This post contains questions asked of me during the 2018 Brewery Accelerator Workshop in San Diego, California, followed by my answers.
Taxes and Compliance Questions
What things need to be captured for government agencies?
Government agencies want to prove that you are following the law and that the correct tax is paid. Therefore, it is important to have good books and records. In fact, the Tax and Trade Bureau (TTB) requires daily and summary records so it is important to start good record keeping early. Sales tax is pretty easy to report. Just make sure that your Point of Sale (POS) system is correctly ringing up tax. It is important that only one system calculates tax. If your POS system calculates the tax, then the accounting system just journals the value into the liability account. Special note: if you want to do inclusive tax (total price of the pint of beer is a flat dollar amount), make sure that the system can handle those calculations. No one want to makes change for a $5.40 pint of beer.
That being said, a properly structured accounting and POS system should be everything that you need to keep good records, and you don’t have to spend a fortune to do that.
Brewery Expansion Questions
How do you know when expanding your brewery or expanding production will outweigh the cost of the expansion?
The market will tell you if you need to expand production. Usually, you are shorting orders and you have accounts on a waiting list. However, those days are mostly gone. I will say that if a brewery hires a good sales manager, you can push sales out of the local market and into the regional market. At the last CBC, Dr. Bart Watson said that breweries are only using 50% of their cellar capacity. That means that there is a whole lot of unused capacity out in the marketplace.
Is it a wise investment to make the capital purchase for larger scale or should you wait until you’re actually at the point of need?
It is important that all founders have the same vision. Most founders are scared and want to start off small. There are a few brave souls with industry experience that will start a large-scale brewery. Over the last year or so, I’ve seen a great chill in scaling breweries. At first everyone wanted to get bigger, and then when it got harder and harder to sell beer, everyone’s dreams got a bit smaller. I will say that you should not plan for rapid growth unless you have all of the components in one company (and prior experience is key). You must have a good salesperson who can make the case for the beer. And you must have fantastic beer that is consistently fantastic. Nothing ruins a reputation more than a brewery that is not producing consistently good beer.
Start Up Capital Questions
How do I eventually buy out investors?
Buying out investors is the least effective use of cash. In order to buy out your investors, you will need to have built out your brewery as far as you want it to go. You will need to have a stable market that will not change in the short run. You will have to have profits for a number of years to build the stockpile of cash to pay them off. As you can see, this is not common in our industry.
What is the typical breakdown of ownership percentages if for instance four people invest, but one of them is the only one brewing, record keeping, etc.?
Interesting question. I’ve seen a wide range of ownership percentages. It depends on the money people want to get for the investment. I’ve seen investors take 99% of the company all the way down to no ownership (but a 2nd class of stock that is paid back first). Typically, I’ll see that the working members of the ownership team have a majority of the “decision-making” shares. At start up, the working founder should have 60-75% equity. That will allow for dilution by additional investment into the company that will not change majority ownership.
At the outset is it advantageous to lease or purchase used cooperage to save capital?
There are two major drivers at play when answering this question: What is your market and how much capital do you have? If you are only selling within your local market and you can drive to your kegs, then absolutely purchase them. In the last year, I’ve noticed a drop in keg prices upwards of 20% as breweries have begun to contract. You can get a high quality ½ bbl keg for close to $80, and if it costs $8 per keg fill…
The other side of the coin is if you ship beer outside of your local market. It takes much longer to retrieve the kegs and it takes much more effort to drive to the kegs. In this situation it would make sense to lease those kegs. I’ve seen breweries split the difference. They purchase kegs for local consumption, but lease kegs going outside the local market.