Startup tips: What to know about private equity funding, exit strategies, co-manufacturer agreements

Exit strategies: From acquisitions to closing for good 

Over the years, food and beverage startups have increasingly turned to private-equity funding – where they offer an equity stake in their company in exchange – to fuel their business growth. In 2023, private-equity firms, which “rely very heavily on debt as part of their capital structure,” became more judicial in the companies that they invested in, and those that raised money in previous years started to see their capital reserves dry up, Cain said. 

“If you raised a bunch of money in Q2 of 2022 before the party stopped [and] if you haven’t run out of money, you’re going to run out of money. So, that venture money you raised is coming to an end, that runway is coming to an end, and you have to do something, and I don’t think we saw the full reckoning of that in 2023 because I think a lot of those companies still had money from 2022. But that’s going to run out for a lot of them in 2024.” 

Many startups that find themselves with no capital to run the business will ultimately have to decide whether they can sell the company outright or sell parts that other companies deem have some value, he explained. 

When it comes time to selling a company, food and beverage startups need to ensure that they have all their legal documentation — patents, business agreements, etc. — in order,  Cain said.

“You want to have your legal house in order, and the co-manufacturer agreement … is one example of that. You want all of your important commercial relationships that a buyer is going to be interested in continuing, that they’re all well documented, pursuant to binding agreements, that are fair to you as the company, [and] they’re fair to the other side as well,” Cain said. “They’re well negotiated drafted documents such that a buyer feels good about stepping into them, and then taking them on.”