Make or Buy? The Copacker Decision Is a Capital Allocation Problem in Disguise

Every operator in food and beverage eventually faces the same question: should we manufacture this product ourselves, or route it through a contract manufacturer? For new companies, the question surfaces at the seed stage — founders are deciding whether to raise enough to build a facility or launch lean through a copacker relationship. For existing companies, it resurfaces at every meaningful line extension — when a new SKU, format, or category requires evaluating whether incremental capex is justified or whether the copacker premium is the smarter trade.

Most operators get the analysis wrong. Not because the math is difficult, but because the frame is wrong.

The make-vs.-buy question isn't a manufacturing question. It's a capital allocation question. The capital you would deploy into production equipment has an alternative use: marketing, distribution, working capital, brand development. The honest analysis has to compare what that capital produces in each deployment — not just whether your in-house COGS would be lower than your copacker's invoice. A $2.5 million canning line and a $2.5 million marketing program are competing uses of the same dollar. Treating them as separate decisions is how companies end up with beautiful production lines running at 54% utilization while a better-capitalized competitor builds distribution.

This article builds the full decision framework in two parts: first for new companies deciding how to launch, then for existing companies — including PE-backed portfolio companies — evaluating line extensions and incremental capex. Both parts include worked financial models. Both include an honest look at the risks that don't appear in a discounted cash flow. If you're a founder making this decision for the first time, this is the framework you wish someone had given you at the start. If you're a sponsor or operating partner sitting in a portfolio company board meeting where this debate is live, this is the model your team should be running.

The Economics of Copack: What the Premium Actually Represents

Before building any model, you need to understand what the copacker premium is and where it comes from. A copacker is not charging a premium out of inefficiency or greed. They're a manufacturer absorbing a cost structure that you would otherwise absorb yourself — and pricing it accordingly.

When a copacker invoices you for a production run, their per-unit price includes direct materials (sometimes passed through at cost, sometimes with a markup for purchasing administration), direct labor, variable overhead for the production line, and an allocation of fixed overhead — their facility depreciation, minimum staffing for food safety and sanitation, insurance, and regulatory compliance — spread across the total production volume they run for all clients combined. On top of that, they include margin. Contract manufacturers in CPG run EBITDA margins of 8–15% depending on category complexity, volume commitment, and their competitive position in that region.

There is also a structural cost that rarely appears on the invoice but is very real: minimum run requirements. Copackers set production minimums to protect their efficiency. If your required run is 40,000 units but their minimum is 60,000, you're taking 20,000 units of inventory you didn't plan for — with the cash outflow and carrying cost that comes with it. For early-stage brands with uncertain demand, this is a recurring working capital friction that compounds over time.

The critical nuance in reading Table 1: the in-house figures above assume an established facility running at healthy utilization. For a new company building from zero, those in-house numbers are understated in the early years. When you invest in production infrastructure and then ramp to volume, your fixed overhead is fully loaded on low initial volumes — which means your actual per-unit cost can exceed the copacker's price until you reach meaningful utilization. That is the heart of the new company decision, and it deserves its own analysis.

Part One: The New Company Decision

For a company that doesn't yet have manufacturing infrastructure, the make-vs.-buy question reduces to a single, clarifying question: what does this capital do if it doesn't go into production equipment?

Most founders treat the in-house manufacturing option as a cost reduction decision — lower COGS means better margins. That framing ignores three structural realities of early-stage manufacturing:

First: fixed costs don't scale with early volume. When you build a production facility — even a modest one — you immediately absorb a fixed cost base: facility lease or purchase, equipment depreciation, minimum headcount for food safety, QA, and sanitation compliance, utilities and insurance, permitting and regulatory certifications. Those costs are roughly the same whether you run the line 20 hours a week or 80. At early-stage volumes, they divide across far fewer units, producing a per-unit overhead load that can materially exceed your copacker's all-in price. Founders routinely model in-house COGS using benchmarks from a fully-ramped facility — and they end up surprised when their actual unit economics in Year 1 look nothing like those benchmarks.

