How to Start a Co-Packing Business, With a Projection

A co-packing business makes other brands' products in its own licensed kitchen. Some clients send their own ingredients and packaging and pay a fee for each unit made, called toll work; others pay you to buy everything and sell them the finished product, called turnkey. A co-packer earns on the fees, the setups and the storage, and keeps every client's goods, recipes and numbers apart. The plan has to cover a facility that passes inspection, the FDA's registration and food safety rules, and a sales pipeline that fills the line. In the example below, a small sauce co-packer in Massachusetts loses about $17,300 in its first year on $303,100 of sales, turns a profit in month 8, and runs at about $6,100 a month once the line is full. Below is each part of the plan, the rules, the first year month by month, the startup budget, and a free template.

The short version

• Pick a product family you can make well and safely: sauces, baked goods, snacks or drinks, not all four.
• Offer toll runs (their materials, your fee) and turnkey runs (your materials, their price), and price each.
• Charge for setups and cleanups, pilot batches and storage; those fees carry the business early on.
• Register the facility with FDA, and plan for preventive controls: a toll co-packer's food counts at market value.
• Acidified sauces need FDA's canning establishment registration and a supervisor trained at an approved school.
• Keep every client's goods, runs and charges apart, and send each a monthly statement.
• TaroStack keeps each client's goods as theirs, records toll runs, bills the fees and prints each client's statement. More below.

Part 1: the business description

Merrimack Valley Co-Pack, a made-up co-packer in Lowell, Massachusetts, I use in these examples, writes:

Merrimack Valley Co-Pack makes hot sauces, barbecue sauces and jams for small brands in a 2,500-square-foot licensed kitchen with a 100-gallon kettle, a piston filler, a capper and a labeler. Clients can send their own ingredients and glass for a fee per bottle, or have us buy everything. In its first year it aims to fill 28,000 bottles a month for about 15 brands.

Part 2: the rules

Every facility that manufactures, processes, packs or holds food for consumption in the US registers with FDA, unless it's exempt, as farms, retail food establishments and restaurants are (21 CFR 1.225). A co-packer isn't exempt. Under the preventive controls rule, a qualified facility, including a very small business, is exempt from the hazard analysis and risk-based preventive controls and the supply-chain program, and follows modified requirements instead (21 CFR 117.5). A very small business averages less than $1,000,000 a year, adjusted for inflation, in sales of human food plus the market value of food held without sale, such as food held for a fee (21 CFR 117.3). That last part matters to a co-packer: the clients' sauce it bottles for a fee counts at what the sauce is worth, not at the fee. Merrimack's first year bottles 136,000 toll bottles worth about $612,000 at the clients' wholesale prices, plus $158,000 of turnkey sauce; at full speed, that's about $1.36 million a year, well past the line.

Sauces and salsas made safe by adding acid are acidified foods. A processor registers with FDA on Form FDA 2541 within 10 days of starting, files its processes (21 CFR 108.25), and operates under the supervision of someone who has completed a course at a school the Commissioner of Food and Drugs has approved, often called Better Process Control School (21 CFR 114.10). Each client's recipe needs a process authority's review; how that works is in process authority letter. Your state licenses the facility as a food processor too. This is general information, not legal advice. The wider FSMA picture for small businesses is in FSMA requirements for small food businesses.

Part 3: what each service earns

A toll bottle's 36 cents is line labor, gas and power, cleaning chemicals and a share of the pH and other testing. A turnkey bottle's $2.20 adds the ingredients, the glass, cap and label, freight in and a loss allowance. In a month at full speed the turnkey sauce brings $5,600 of the $17,520 of contribution, toll bottling $4,800, setups $4,560, storage $1,560 and pilot batches $1,000. Turnkey earns the most per bottle and ties up the most cash, because Merrimack buys the ingredients and glass weeks before the client pays. The setup fee does more work than it looks: without it, a client who orders 300 bottles at a time costs more to clean up after than the run earns. How minimums protect both sides is in minimum order quantity.

Part 4: clients

The first clients come from the brands that have outgrown a commercial kitchen: a hot sauce maker filling 200 bottles a night by hand, a jam maker who has landed a grocery chain. What they weigh before they come is in co-packer vs commercial kitchen, and what they look for in what is a co-packer. Fifteen brands at 1,500 to 2,500 bottles a month fill the line; a single client over a third of the volume is a risk, because its first move to a bigger co-packer takes a third of the business with it.

Part 5: the first year, month by month

Fixed costs are $11,400 every month: rent ($3,500), utilities ($800), insurance including product liability and recall ($700), the owner's salary ($4,000), lab testing ($300), software and card fees ($200), the equipment loan ($1,200), maintenance ($400) and sanitation supplies ($300). Clients arrive slowly, so the year starts at 15% of full speed:

The year's sales are $303,100 and it loses $17,312, with the lowest cash, −$37,576, in month 7, which the $50,000 of working cash covers. At full speed, Merrimack makes about $6,100 a month, about $73,400 a year, so the second year earns back the first year's loss and most of the build-out.

Part 6: the startup budget

The rest of the equipment is financed, which is the $1,200 a month in the fixed costs.

Get the template

Download the co-packing business plan workbook. Four sheets: your services with price, variable cost and a month at full speed; the first year, month by month, with sales, profit and cash; your fixed costs; and your startup budget with working cash. It's an ordinary Excel file with no macros, and it works in Google Sheets, LibreOffice and Numbers.

Where this stops working

Fifteen clients, each sending their own peppers, vinegar and glass, two of them sending the same cane sugar, runs that mix a client's chiles with your salt, a client who wants 400 cases sent to one store and 200 to another, and a bill each month that has to match what each client was told. A spreadsheet can't keep one client's sugar from going into another's run, say what each client's goods on your shelves are at month end, or show a client the lots their bottles came from when a recall comes.

How TaroStack does it

TaroStack keeps each client's goods as theirs, records toll runs, bills the fees and prints each client's statement.

Every item says whose it is. With We make or keep goods for clients turned on, each item is yours, yours made for a client, or the client's own. A client's own goods are received from them at no cost to you, kept apart, and left out of your stock value and margins, so the shelf and the books both say what's yours.

Toll runs and billing. A run for a client uses that client's goods and yours, never another client's, and records every material it used and whose each was. The fee per unit made is set on the item, and Bill puts the run's production fee and your materials at cost onto an ordinary sales order, each line naming its run. A client's goods go back on a release, with no price, to them or wherever they say.

A statement for each client. Each month, each client's statement shows their goods you hold and how each moved, by lot: opening, received, used, made, released, counted and closing, with the month's charges. How a recall works across lots is in recall plan example.

Copacking, with clients' own goods, toll runs, releases, billing and statements, is on Standard at $99 a month. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.

Questions people also ask

Is co-packing profitable?

It can be once the line is full. In the example, a small sauce co-packer loses about $17,300 in its first year and makes about $6,100 a month at full speed.

How much does it cost to start a co-packing business?

In the example, $98,500 for a small sauce kitchen, with $50,000 of working cash and the build-out the biggest parts, and the rest of the equipment financed.

Does a co-packer need to register with the FDA?

Yes, a facility that makes, packs or holds food registers with FDA. A co-packer making acidified sauces also registers on Form FDA 2541 and files its processes.

What is the difference between toll and turnkey co-packing?

In toll work the client sends its own ingredients and packaging and pays a fee for each unit made. In turnkey work the co-packer buys everything and sells the client the finished product.