Selling a Packaging Company: Customer Concentration, Equipment, and What Buyers Evaluate

Packaging companies, flexible packaging converters, rigid plastic manufacturers, folding carton producers, corrugated box plants, label printers, and specialty packaging fabricators, are a segment of the lower middle market that has seen consistent PE consolidation activity. The acquisition thesis is straightforward: packaging is a recurring consumable (customers reorder constantly), switching costs are meaningful (new tooling, qualification testing, supply chain integration), and there are operational efficiencies available through scale purchasing of raw materials.

The diligence issues that recur in packaging M&A are specific and predictable: customer concentration in a small number of large CPG accounts, material cost pass-through mechanics, tooling ownership, environmental compliance, and the proprietary vs. commodity product distinction. Founders who understand how buyers evaluate these issues can position their businesses and processes to achieve premium valuations.

Customer concentration and the rebid cycle in packaging

Packaging customers, consumer brands, food manufacturers, pharmaceutical companies, industrial distributors, periodically rebid their packaging supply relationships, particularly when a contract expires, when a new procurement leader joins, or when commodity prices shift enough to justify a sourcing exercise. Unlike a pest control customer who rarely thinks about switching, a sophisticated CPG procurement team runs structured RFP processes for packaging spend.

Buyers apply a concentration discount when any single customer exceeds 20% of revenue, and a more severe discount above 30%. The mitigation: document the switching cost. A customer whose product runs on custom tooling (molds, dies, printing plates) that the packaging company owns, and that would cost $150,000–$400,000 to replicate at a competitor, has a meaningful switching cost that reduces the rebid risk. A customer running on shared or commodity tooling has a much lower switching cost and higher rebid vulnerability.

Long-term supply agreements, multi-year contracts with volume commitments and defined pricing escalators, are the gold standard for managing concentration risk. If a customer representing 30% of revenue is under a 3-year supply agreement with a defined termination notice period, the concentration risk is meaningfully lower than the same revenue on purchase-order-by-purchase-order terms. Founders should push to convert significant accounts to supply agreements before a process.

Material cost pass-through: who bears the raw material risk

Packaging raw materials, polyethylene and polypropylene resin, paperboard and containerboard, aluminum foil, inks and adhesives, are commodity-priced and subject to significant price volatility. A packaging company whose material costs represent 50–60% of revenue (typical for flexible packaging converters) is exposed to significant margin compression when material prices spike, unless its customer contracts include material cost pass-through provisions.

A pass-through provision allows the packaging company to adjust its pricing when raw material costs change by a defined threshold (e.g., when resin prices increase more than 5% from the contract baseline, pricing is adjusted to reflect the change). Without a pass-through provision, all material price increases hit the packaging company's margin, the customer pays a fixed price regardless of what materials cost.

Buyers model this risk explicitly. They will ask for the last 24 months of resin or paperboard price data and compare it to the company's gross margin trend. A company that maintained stable margins through a period of commodity price volatility has either effective pass-through provisions or exceptional hedging, both are positives. A company whose margins compressed by 600 basis points during a resin price spike and recovered only when prices fell has no effective pass-through protection.

Before a process: audit every significant customer contract for pass-through language. If contracts lack it, the next renewal cycle is the opportunity to negotiate it in. Buyers who see contracts with defined pass-through mechanisms will credit the margin stability; those who see fixed-price contracts with no protection will apply a commodity margin risk discount.

Tooling ownership and proprietary product positioning

In packaging, tooling, the molds, dies, printing cylinders, and plates used to produce a customer's specific packaging, is a recurring source of ownership disputes in M&A. Many customer contracts specify that tooling purchased or fabricated for a specific program is the customer's property, particularly when the customer paid a tooling charge during the initial program launch. The same issue that arises in precision machining appears in packaging: tooling that is legally the customer's property sitting on the seller's shop floor, misclassified as a company asset.

Conduct a tooling ownership audit before the process. Map each significant piece of tooling to its purchase order source and the applicable ownership provision. Remove customer-owned tooling from the asset schedule. Company-owned tooling, developed without customer funding, serving multiple customers, or creating proprietary capability, is a legitimate asset worth highlighting.

Proprietary product lines, packaging structures with utility patents, licensed designs, or trade dress that create a defensible product differentiation, command a valuation premium because they create pricing power and switching cost beyond the tooling level. If the company has patents or exclusive licenses on any packaging structure or material combination, these should be highlighted in the CIM as an intangible asset with defined remaining protection period.