Second: manufacturing is a different business than brand building. Running a production facility requires operational expertise, food safety infrastructure, maintenance capability, and regulatory compliance that has nothing to do with why most founders started the company. The hours your leadership team spends on production scheduling, equipment troubleshooting, FDA compliance, and line staffing are hours not spent on sales, distribution, and consumer acquisition. In early-stage CPG, attention is the most constrained resource — and manufacturing competes directly for it.

Third: the capital has a compounding alternative. In early-stage consumer brands, marketing capital deployed against a product with genuine consumer pull often generates exceptional returns. National broker relationships, retail velocity programs, DTC acquisition, and trade spend that drives trial are investments that compound — they build distribution depth, velocity data, and brand equity that make subsequent capital deployment more efficient. A dollar of well-deployed marketing in Year 2 generates more revenue per dollar than a dollar deployed in Year 5, because the brand is smaller and each new door opened has proportionally more impact. Manufacturing capex deployed in Year 1 doesn't compound in the same way.

The Utilization Trap: How In-House Cost Behaves at Low Volume

Before the NPV comparison, it's worth showing exactly how in-house manufacturing economics behave as a function of capacity utilization. This is the most underappreciated dynamic in the decision, and it's what makes early-stage in-house manufacturing so frequently worse than its proponents project.

The table above illustrates a reality most early-stage manufacturing models obscure: in-house manufacturing is only favorable once you clear approximately 50–55% utilization. Below that threshold — which is exactly where most new brands spend their first 12–18 months — your in-house cost per unit equals or exceeds what a copacker would charge. You've invested $2.4 million in capex and you're paying more per unit to produce, not less. The economics only invert once the fixed cost base is sufficiently diluted across volume.

The practical implication: if your Year 1 volume projection sits below 700,000–800,000 units for this type of facility, you should be very skeptical of a business case for in-house manufacturing that shows favorable unit economics. Run it with utilization-adjusted fixed cost absorption, not a mature-facility benchmark.

Worked Example — New Beverage Brand, Make vs. Buy Over Five Years

The table tells a clear story for early-stage companies. In Years 1 and 2, Path A (in-house) is generating less gross profit than Path B (copacker plus marketing), despite having spent $2.4 million on production infrastructure. The in-house path only closes the gap in Year 4 and slightly exceeds Path B in Year 5 — but by then, Path B has deployed $2.4 million in marketing that has built distribution depth, consumer awareness, and velocity data that creates compounding value not captured in a simple gross profit comparison.

"The instinct to build manufacturing is understandable — it feels like control. But in early-stage CPG, the most valuable form of control isn't owning the line. It's owning the consumer relationship and the shelf. Manufacturing can be contracted. Distribution cannot."

LJ Govoni

Part Two: The Existing Company Decision

For a company that already manufactures — and is evaluating whether to run a new product through existing infrastructure or route it to a copacker — the analysis is fundamentally different. Three variables change the calculus entirely: current capacity utilization, whether the new product uses existing equipment, and how the existing fixed cost base absorbs incremental volume.

This is where PE-backed operators need to pay close attention, because the financial leverage of the decision is significant in either direction — and the right answer depends heavily on where you sit on the utilization curve.

The Underutilized Plant: Incremental Margin Is Exceptional

A manufacturer running at 60–70% utilization is carrying substantial idle fixed overhead. Every unit of incremental production in an existing facility doesn't just cover its variable cost — it also absorbs overhead dollars that are being spent regardless. This fixed cost absorption dynamic means that incremental gross margin on in-house production at underutilized capacity is often 60–70%, not the 40–50% headline margin the overall P&L would suggest. In those conditions, a copacker looks extremely expensive by comparison.

This is one of the most overlooked efficiency levers in PE-backed food and beverage portfolios. A portfolio company running at 65% utilization that routes a new line extension to a copacker is, effectively, paying a copacker to do something its own facility is already equipped to do — at a 30–45% premium — while its fixed overhead sits partially idle.

The Over-Utilized Plant: Capex Is Unavoidable, So Price It Right

A manufacturer running above 85–90% utilization faces a different problem. Adding a new product line requires either capex (new equipment, possible facility expansion) or displacement of existing products. Now the analysis looks more like the new company scenario: you need to compare the NPV of a capital investment against the alternative of paying the copacker premium while you build volume to justify the investment. The key discipline is not treating capex as inevitable — it's the right answer at some volume threshold, but that threshold is often higher than the initial business case assumes.

