business Collaborating with Another Sauce Company

It works different ways and interstate alcohol laws have a lot to do with it, but one of the common ways is:
 
Whichever facility is producing the beer, that is the owner. They buy all the materials. Then end product is sold to the collaborator at material cost.
 
Then often times they swap facilities (owners) and let the other be the owner.
 
 

re: hot sauce
 
It's only going to work with at least one big name involved. Two small timers collaborating, no one would really understand the release and it would look confusing on a label. The best bet would be to form a joint venture, or simply hire the other as a consultant.

so if we take this approach and I an buying product at cost, should there be some sort of no compete agreement which would prevent them from selling this collab sauce to places that already carry my sauces and I cant sell to to clients that have purchase theirs?

That's up to you. What the brewers do is treat it as a cross promotional item. So they do not consider it competition. Both companies need the promo and wherever the beer goes, it promotes both. But it's all up to you and perhaps you should consult an attorney.
 
The one-owner method saves a lot of headaches and paperwork. One is the owner, the other is a client that gets it at cost. Easy. Unless you want to share the IP then it gets messy again.

Another take:
 
You bring the recipe.  They supply the kitchen.  You both split on the ingredients/packaging/label.  Whatever is left over after bottles/labels is split 50/50.
 
So you agree to provide the recipe, they agree to provide the space to produce the sauce.  The costs for ingredients, the packaging (bottles & caps), and the label are split down the middle and then once all the costs are paid for you each split the profit.
 
EXP:  You both go in and agree to the above terms.  $500 worth of ingredients are purchased.  250 bottles of hot sauce are produced.  The finished sauces are sold for X per bottle.  The sales compensate the payer for ingredients/bottles/labels first, then any profit left over is split 50/50.