Natural Products Insider

MAR-APR 2018

INSIDER is the leading information source for marketers, manufacturers and formulators of dietary supplements, healthy foods and cosmeceuticals. Since 1997, INSIDER has been serving the needs of the global nutrition industry.

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naturalproductsinsider . com 63 No doubt about it. The food economy of the 21st century has become diverse and crowded with small, emerging companies seeking to leverage consumer interest in foods that are authentic in their recipes and transparent about their origins. Of course, many of these hardworking, small-scale entrepreneurs look forward to the day when a larger, multinational food company may acquire their unique brands and market niches, and bring their teams into a new corporate fold. A major food company looking to buy a small startup will inevitably size up the business considering the current, challenging environment for food manufacturers and marketers. Companies seeking to acquire a small startup fi rm would do well to look beyond the fi nancial balance sheet to avoid stepping on a legal or regulatory land mine. A small company without adequate resources to guarantee safe products and truthful labeling can quickly become a signifi cant headache for an acquiring company. Food Safety The passage of the Food Safety Modernization Act (FSMA) in 2011 dramatically changed the way FDA approaches food safety, giving the agency unprecedented powers to prevent food safety outbreaks rather than simply responding to them. Under current law, a food can now be deemed legally adulterated, unless the food manufacturer or distributor has analyzed potential food safety hazards and established preventive controls to eliminate or minimize them. Food manufacturers must have a written hazard analysis and a written food safety plan that must be available for inspection by FDA. Importers must ensure their suppliers have complied with FSMA. Potential buyers must understand how a target food company manages food safety issues and how it responds to food safety incidents. Does it have the necessary written plans and procedures? Does it have an effective crisis response and recall plan? Can it effectively locate and withdraw product from the marketplace when a potential harm to consumers is discovered? Target companies must be aware that FDA mandates that they have a preventive controls qualifi ed individual (PCQI) to manage their food safety programs, and their managers must obtain this training from FDA-recognized programs, such as those offered by the Food Safety Preventive Controls Alliance (FSPCA), an industry and academic group formed to promote compliance with FSMA. Labeling and Claims Substantiation The labeling of the target company's products can reveal a lot about its approach to consumer claims, transparency, culture of compliance and food safety. Is the company up-to-date on the evolving landscape of food regulation? Every food manufacturer involved in labeling must be aware of the constantly changing regulations administered by FDA, USDA, and state and local regulatory bodies. If the target company likes to "push the envelope" when advertising its products, a potential buyer could be asking for trouble. The target can expect to be asked about its procedures for reviewing and clearing the claims it is using on its labels and in its advertising. Words such as "natural" and "healthy" should not be used, unless the company has studied the regulations and knows what FDA expects in the way of substantiation via "signifi cant scientifi c agreement" and other regulatory standards. "Natural" and other undefi ned claims such as "real" or "wholesome" should be avoided unless the company has carefully studied how consumers and the courts are interpreting those words. A company is responsible for substantiating every message a consumer reasonably takes away from its labeling, including the conclusions a consumer may reasonably draw from undefi ned claims. The way a company handles allergen statements in labeling—where such disclosures are mandated by federal law—could signal whether the company is taking adequate steps in controlling its manufacturing environment. For example, statements such as "may contain peanuts" or "produced in a facility where peanuts are processed" should not be used unless cross-contamination from the disclosed ingredient is impossible to control. The overuse of such statements may signal an allergen control program in need of signifi cant improvement. Other label statements should trigger an inquiry into supply chain practices. For example, "made for" or "distributed by" above the brand owner's name on the principal display panel indicates manufacturing by a third-party contract supplier. Is that supplier following the FSMA requirements? Country of origin statements should lead the buyer to ask about the capabilities and compliance of foreign suppliers. Also, "Made in the USA" is not necessarily just an origin statement, but rather, an advertising claim that must comply with FTC requirements that all or virtually all product inputs are sourced in the United States. In the due diligence process, a target company's quality control (QC), labeling and advertising practices can reveal a great deal about its capabilities and culture. Many startup companies grow quickly, and their consumer demand and production capacity can outpace regulatory compliance. Probing questions about a target's food safety and other compliance programs through due diligence can reveal facts and data that will help the buyer decide the true value of the potential acquisition. For the conversations to lead to a successful deal, this phase of the mergers and acquisitions (M&A) process requires transparency and clear communication from both sides of the bargaining table. EAS Consulting Group's (eas consultinggroup.com) independent advisor for food law and regulation, Steve Armstrong has more than 20 years of experience advising leading consumer products companies on marketing and regulatory matters. Mergers and Acquisitions Pitfalls and Perils in Buying a 21st Century Food Company by Steve Armstrong

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