Worked Example — Existing PE-Backed Food Manufacturer, Line Extension Decision

Scenario A is the cleanest win in manufacturing finance: zero capex, incremental gross margin of 54%, and $850K in incremental EBITDA from a $1.8M revenue opportunity. The company already owns the fixed infrastructure — the only question is whether to use it. At a 7x EBITDA multiple, Scenario A creates approximately $5.95M in enterprise value from a product line generating $1.8M in revenue. That is an extraordinary return on incremental capital deployed.

Scenario B (copacker) with the same volume generates $522K in EBITDA — $328K less per year than making in-house. At 7x, that gap represents $2.3M in enterprise value that is permanently left on the table so long as the product routes through a copacker rather than the existing facility.

Scenario D is the cautionary case. When expansion capex is required, the per-unit economics deteriorate sharply. At 400K units and $2.8M capex, the simple payback period exceeds 10 years — well outside any PE hold period. The right answer in Scenario D is almost always to copacker the new product until demonstrated volume justifies the expansion investment, then make the capex decision from a position of proven demand rather than projected demand.

The NPV Framework: At What Volume Does In-House Manufacturing Win?

The most useful output of the make-vs.-buy analysis is not a yes/no recommendation — it's a volume threshold: the annual production volume at which the NPV of in-house manufacturing turns positive relative to the copacker baseline. Once you know that threshold, the question becomes purely a demand projection question: do you believe you will reach and sustain that volume within your investment horizon?

The NPV comparison is built as follows. Define the copacker path as the baseline (NPV = 0). The make path has a negative initial cash flow equal to the capex investment, followed by annual net benefits equal to the COGS savings per unit times volume, less any incremental fixed costs added by in-house manufacturing (facility delta, minimum staffing additions, maintenance reserve). Discount the annual net benefits at the appropriate rate for the business — typically 12–18% for PE-backed operating companies — and compare the present value to the capex outlay.

With a $1.5M capex and the parameters above, the NPV crossover sits at approximately 1.25 million units annually. Below that volume, the copacker path generates superior value on a risk-adjusted basis. Above it, in-house manufacturing increasingly outperforms.

Two things are worth noting about the shape of this analysis. First, the crossover volume is almost always higher than operators initially estimate, because early-stage volume projections tend to reflect optimistic ramp assumptions rather than demonstrated demand. Second, the model assumes flat annual volume — a growing volume curve would shift the in-house advantage forward in time, since later years carry more volume at the higher COGS savings. The practical implication: if your current volume is below the crossover threshold but you have high confidence in a volume trajectory that will clear it within two to three years, a staged approach — copacker now, build your own infrastructure at the volume inflection point — is often the best answer of all.

What the Model Doesn't Capture: The Hidden Ledger on Both Sides

The NPV framework is the right starting point, but a complete make-vs.-buy analysis has to account for risks and costs that don't appear in a discounted cash flow. Both paths carry material non-financial exposures that can make a theoretically favorable decision look very different in practice.

The Hidden Costs of Copack

Dependency and leverage. Once your brand is built on a copacker's capacity and schedule, they have leverage over you. A copacker who decides to exit your category, prioritize larger clients, raise prices 20%, or increase minimum run requirements has limited contractual exposure if they provide adequate notice. Your ability to respond is constrained by lead times: switching copackers typically requires 90–180 days to validate a new facility, qualify the production process, and work through initial runs — all while your existing supply chain is in limbo. Brands that have experienced a copacker relationship ending involuntarily know how disruptive that 90-day window can be.

Intellectual property exposure. Your formula, your process, and your product specifications reside in your copacker's facility. Many copackers service multiple brands in the same category — some competing directly with each other. NDAs and formula protection agreements exist and can provide meaningful contractual protection, but enforcement is imperfect and litigation is expensive. The more differentiated your formulation, the more this risk matters. A beverage brand with a proprietary fermentation process or a snack brand with a distinctive seasoning blend faces materially more IP exposure than a brand with a commodity formulation.

