When you’re thinking about starting a brewery, it’s easy to feel daunted by the cost of it all. As we’ve covered elsewhere, there are strategies to get around those brewery start-up costs—and oftentimes funds are out there. (See all of our Brewery Start-up Series here.) Still, no matter how you fund the brewery, a significant business expense is the commercial lease. Understandably, brewery start-ups are reluctant to sign a lease and obligate themselves to rent payments too early in the process. For those considering opening a brewery, however, it’s important to note that in order to get a license to commercially brew beer, a brewery needs a premise. The premise, along with the start-up team, is what is licensed.
Commercial Brewery Lease and Opening Timeline
In other words, the brewery’s lease comes before the licensing application. (You can check out our general Brewery Opening Timeline here.) This is the case for the federal brewery license through TTB, which you apply for through a Brewer’s Notice and filing other information about the business owners. This is also the case for states such as Washington, seeking a Washington brewery license through LCB (Liquor Control Board).
This brewery-opening timeline is important to keep in mind, as it informs a start-up brewery’s budget and brewery business plan. However, there may be creative ways to alleviate some of this pressure. For example, a brewery may be able to negotiate reduced rent with its landlord for those first months, while waiting for licenses to come through. Or, to at least give the start-up team peace of mind, the brewery’s long-term obligation to pay on the lease may be made contingent on the start-up’s ability to obtain proper licensure.
Ultimately, when putting together a brewery business plan, it’s wise to be thinking about location early in the process. Not only does licensing depend on it, but the location itself, proximity to other breweries, parking configuration, access to foot traffic, and the like, can all play important roles in how successful a particular business plan will be.
Next Brewery Start-up Series:
In our next segment of the Brewery Start-up Series, we’ll discuss common premise-licensing issues and important things to consider when reviewing a potential premise or lease.
Last time in the Brewery Start-up Series, we touched on different brewery start-up sizes, including some creative business planning that might help a brewery get off the ground without forcing its founders to quit their primary jobs just yet. Check out that post here, if you haven’t already. Once you’ve thought through preliminary start-up brewery size questions, then it’s typically time to consider the next step, which is today’s topic:
How Will You Structure Your Start-up Brewery Business?
Every start-up brewery has a different story that led them to the decision to go pro, so every new brewery will have a different answer to this question. How you structure your brewery business itself will turn on your brewery size, how many owners you have, how many managers, how many investors, and how well everyone knows each other. It will also turn on your business goals, the rate you want to pay back investors, and where you see your brewery going in the future. Different founders may have different thoughts on these basic issues, so a good starting point to find some answers to these questions is to begin putting together a solid Brewery Operating Agreement.
What is a Brewery Operating Agreement?
Essentially, it’s an official document among owners (that frequently contemplates investors) that sets forth how decisions will get made, addresses how profits/losses will be distributed, and lays out all the nuances of ownership interests. Whether you’re a family-owned operation, a start-up brewery among best friends, or you’re planning a massive fundraise, it’s essential to get a Brewery Operating Agreement in place so your business can efficiently function and so that everyone’s on the same page.
Some elements of a good Brewery Operating Agreement may not be obvious but are nevertheless essential, such as including a requirement that any new member (owner) of the business pass TTB / local reg background muster, so the brewery won’t jeopardize its licensure. Here at Reiser Legal, we help make sure Operating Agreements have these essential provisions all the time. Outside of that, though, how you structure your business is truly your call. We frequently make suggestions, especially if the business is planning to raise funds, as certain provisions are more likely to drive investor confidence. Nevertheless, it’s ultimately up to you. Often, it’s most helpful if you create a basic framework for the Brewery Operating Agreement before bringing it to us, or your local lawyer, for us to review and offer suggestions.
Here are just a few points you’ll want to think through in building out your Brewery Operating Agreement, depending on your concerns and business plan, you may have many others, and your beer attorney can help you drive that discussion based on your unique needs and concerns:
How much money will each owner put in, if any?
Will some individuals be investors, while others will be managers?
If you’re seeking investors, what’s the maximum amount of the company you’d want to give up?
