturing processes are easier when brought in-house and higher volumes make bringing manufacturing in house more attractive, this is a big step in business complexity.
Value chain – A value chain is the representation of all of the actors that steward a food or beverage product from raw ingredients to the end consumer. Ingredients can be basis for defensibly uniqueness in a food business, but some specialty ingredients or single sources of ingredients can lead to supply chain bottlenecks.
Sales and Marketing
Channel – A distribution channel is a chain of businesses used to reach the end consumer, including wholesalers, retailers, distributors and via the Internet. Channels can be both direct and indirect, with a “direct” channel allowing the consumer to buy the good from the manufacturer or producer, and an “indirect” channel allowing the consumer to buy the good from a wholesaler or retailer.
Category – Nielsen defines categories as products that meet a similar consumer need or that can substitute for each other. Food and Beverage categories include:
Desserts & Ice Cream
Fruit & Vegetables
Meals & Meal Centers
Processed Fish, Meat & Egg Products
Sauces & Seasonings
Sugar & Gum Confectionery
Sweeteners & Sugar
Carbonated Soft Drinks
Sports & Energy Drinks
Stock Keeping Unit (SKU) – A stock-keeping unit (SKU) is a product and service identification code for a store or product, often portrayed as a machine-readable bar code that helps track the item for inventory. Food and beverage companies should develop at least 3 SKU’s under the same brand in each product category they operate in. This gives them sufficient shelf space at a retail store to get a consumer’s attention or views in a distributor product catalog to get a trial.
Distributor – A distributor is an independent agent who’s entered into an agreement to offer and sell the product of another company but isn’t entitled to use the manufacturer’s name as part of its business name. Depending on the agreement, the distributor may be limited to selling only that company’s goods or it may have the freedom to market several different product lines or services from various firms. Distributors are in the business of moving food and beverage products from A to B. While in the past they may have also acted as sales agents, in the current business environment it is a big mistake to expect distributors to actually sell product.
Broker – A food broker is an independent sales agent that works in negotiating sales for food producers and manufacturers. Food brokers work for both producers and buyers of food as they help sell food products to chain wholesalers, retail stores and independent wholesalers.
EBITDA – EBITDA stands for earnings before interest, taxes, depreciation and amortization. EBITDA is one indicator of a company’s financial performance and multiples of EBITDA can be used as a proxy for the earning potential of a food, beverage or value-added farm business when attempting to value that business.
Cost of Goods Sold (COGS) – Cost of goods sold (COGS) are the direct costs attributable to the production of the goods sold by a company, both materials and direct labor. COGS appears on the income statement and can be deducted from revenue to calculate a company’s gross margin. COGS should reflect the costs of the products as they are sold, meaning that it is important for food companies to set up their books so that they record purchased ingredients into Works in Progress (WIP), transfer them to finished goods inventory when the final product is manufactured, and then report them as COGS when they relieve inventory upon sale.
Gross margin – Gross margin, sometimes called Gross Margin Contribution or Percentage, is a company’s total sales revenue minus its cost of goods sold (COGS), divided by total sales revenue, expressed as a percentage. The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services it sells. The minimum gross margin contribution for a viable food or beverage brand is 35%; the optimal level is 45% or higher. Most small food companies have a hard time reaching this point until they achieve significant economies of scale in both production and distribution.
Formation Documents – Formation documents are documents that outline the business’ legal form (Sole Proprietorship, Manager-Managed LLC, etc.) This is important in food businesses, especially because the type of entity you form matters in terms of your strategic path to grow and what kinds of money you are able to raise to support that growth.
Trademark – Since selling food or beverages like beer are about selling your brand, protecting that brand and its growth in value through the trademark process is very important. The United States is one of the few countries in the world that doesn’t have regional trademark registration (think Champagne only being Champagne if it is made in that part of France). Trademarks should be distinct and evocative as opposed to generic and descriptive and the likelihood of confusion with other trademarked intellectual property is a consideration when pursuing trademarks.
Protecting Recipes – You cannot use copyright law to protect recipes and you probably cannot use patent law to protect recipes. Often, you can protect your recipes through legal processes like contractual protections (non-disclosure agreement of trade secrets) as well as process secrecy i.e. breaking down processes of your production to assign to multiple people, mitigating the risk of another person knowing all aspects of your product production process.
Alcohol Distribution Rights – Distribution is the method by which a brewery, winery or distillery’s product actually reaches the marketplace. The structure of beer distribution varies from state to state, or even municipality to municipality. With some exceptions, most of the states subscribe to the three-tier distribution system, where a brewer cannot be a wholesaler or a retailer. Brewpubs and Taprooms are common exceptions.