Quality consistency over time. You can write a precise specification, conduct pre-production tastings, and audit the facility annually. You are still not in the building. Line changeovers, raw material substitutions, and staffing changes can produce quality drift that is difficult to catch until it's already in distribution. Recall liability follows the brand, not the manufacturer — a point that too many founders discover for the first time when they need it least.

Scheduling constraints and velocity risk. A copacker serves multiple clients. Your production slot competes with theirs. When you have an unexpected velocity spike — a major retail account accelerating reorders, a viral moment, a seasonal surge — your copacker's ability to flex production is constrained by their other commitments. The brands that grow fastest are often the ones most exposed to copacker scheduling risk, because their demand is the hardest to predict and accommodate on a shared production calendar.

The Hidden Costs of In-House Manufacturing

Utilization risk is permanent. Manufacturing facilities have high fixed costs and long economic lives. If sales development is slower than projected, if a major retail account cuts your distribution, or if a new competitor disrupts your category, you're still paying for the facility. At 45% utilization, in-house manufacturing costs more per unit than the copacker you left. You can't convert fixed infrastructure costs back to variable costs — the capex decision is largely irreversible on the downside.

Capex overruns are the rule, not the exception. Equipment installation, facility fit-out, regulatory permitting, and food safety plan development routinely run 15–30% above initial estimates. A $2M capex budget frequently lands at $2.4–2.6M when you add commissioning delays, equipment modifications during startup, and the one or two permits that take longer than expected. For a company with a committed capital structure, a 25% capex overrun can be the difference between adequate liquidity and a drawn revolver.

Technology lock-in constrains your product roadmap. Production equipment has a long physical life but a shorter period of strategic relevance. A canning line installed today for a 12-ounce can format will still be on the balance sheet in 10 years, but the market may have moved to different sizes, materials, or formats. Fixed manufacturing assets can create subtle but real constraints on your ability to innovate — you'll be reluctant to abandon packaging formats that your production line is optimized for, even when the market is moving away from them.

Operational complexity scales nonlinearly. Managing a production facility is genuinely a different business from managing a consumer brand. Food safety protocols, equipment maintenance programs, HACCP plans, allergen management, and workforce management add organizational complexity that grows faster than revenue once you cross a certain threshold. Each of these functions requires expertise that has to be hired, trained, or contracted — and the total cost of building a competent manufacturing organization is almost always underestimated in pre-investment models.

The PE Sponsor Lens: EBITDA Multiple Math and Enterprise Value Creation

Private equity sponsors view this decision through a different frame than operators do. The unit economics matter, but the analysis doesn't stop at EBITDA — it runs through to enterprise value creation relative to capital deployed. And when you run that calculation, the results are often less flattering to manufacturing capex than sponsors expect.

The EBITDA Multiple Test

Consider a manufacturing investment of $2.0M that generates $240K in annual COGS savings, flowing directly to EBITDA. At a 7.0x entry multiple, that $240K in EBITDA is worth $1.68M in enterprise value. The investment returned $0.84 of enterprise value for every dollar of capex deployed — before accounting for the interest cost on the leverage used to fund the project. If the business is carrying debt at 8.5%, the annual interest on $2.0M is $170K, reducing the net EBITDA contribution to $70K. At 7.0x, that's $490K in enterprise value — a return of $0.25 on every dollar invested.

Now compare that to $2.0M deployed into brand marketing, distribution expansion, and velocity programs that generates $420K in incremental EBITDA through revenue growth. At 7.0x, that's $2.94M in enterprise value — or $1.47 per dollar deployed. The return profile on marketing capital, when deployed well in a brand with real consumer pull, typically outperforms manufacturing capex on an EV/dollar basis. This holds across most categories and hold periods.

The exception that changes the calculus: manufacturing as a genuine competitive moat. In certain categories — craft beverages with distinctive fermentation profiles, specialty fermented foods, controlled-process nutritional products, USDA-certified organic or specific allergen-free manufacturing — proprietary production capability is itself a differentiation driver. It's not just COGS. It's a capability that creates a product that can't be exactly replicated by a copacker, and it may command a meaningful valuation premium in a strategic sale where the acquirer is buying both the brand and the production capability. In these cases, the EBITDA multiple math above is incomplete — the capex is buying something that doesn't fully appear in annual EBITDA. That's a legitimate investment thesis, but it needs to be named and underwritten explicitly, not assumed as a default.

