What is a tolling agreement vs a turnkey agreement?

In a tolling agreement, you buy and own the ingredients, and the co-packer just charges a fee for labor and equipment. In a turnkey agreement, the co-packer buys the ingredients, manufactures the product, and sells you the finished good at a markup.

Can I audit my co-packer's facility?

Yes, your contract should include an audit right. You should be allowed to inspect their facility, review their food safety records, and observe a production run of your product, usually with reasonable advance notice.

Who pays for specialized equipment?

If your product requires a specific piece of equipment the co-packer doesn't own (like a unique die-cut mold), you will usually have to pay for it. The contract must explicitly state that you own that equipment and can take it with you if you leave.

How to Negotiate a Co-Packer Manufacturing Agreement

A Master Manufacturing Agreement (MMA) with a co-packer is the most important legal document your food brand will sign. A bad contract can trap you in a relationship with an underperforming manufacturer, bleed your margins through hidden fees, or even cost you the ownership of your own recipe. Here is what you must negotiate before signing.

1. The Shrinkage (Yield Loss) Allowance

Manufacturing is messy; some ingredient waste is inevitable. The contract will specify a "shrinkage allowance". the percentage of your ingredients the co-packer is allowed to waste without financial penalty. If the allowance is 3%, and they waste 5%, they must reimburse you for the 2% difference.

The Negotiation: Co-packers will push for a high allowance (5-8%) to protect themselves. You must push for a lower allowance (2-4%) based on industry standards for your product category. Crucially, ensure the contract states that they must reimburse you at your fully landed cost of the ingredients, not just the invoice price.

2. Intellectual Property (IP) Ownership

If you bring a recipe to a co-packer, and they tweak the formula slightly to make it run better on their machines, who owns the new formula?

The Negotiation: Your contract must explicitly state that you own the formula, including any modifications, improvements, or scaling adjustments made by the co-packer. This is known as a "work for hire" clause. If you do not secure this, the co-packer can hold your recipe hostage if you try to move to a new facility.

3. Minimum Run Sizes and True-Up Fees

Co-packers make money by running their machines continuously. They will require a minimum order quantity (MOQ) per production run.

The Negotiation: Ensure you understand what happens if you cannot meet the MOQ. Instead of being forced to over-produce inventory that might expire, negotiate a "minimum run fee" or "true-up fee." This allows you to pay a flat penalty to run a smaller batch, which is often cheaper than writing off expired finished goods.

4. Termination and Transition Assistance

Eventually, you will outgrow your co-packer. When you terminate the agreement, you need their cooperation to transition your specialized equipment, packaging inventory, and production knowledge to the new facility.

The Negotiation: Include a "transition assistance" clause requiring them to cooperate with the transfer of your materials and IP for a period of 60 days post-termination, provided your invoices are paid in full.

Enforcing the Contract

A strong contract is useless if you don't enforce it. If you agree to a 3% shrinkage allowance, but you manage your production in a spreadsheet and never actually calculate the yield loss on a run, the co-packer will waste 6% and you will never know. You need operations software to track every pound of ingredients consumed and automatically flag runs that exceed your negotiated allowance.