are you ready to start a brewery?

A panel addressing business and financial issues for start ups breweries.

Moderated by Lynne Weaver, Founder and CEO,

Three Weavers Brewing Company

Randall Behrens, SBA Senior Loan Officer, Live Oak Bank

L.J. Govoni, Founder and CEO, Boston Capital Leasing

Jeremy Little, Attorney, Carle, Mackie, Power and Ross

Which entities are the easiest to work with and why?

• Sole Proprietorship

• Limited Liability Company (“LLC”)

• Corporations

(“C-Corp” or “S-Corp”)

• General Partnership & Joint Ventures

Entity Selection

Advantages & Disadvantages - LLC

• Pros – Limited liability protection with pass-through tax treatment; flexible structure; reduced formalities; Operating Agreement governs conduct; create different ownership classes

• Cons – Some investors turned off, can be more difficult with large number of owners, securities law applies under most circumstances, State of California imposes gross receipts tax

Advantages & Disadvantages – C- Corp

• Pros – Shield from liability; stock options; predictable for some investors; multiple classes of stock

• Cons – Lack of flexibility; rigid structure; formalities (consents, meetings, etc.); greater effort to include varying economic allocations; Blue Sky laws; double taxation

Advantages & Disadvantages – S- Corp

• Pros – Liability shield; treated as partnership for federal tax (pass-through tax treatment);

• Cons – Status can be “lost” (automatically become a C-Corp); limited to 100 shareholders; limited to type of shareholders (individuals, trusts – ok, not partnerships); limited to a single class of stock

How important are business plans and projections?

Are there any financial tools available to start up breweries?

What is the SBA?

• Created on July 30, 1953 as part of the Small Business Act.

• The SBA is a Federally funded program that gives the lender a guaranty of up to 75% of the net loss after liquidation of collateral.

• Allows the lender to expand their credit policy and consider loans that may not meet conventional guidelines.

• Allows for longer terms and higher leverage.

• Lender can consider projection-based repayment; ideal for start-ups.

• Typically less expensive than private money or leases.

• SBA funds can be used for real estate, construction, leasehold improvements, equipment, working capital, acquisition and refinance.

• Preferred Lenders can approve SBA loans in-house under delegated authority, resulting in quicker approvals and closings.

What is a Bank looking for from a Start Up Brewery Applicant?

• Equity

• 30%-50% is typical requirement.

• Experience

• Should include commercial brewing experience and management / ownership experience from one or more guarantors.

• Collateral

• Tangible business assets (i.e. equipment).

• Outside collateral from guarantors (i.e. real estate).

• Personal Credit / Character

• If there are any issues, address them early and own up to it. Be prepared to provide a detailed explanation and supporting information if needed.

• Recurring Outside Income / NDI

• One or more guarantors keeping a high-paying job.

• Working spouse.

Start-up Case Study

• Well funded project

• Strong Management Team

• Installing 30bbl Brewhouse

• Guarantors had recurring outside Income

• Excellent personal credit

Loan Structure

Options for a Startup Brewery

• Family and Friends

• Conventional Loan

• SBA

• Equipment Leasing

• Private Equity

• Hybrid Options

$1,000,000 Raise

$100,000 Equipment Lease

$300,000 Friends and Family

$500,000 SBA

$100,000 Personal

Contribution Home Equity

Loan

Equipment Leasing Options for Startup Brewery• Capital Lease

• Installment Purchase Agreement• Fully amortized lease with a “bargain” terminal purchase option (fancy way of saying

“end of lease buyout”) stipulated in the lease documents• Bargain as a misleading term

• Examples of • $“X” • “X” %

• Operating Lease• Think long term rental agreement• More flexible, less stress on cash flow• “The then current fair market value”

Underwriting a Startup Brewery

• Art vs Science• Character Matters

• Explanation of past mistakes or blemishes• Life happen, businesses fail, entrepreneurs persevere

• Business Plan• Do you know your industry? Do you know your market? Do you know

your equipment? Will you distribute? If yes, with whom? • Why will you succeed?

• Legal/Finance• Articles of Incorporation• Operating Agreement• Is professional assistance available if necessary/ have you already

contacted a lawyer and accountant… you will need them

Expectations for Startup regarding Equipment Leasing• Lease Structure

• 100% equipment cost• Amount due at signing:

• First Lease Payment• Last Lease Payment• Disposition Fee

• 1 to 5 year terms• Flexible rate range• Flexible terminal purchase options

• Equipment Eligible• Steel

• Brew house• Tanks

• Package Lines• Can• Bottle• Keg Filler/Washer

• Cooperage• Finance based Keg Leasing, not

Logistics based• “Stuff” others refuse to

finance/lease• If the bank hates “it”, “it” is

that much more attractive to us

Starting up…mix of selling equity and obtaining debt

• Equity = giving up ownership; expensive; restricts freedom to borrow; scrutiny of operations

• Debt = bank/lender scrutiny of business plan, books and records, other entity documents, interim interest or principal payments paid monthly, company’s property as collateral (“bank-owned”)

• Crowdfunding = different types, sell equity; pre-sell goods in return for investment

• Dividends / Distributions

• Liquidation Preferences

• Voting Rights or Management Positions

• Protective Provisions

• Rights of First Refusal

• Information Rights

New investors will typically demand certain requirements

How important are Professional Brewers in determining the viability of a brewery?

What are some of the major mistakes that start up breweries make?

How important are relationships with trades?

How important are relationships with trades?

Questions for our panel?

Jeremy LittleSenior Associate

Carle, Mackie, Power & Rossjlittle@cmprlaw.com

707-526-4200

L.J. GovoniFounder and CEO,

Boston Capital Leasinglj@bostoncapitalleasing.com

877.901.1378

Lynne WeaverFounder and CEO

Three Weavers Brewing Companylynne@threeweavers.la

(310) 400-5830 x 101