Leverage, Covenants, and Working Capital

Three financing dynamics that operators frequently underweight when evaluating manufacturing capex in a PE-backed context:

Credit agreement constraints. PE-backed companies typically operate under credit agreements with lenders that contain capex limitations, leverage covenants, and consent requirements for material capital expenditures. A $2.5M manufacturing project may require lender approval, draw on a capex tranche with different pricing than the revolving credit, or trigger a leverage covenant review. The management time involved in getting a material capex project through the credit agreement is not trivial — and the timing friction can matter in fast-moving market conditions.

The incremental cost of debt. If the capex is funded with incremental debt at 8.5–9.5% all-in cost, the annual interest carry is a real drag on net EBITDA contribution. Manufacturing investments that look marginally positive on a pre-financing basis may look negative when the interest cost is loaded back in. Run the model both ways.

Working capital expansion. In-house manufacturing typically increases working capital requirements relative to copack. When you manufacture internally, you buy raw materials earlier in the production cycle, carry work-in-process inventory, and hold finished goods at the plant before they move to distribution. A copacker invoices upon delivery — the inventory and raw material financing is embedded in their price. For a company with a constrained revolver or tight liquidity, the working capital expansion from in-house manufacturing can be a meaningful operational constraint that doesn't appear in the P&L model.

Special Situations: When the Standard Framework Inverts

The analysis above applies to the typical case. There are four situations where the conventional logic inverts, and getting these wrong is costly in either direction.

Limited copacker supply. Certain categories have very few qualified copackers nationally. Cold-pressed juices, certain fermented products (kombucha, kimchi at scale), highly specialized dietary formulations, and products requiring specific regulatory certifications (USDA organic production at scale, certain SQF Level 3 facilities) may have only a handful of viable copacker options in the country. When supply is constrained, copacker pricing isn't a 30–40% premium — it can reach 60–80%, and availability is not guaranteed. In these categories, in-house manufacturing becomes economically viable at a much lower volume threshold, and the risk of being unable to source a copacker at all is a real strategic exposure.

IP-sensitive formulations. If your product's competitive differentiation lives primarily in the formulation — a proprietary flavor system, a patented process, a distinctive microbiological profile — copack exposes that differentiation to a party whose confidentiality obligations are contractual rather than organic. For brands where the formula is the moat, in-house manufacturing is not just a cost decision. It's an IP protection decision that has strategic value beyond what the COGS comparison can capture.

Volume confirmed and large from day one. The new company case above assumes a typical volume ramp. If you are launching with a confirmed large-format retail placement from day one — say, a 1,500-store Costco or Sam's Club placement — the initial volume may already clear the NPV threshold for in-house manufacturing before the first unit ships. This scenario is rare for independent brands, but it does occur in licensed product launches, celebrity-backed brands with pre-existing audiences, and corporate spinoff situations. When the volume is real and near-term, the case for in-house manufacturing at launch is materially stronger.

The copacker relationship as a strategic liability. In active M&A situations, acquirers conduct detailed manufacturing due diligence. A brand that is 100% copacker-dependent has a specific risk profile that strategic and financial buyers will price into their valuation: they're buying a business where the gross margin and supply chain reliability depend on a contract with a third party who has market alternatives. A brand that manufactures in-house has an asset — equipment, facility, food safety systems, trained workforce — that a buyer can evaluate and, in some cases, expand. For a company on an active exit trajectory, the decision to build manufacturing capabilities isn't just about current COGS. It's about how the business will look in a data room.

The Decision Framework: Seven Questions Before You Model Anything

The framework below is the diagnostic I run with any client before we build a financial model. The answers to these questions define the shape of the analysis — which variables matter most, where the uncertainty is highest, and which path deserves the burden of proof.

The Hybrid Path: Copacker Now, In-House Later

The most intellectually honest answer to the make-vs.-buy question is often a staged one: copacker through the volume-building phase, then transition to in-house manufacturing when demonstrated volume clears the NPV threshold. This approach is systematically underused, largely because founders frame the decision as binary and permanent when it doesn't have to be either.

