In 2017 I attended the Brewery Accelerator Workshop in San Diego, California and was available to answer pre-workshop questions for brewery CFOs. The topics included taxes and compliance, outsourced accounting vs. home-grown operations, start-up capital, and operational accounting.
Part 3 discusses questions about start-up capital.
Q: What is a common mistake in managing working capital?
A: Not understanding the owner’s/founder’s living expenses. If you have two to three owners who need to pull down 10,000/month to make their monthly bills, that is a huge competitive disadvantage.
Q: At what point does one need to have financing secured?
A: People need to believe in your brewery concept. The brewery comes to life when people start to believe in it. That happens when you have to have enough of the company built to make a ‘money person’ believe in you. Usually to obtain financing, you will need a basic financial proforma, logo and branding; good sample beers; and preferably a Letter of Intent from a building. Those are the major steps towards creating a reality.
Q: Is there a typical financing scheme, say, equipment through a SBA loan, portion of capital from private investors (percent?), plus personal capital (percent?) From private investors, do you pay back on profits or some target interest equivalent?
A: There are also stages to raising capital. Before opening the brewery, you’ll probably need to find people willing to take a huge risk on you. Those people are called “FFF” (friends, fools and family). It is possible to attract professional money, but you’ll need to demonstrate that you have something special (experience in running a brewery or a lot of awards for beer). Once you’ve been open for a few years and have proven your concept, the professional money will be glad to organize an SBA loan. Since the SBA is backed by the federal government, banks are willing to take an early chance on your success.
Q: Should I target multiple small investors or a handful of large investors?
A: For better or worse, investors become family. And they may have a lot or a little to say. In general, it is easier to wrangle a small number of investors versus a large number of investors. I’ve seen brewery owners complain about large number of investors, but rarely do I hear them complain about small number of investors.
The real question is whether or not the investors have any say; either in operations OR in financing. Keep in mind that a 20% investor must personally guarantee an SBA loan. I’ve seen brewer expansions fold because an investor was not willing to give the personal guarantee.
Q: If the brewery goes bankrupt, how are investors handled and how is personal equity handled? What are some common mistakes in fundraising?
A: In a bankruptcy, there is an established pecking order for debt satisfaction. Those people with a UCC Filing (a claim on the assets at the courthouse) have the right to take the equipment to satisfy the debt. That leaves unsecured debtors (employee wages and accounts payable). Once those people are satisfied, then the investors would see funds. Typically, they will lose everything.
Common mistakes include underestimating the amount of working capital to get started, building up too much too quickly, and ownership draws that strains working capital. Those actions take valuable funds that could be used to purchase malt and hops.