There are many points to consider when trying to raise capital. This purpose of this article is to help you navigate the cash waters and avoid any pitfalls that may arise. There are three ways to raise capital for your brewery:
1. Self funding — This includes your money or family money.
2. Investors — This includes giving up ownership in the brewery for money.
3. Institutions — This includes banks, venture capitalists (VCs) or other lending organizations.
Self funding
Wouldn’t we all like to be self-funded? Own the whole pie and be debt free! While some production breweries are self-funded, this is not the reality for most. Self-funding is simple because it is your money and you can do with it as you please. I support self funding to a degree; meaning, put as much in as you can without emptying your reserves. I especially like self funding when it is parlayed with institutional money.
Investors
If you choose to bring on investors, you will give up ownership in the brewery in exchange for cash. This route is the most common for startup breweries. To get started, you need to develop an investor packet, which should provide a savvy investor all the information they need in deciding to invest or not. This packet should include a brief business plan, financial projections, market analysis and private placement memorandum. The goal of this document is to attract investors, so make it look nice. Next, find people with money. If you happen to know a bunch of people with money, brew up a batch of liquid gold and host a Pitch Party. This will gather all potential investors in one area, they get to sample the product and you get to pitch your deal. You need to prepare for this event. Why? Because once the pitch is over, the questions will begin. A great place to get a sense for this is on the ABC show Shark Tank. Common questions that may arise are: How did you determine the valuation? How will you structure the deal? When will we see a return? What will you do with the money? Have answers.
You’re in the money
So you had a successful pitch and the money starts flowing in, now what? The most important part to understand about this method of funding is, once you take investor money, you are now working for them. So are your grain providers, lawyers, accountants and anyone else who does business with the brewery. This is a reality of inviting investors in and should not scare you. My point here is investors will expect that you understand how to operate not only the brewery, but a business. Examples of properly running a business include: timely and accurate financials; annual comprehensive reviews of insurance policies; and investor communication.
Welcome to the big leagues
This may be overwhelming, but it can be done — trust me. A little organization goes a long way. Last tip for working with investors: Please do not cut corners with document creation. Seek and pay for sound legal advice when preparing any documents involving the investors. It is not uncommon for a Private Placement Memorandum to cost between $20,000-$80,000 depending what region you are in. I have found that most brewery investors are easy to please. The key here is transparency. Check out my five tips for keeping brewery investors happy.
Institutions
Banks are a great source of capital, if they will lend you the money. Banks are starting to open their doors to breweries. There are three ways to penetrate the institution arena: 1) two years of sound financials; 2) they want to see you have skin in the game (i.e. your own money); 3) collateral. If you can satisfy those requirements go for the bank debt. It never hurts to ask a bank, especially now when they are trying to catch this wave of brewery growth.
Ideal financing examples
Senario #1
Production brewery (no taproom) wants to be at 5,000 barrels (bbl) and canning by the end of year two. My estimates say they need $750,000 in equipment and build-out. Add my 30-percent topper and they need a total of $975,000. I would break it down like this:
Year 1
$100,000 Self Funded
$475,000 Investors
Year 2
$400,000 Institution
Senario #2
Production brewery with a taproom wants to be at 5,000 bbls and canning by the end of year two. My estimates say they need $900,000 in equipment and buildout. Add my 30-percent topper and they need a total of $1,170,000. I would break it down like this:
Year 1
$50,000 Self Funded
$400,000 Investors
$110,000 Taproom Profits
$300,000 Institution
Year 2
$110,000 Taproom Profits
$200,000 Institution
Chris Farmand is the founder of Small Batch Standard, a CPA firm helping craft breweries across North America. Chris has more than 10 years of tax and accounting experience, with the last 3 years dedicated to the craft brewing industry. Small Batch Standard believes brewery owners should have reliable financials while focusing on what they do best, making beer. He can be reached at chris@sbstandard.com.