A copacker relationship is not a commitment to copacker forever. It is a financing arrangement — you're paying a premium per unit in lieu of investing capital in infrastructure, and preserving that capital for uses with potentially higher returns at an earlier stage. When the volume math changes, the financing arrangement changes with it. The transition from copacker to in-house is a complex operational project that requires 12–18 months of lead time, careful capital planning, and execution discipline — but it is a predictable, manageable project for a company that has demonstrated demand and has the financial resources to invest from a position of strength.

The companies that do this best treat the copacker relationship as temporary by design from the beginning. They negotiate copacker agreements with reasonable term lengths and exit provisions, maintain full ownership of their formulas and specifications, and build internal production operations knowledge — even if they're not operating a facility yet. When the volume inflection point arrives, they're ready to move.

The Bottom Line

The make-vs.-buy question is one of the highest-stakes capital allocation decisions an operator or sponsor makes in a consumer food and beverage business. It deserves a model that explicitly compares the NPV of manufacturing investment against the NPV of alternative capital deployment — not an intuitive judgment based on which COGS number looks better at mature-facility utilization.

For new companies: the break-even volume threshold for in-house manufacturing is almost always higher than founders initially model. Fixed cost dilution at low volumes makes in-house manufacturing more expensive than a copacker through the critical early growth phase. Marketing capital, deployed against a brand with demonstrated consumer pull, typically generates superior NPV over the investment horizon. Build brand equity first. Build infrastructure second — from a position of proven demand, adequate capitalization, and operational readiness.

For existing PE-backed manufacturers: when you have available capacity and the new product fits your existing equipment profile, in-house production of line extensions is almost always the right answer. The fixed cost absorption dynamic creates incremental margins that are exceptional and simply cannot be replicated through a copacker. Route to a copacker only when incremental capex would be required at unproven volume, when the manufacturing process is fundamentally different from your existing capability, or when the expansion capex required would push the payback period beyond your investment horizon.

For both audiences, the universal discipline is the same: don't allow the operational satisfaction of building something — a production line, a facility, a manufacturing organization — to substitute for a rigorous model of what that capital would produce in its next-best use. The companies that navigate this decision well are the ones that treat it as a capital allocation question first and a manufacturing question second. The sequence matters.

"A copacker relationship that gets you to $15M in revenue isn't a failure — it's a financing vehicle. When in-house manufacturing clears its NPV threshold, you transition. That transition, made from a position of demonstrated brand strength and real volume, is a far stronger investment thesis than capex deployed into an unproven product on the hope of future demand."

LJ Govoni

If you're working through this decision for your business — whether you're a founder weighing infrastructure investment or a PE operating partner evaluating a line extension at a portfolio company — the framework above is the starting point, not the finish line. The model needs to be built with your actual unit economics, your real cost of capital, and a volume assumption you can defend. That's where the decision becomes yours.

Frequently Asked Questions

Is a copacker cheaper than making in-house?

Often per-unit, rarely per-dollar-of-capital. A copacker converts a big fixed investment into a variable cost and gets you to market without buying a plant — but you give up gross margin and some control. The right answer depends on volume, capital access, and how differentiated your process is.

When should a CPG brand bring production in-house?

When volume is high and predictable enough that in-house unit economics beat the copacker margin you're giving up, when your process is a competitive advantage worth protecting, or when copacker capacity or quality has become the constraint on growth.

Why is make-vs-buy really a capital-allocation decision?

Because the question isn't just what a unit costs — it's what the best use of the next dollar is. Building a plant ties up capital that could fund demand, distribution, or working capital. Framing it as capital allocation, not manufacturing, is what changes the answer.

About the author: LJ Govoni is a Client CFO at Split Oak Advisory Group, a CFO advisory firm serving founder-led companies. He has just under two decades of experience as CFO, President, and Controller across PE-backed food manufacturing, CPG, and craft beverage businesses, spanning 28+ transactions. He lectures in Finance at UTSA's Carlos Alvarez College of Business and publishes practitioner-focused insights at ljgovoni.com.