Hi everyone,
I have been home brewing for over 15 years and have been competing with great success for the last 4. I love it. I want to go pro but I am running into a capital fund issue. How does one raise the capital in such a tough lending market that we are in? By the way I have no money to put into the business at the end.
Join the club. Lack of capital is the reason many breweries never get off the ground. I am in a similar situation. My advice would be to save as much of your own money as possible and work on a solid business plan. You can probably raise some if your funds through family and friends without a business plan, but if you plan on asking anybody else you need one. Plus it’ll help you stay on track and manage your money. Hope it works out for you!
I started my brewery with 3 other partners and myself. We each put in equal amount of money and started very small. Brewed for a year to build a brand and a concept then approached a bank for a loan. Grew for a year and approached the bank for another loan. We started as a single bbl brewhouse and now have a 15 bbl brewhouse with 30 bbl tanks.
It’s not easy. I worked 40+ hours/week for over a year for free, still make far less than I did working in the business world and still have a long way to go to grow my business. But it has been a lot of fun and a great challenge and I love it.
15 years brewing is the experience I had under my belt when I went commercial. I think that is one of the most important things you can have to open a brewery. You really need to know how to make good beer and you need to iron out a handful of recipes.
Only other thing I will warn you of is everyone and their brother is opening a brewery now and the market is getting tight. You will be a year or two out from getting a hop contract unless you stumble on some good fortune. And this industry is in unsustained growth right now, especially in certain parts of the country.
I know of at least one current pro brewer who got a combo of investors and bank funding for 100% of the startup cost. He had a fantastic business plan, and he knew exactly how to run a brewery.
Our bank called us last week to ask us to borrow $150k to make capital improvements, and offered to refinance our whole business loan amount to 3.5% if we did. So I don’t think you can really blame the lending market for being tough.
Bottom line: Banks and investors are good judges of risk. If they don’t want to loan you money, you must look like a huge risk.
If you want to send me a copy of your business plan, I’d be happy to give notes on it.
Keith, what year was it when you got your first bank loan?
+1 on the hop contracts. I’ve been looking at availability of hops, and the next couple of years are already gone as far as the more popular hops go.
Nate, what business plan software would your recommend? I’ve been looking at Business Plan Pro. Probably a good $150 or so investment IMO.
But you probably can’t pay them back without one.
I don’t have a clue on software. I’ve only ever used Word and Excel.
The biggest problem I’ve seen: People have no idea how accounting works. People don’t know what COGS means, they don’t know how to calculate it, they don’t know how to build an income statement or a statement of cash flows.
For instance: every investor (I’m talking pro investors, not your grandma) and every banker knows how to calculate COGS. If you walk in and show a banker a paper where you say COGS = direct material + direct labor, they will know instantly you don’t know anything about accounting, and assume you also don’t know how to run a business.
I just heard essentially the same thing in beer class last week. We had guest speakers from a new 30 bbl brewery here in Yakima. So new they have not yet sold a drop - but they are getting close. Anyway, they said, because the craft beer industry sales are growing by ~10%/year, coupled with the fact that few other segments in the economy are, that it is fairly easy to get venture capital.
I wish them a lot of success. They are three young adults that are about as nice, friendly and helpful as I have encountered. Plus they make great beer. Redirecting...
They’ll be distributing in Washington and Northern Idaho soon.
I am about 90% finished drafting our business plan for a packaging brewery in Minneapolis, MN. You should go to SBA.gov and check out their business plan templates. They are extremely helpful. No need for software, IMO – the web has a ton of free resources that provide more than ample guidance. Drafting a solid business plan is a huge undertaking, but I can’t imagine not drafting one. Once you do it, you will have an entirely new perspective on your proposed business.
Also, you should join the Brewers Association as a brewery-in-planning. We could not have drafted our financials or marketing plan without the BA’s statistics and industry averages. But you’ll also have to do a crap ton of research on your own to see whether the numbers in your local market square with the BA’s data. For us, the numbers were pretty similar with a few exceptions.
FYI, we are raising capital through a variety of ways: SBA 504 loan for equipment, crowdfunding via Kickstarter (this is really more of a PR effort), and a mix of privately invested debt and equity.
Re: competition in the marketplace – yes, it’s true that there are a ton of new entrants to the craft brewing segment. But, if you draft a solid business plan, capitalize your brewery sufficiently, bring something unique to the market, AND BREW GREAT BEER, you’ll have a fighting chance of succeeding. To a certain extent, I think you need to put on blinders when it comes to the competition. If this is something you are ready to pour your heart and soul (and a hell of a lot of time/energy/money) into, then go for it!