What value would you consider the company to know how much you’d need to raise to reach that value and maximum investor percentage?
Do investors have any first rights to distribution (profit payouts), before managers start earning profits according to their ownership share?
How do you want decisions to get made?
What decisions do you want to require a Supermajority to make, versus a simple majority?
Do you want unanimous decision-making for certain decisions?
Are members allowed to sell their shares, or do existing members have the right to buy them if they want first?
What happens if something happens to a founder such that he or she can no longer pull the anticipated share of management duties? Who gets shares upon a member’s death?
What happens if a founder is doing things the other members disagree with, can a founder be kicked out or what steps must happen first?
The best time to make these decisions, and think through a Brewery Operating Agreement, is when everyone’s getting along and building the dream, rather than when something comes up down the line. It’s your business, and you can structure it how you want. However, by agreeing on certain basic terms, a start-up brewery is poised for more efficient decision-making and, by hammering out a professional Brewery Operating Agreement in collaboration with an experienced beer attorney, a brewery is ready to open up shop and potentially take on investors, too.
Next time in the Brewery Start-up Series, we’ll discuss the step of brewery entity selection, an important piece of any brewery’s overall start-up plan. Is the best choice an LLC? Or, should you think about a different business structure? Stay tuned.
Planning a successful start-up brewery may seem like a quite the feat, but getting through your first brew day probably felt that way too. Like most things, it helps to break the project down into smaller steps (and RDWHAHB). In this Brewery Start-up Series, I’m covering some items and questions every future brewery owner will want to consider when planning a brewing business. The list will be by no means exhaustive, but should help get the process rolling—and, as always, Doug and I at Reiser Legal are here as a resource when you’re ready to take that next step or have questions along the way. Today’s topic:
If you want to dive in and get your own equipment, but are reluctant to amass debt or take on too many investors, opening a nanobrewery is also a viable route that’s proven successful for a number of breweries. You can start with a small system, build a fanbase, and grow at your own rate. What’s more, as you generate interest in the community, you might find that you can generate an even more substantial fundraise for a bigger facility down the line, versus had you raised funds before ever proving yourself as a brewery and business owner. We’ll note that if you have some funds, but need a bit more to build out at the level you want, light fundraises through outlets like Kickstarter have also proven quite successful, and are a great way to garner attention in your community.
Dive in and Open a Packaging or Production Brewery.
So long as you have the funds, aren’t afraid of going big from the start, or don’t mind giving a piece of your future business away, a start-up brewery can go from 0-60 quite quickly. The key to a successful fundraise is a rock-solid business plan. It’s your pitch.
In the end, start-up costs are unavoidable, but through some basic business planning and sometimes creative choices, a start-up brewery need not feel daunted.
Next time, we’ll walk through some business planning strategies, including items you’ll want to address in your brewery’s Operating Agreement.
It won’t surprise you to hear that, for every group of folks that takes positive steps to start a brewery, a certain percentage never end up launching. There are countless reasons for abandoned business plans. Life happens, after all. More often than not, however, struggles in the start-up days are due to the same sorts of struggles that crop up in already-operating businesses: tension among the folks behind the business because of differing viewpoints about how to move forward. For the operating business, however, these sorts of tensions are easy to get past because there are formal rules in place for how decisions get made. Indeed, that operating agreement is the sort of document we regularly put together for clients, as we help them choose a corporate structure and prime their business to attract investors to get the business rolling.
But, many start-ups aren’t ready to take those formal steps just yet. They’re just not quite there. Still, no matter how well you get along with your future partners, some of the wisest start-ups (and the ones that tend to make it to launch) are the ones who put some rules and agreements in place before too many decisions get made. An agreement among founders will look different for every group that puts one together. It doesn’t necessarily have to be a formal thing, although Reiser Legal and other beer attorneys are available to help you start the process, whether formal or not. Whatever your preliminary agreement contains, it can go a long way toward uniting the team—and even preventing the possibility of fallout by devising up-front plans to avoid spats. These sorts of agreements can help lay out who does what and set forth how early decisions will get made. It’s no surprise that the best time to come to an agreement is when everyone’s getting along, before emotions ever get mixed in. You might think that you and your best friends will never reach an impasse, but starting a business can be filled with fear and frustration, even if it’s taking you all closer toward your dream.
