Follow the margin, not just the sales
A manufacturer can grow sales while creating more production work and less cash. Review revenue and gross margin by product, customer and channel. Separate repeat orders from seasonal demand, and examine returns, rebates, waste and delivery costs. A large customer may look attractive until its short runs, packaging requirements and payment terms are considered.
Ask management to reconcile its commercial story with the records. Which customers produce a dependable contribution? Which products interrupt higher-margin production? Changes in the mix can matter as much as changes in total revenue.
Find the real production constraint
An unused shift is not proof of available capacity. Labour, sanitation, changeovers, packaging equipment, freezer space or dispatch can limit output before the main production line reaches its rated speed. Compare actual production with downtime records and maintenance schedules.
A useful assessment identifies the constraint, the investment needed to remove it and the output that could then be sold. Additional capacity has little value if customer demand or cold-chain distribution cannot support it.
Test continuity and food-safety evidence
Review current audit findings, corrective actions, traceability records and recall procedures with qualified specialists. A certificate alone does not show how consistently the operation follows its controls. Check which requirements apply to the specific products, activities and markets.
Also identify the people who hold essential knowledge. If the owner manages key accounts, production scheduling and purchasing personally, the buyer needs a realistic transition plan. Documented responsibilities and capable supervisors can make the handover more manageable.
Translate findings into the purchase decision
Connect each material issue to cash, timing or an action. Deferred refrigeration maintenance may require immediate spending. Slow-moving inventory may be less useful than the balance sheet suggests. An undocumented process may require training before production expands.
The outcome should identify the issues that affect price, financing, conditions or integration and explain how each should be addressed. Some issues can be resolved before closing; others need an agreed budget, owner and deadline afterward.
When more production creates less cash
Illustrative example — not a client transaction.
Consider an illustrative manufacturer offered a new private-label contract. The contract adds $600,000 in annual sales, but requires $390,000 in ingredients and packaging, $90,000 in additional labour and $45,000 in freight and waste. The remaining $75,000 is a contribution before extra overhead, financing and tax; it is not the contract’s final profit.
The customer also pays after 60 days. The manufacturer must fund materials and wages while waiting for receipts. If the line is already constrained, the new contract may displace another product with a better contribution. The buyer needs to compare both the cash requirement and the output being displaced before including this contract in the acquisition case.
Ask for trial-run records, customer terms and a weekly production schedule. Reconcile the estimated costs with actual yields and changeover time. If the evidence is incomplete, keep the expansion out of the base case and assess it separately as an opportunity requiring investment.
| Question | Evidence to examine | Decision affected |
|---|---|---|
| Does the contract contribute enough? | Product costs, waste and freight | Whether to accept the volume |
| Can the plant produce it? | Trial runs and line schedules | Equipment and staffing budget |
| When does cash arrive? | Customer and supplier terms | Operating cash requirement |
The decision to take forward
Do not pay for additional revenue until its contribution, production requirements and cash timing are understood.
Source notes
MerchantBanker.ca’s Operational Assessment framework: revenue quality, production capacity, food safety, inventory and succession.
General transaction education. Company-specific decisions require appropriate financial, legal and other professional review.