Cheers and good luck!
Also, to dovetail with what I was saying about needing to know how accounting works: debt is cheaper than equity. Interest on debt is a period expense that reduces your net income, lowering your tax liability. Equity is taxed on its full value.
I’ve also heard of people getting a bunch of investors to buy-in with equity, then the person who started the brewers gets kicked out of the company and their investors hire someone else to run it.
So if you want investors, you need to be realistic about what you bring to the table. If you were an investor, would you hire yourself to run a brewery? There are plenty of unemployed pro brewers who will work for peanuts.
…or beer! ;D
Trey - I think the first business loan was in 2011. Second one was last year.
I was lucky enough to meet them and see their test setup during hop school last fall. It helps that they will have no problem getting any hops they like - two of them come from an old Yakima hop family with a gigantic farm. And it also helps that the third is a pro brewer with a proven track record.
And you’re right, they are super nice people. 
I guess that would depend on how you look at it. In my experience, debt can be expensive. It’s just less expensive lately. I would rather have 100% equity and no debt service. Sure, you don’t get to expense any interest, but the other 85% (after corporate taxes) you keep. You still have to spend the money to call it an expense. That said, borrowing money is an essential part of starting a business. And with rates like they are these days, it’s not too expensive to borrow. Just watch your ratios and be careful.
Yeah, I’d rather pay cash for a brewery and own 100% of it too. But if you need startup funds, you need to either sell equity or borrow money. Selling equity reduces all of the income you’ll ever make from the business, while debt is fully amortized (loans) or it has a definite maturity (bonds).
Or start up small, learn the business and reinvest your earnings.
Agreed. For those looking at giving away equity or assuming debt, leveraging is generally the cheaper option over the long term because it goes away. Sure, there’s ways to write mandatory buyback provisions on equity but no serious investor is going to want to take equity on those terms because that means you want them to finance the risky period early on but then get cut out of the profits down the road.
As said above, the lending market isn’t that bad. It’s not 2006 loose but it’s not 2009 tight either. Banks are sitting on a lot of cash waiting to be lent out. People are not investing as they were so a lot of cash is going into savings accounts, which is money banks want to lend and generate profit on. However with the newer restrictions on banks and rough local economies they are being more selective about lending than before. When I was in Denver last summer I saw billboards for banks wanting to finance breweries. That’s probably a local phenomena.
It’s very difficult to start a business with no capital of your own. You’re basically asking lenders/investors to take on all the risk while you can just bankrupt out your company and walk away with no liability. That’s especially true if you don’t have a solid business plan (as Nateo discussed above) and you lack experience with business management and/or brewery management. Investors/Lenders are going to want to see qualifications and a clear vision. You’re trying to get into a business which is a combination of an industrial factory (brew house), a public bar (tap room) and sell a product into a highly regulated market. (I don’t know what kind of qualifications you have.) For your own sake I think it’s a bad idea to start a business you lack financial liability in. I think you need some personal money in the business to fear having to ditch the business. It also helps with lenders and investors to show you’re liable for the business, too.
If you can’t get financing through traditional lending or investor routes, you’re going to have to go after alternative financing routes which can be really bad news. If you don’t understand the risks involved you can end up getting sued and held personally liable on the financing deals, have to close up shop, get cut out of the profits, or worst of all, cut out of the business entirely. If it’s something you are considering you should consult with a start up consulting firm or law firm that specializes in business formation.
(I also don’t know what kind of qualifications Duane has, so I’m saying this just generally, not directly about Duane, so don’t get offended)
Touching on something RAM said: Years ago I read in Savage Love (advice column) a letter from a sad kid who desperately wanted a girlfriend. He was like 15. The advice Dan Savage gave him was “Don’t focus on getting laid today, focus on getting your future-self laid.” He told the kid to hit the gym, hit the books, get out there, get life experiences, develop interests, etc. so when he’s actually in a position to date a girl, he’s attractive, both physically and mentally. He’d be prepared, so the girl part would just take care of itself.
It’s about laying the groundwork. I hear from a lot of people who want to start a brewery who have no manufacturing or business background. I don’t hear much from people who know how to start and run a business, because they don’t tend to ask questions on homebrew forums. They just know what to do, and do it.
So if you want to start and run a brewery, start developing the skills you need now, and focus on starting one once you have the foundation you need. Learn how accounting works. Learn how marketing works. Learn how pro’s brew. Learn how to run a business. School works for me, but if you can’t take classes, there’s very little you can’t learn on the Internet.