Here are just a small handful of questions you might ask your co-founders, in thinking about putting an agreement together. Sometimes, just asking the questions and coming to agreement in advance, even if it’s not in writing, can go a long way toward getting collective momentum going in your favor. Of course, depending on how many steps you’re taking up front before formally incorporating, it may be wise and offer the best protection for everyone by putting pen to paper and formally agreeing to agree.
How will we make preliminary decisions, even about designing our corporate structure? Do we need to be unanimous? How much of a majority?
When we need to put in some up-front money to get things done, how will we account for that? Who’s in charge of keeping those records?
What if something comes up and one of us can’t move forward with the plan or just doesn’t want to? What if that person has put money into some preliminary steps? What if, when leaving, that person or group wants to open up a different brewery in town?
Whose name will our intent-to-use trademark be in, in the event we’re not incorporated when we want to get it? Will that person be required to release the name to the rest of us if they don’t want to move forward with the rest of us?
What happens to our planned recipes, brewery name, preliminary artwork, and so forth, should our team disband before launching?
Most start-up teams have agreed on the personality of the brewery they want to start, and have a growth plan for the business itself, knowing exactly what kind of brewery they want to be to best position for success. That’s why the group has come together in the first place. But, to increase your odds of being that success story, we find that start-ups really can be set up for the best by taking the time to plan for the worst.
***NOTE: I have had two comments now from confused readers regarding my use of the term of “Pilot.” I use the term pilot to refer to a brewery’s test system – the brewing equipment used to prepare small batches of beer. My use does not include the TTB’s use in the “pilot brewery license,” which is a license reserved for educational, scientific and research purposes. That license will not allow you to sell your beer. But using a “pilot-type” brewing system, you can obtain a normal Brewers Notice. That is my intent with this article. Hope that clears it up!
The past few months have been extremely exciting. My office has been inundated with calls from brewers ready to go commercial. I am very happy to announce that Reiser Legal’s flat rate licensing packages have been uber successful – and as a result we have more beer being churned out. I only wish I could help more of you in other states (sorry guys and gals).
A trend is seriously starting to take shape – brewers are getting the TTB out of the way early on by licensing a pilot system. Whether it’s a 10 gallon system, or its a 10 bbl commercial pilot, many are finally taking advantage of the fact that a Brewers Notice can be attained much earlier than you might have thought.
I have always taken the stance that the best thing a brewery can do is get licensing accomplished as soon as possible. Waiting until you have you found investors, ordered equipment, installed equipment, ordered materials, etc. – can cost you quite a bit of money in standstill operations. Remember, the TTB and state licensing processes can take several months to accomplish.
In the past few years, the TTB has become accustomed to the “nanobrewery.” Regularly, the TTB licenses commercial brewing operations of no more than 10 gallons of production per batch. In some instances, I have seen anything from modified stovetop assemblies to standing burner setups get their TTB licenses and begin to churn out legally-salable beer.
The important things to remember are that the TTB will only license a bonafide commercial operation – which means finding zoned space capable of meeting local codes. Sometimes, it might be an industrial garage and sometimes it will be a small shed in your residential backyard. But, as long as you can meet the minimum standards, your dream of opening a microbrewery might be closer than you thought.
Knowing these things, many brewers are getting started earlier than they had hoped. By obtaining a suitable space and a reliable pilot brewing system, brewers are able to submit their application to the TTB and state licensing agencies. Once approved, they can grow organically and obtain change of locations, change of owners and other approvals required by the TTB.
Want an example? The photo above is my wife’s brand spanking new pilot system. This system will be used to submit an application to get her brewing. With the licensing processes out of the way, she can begin producing and selling beer while raising the money to start a full scale production facility.
Don’t delay the application process. Get brewing and grow organically.