Investing into a Brewery

[Youngblood]

I was recently approached about becoming a minority owner in a local brewery. I would have passed on this right away, because I have celiac disease and can not consume gluten. It would be hard for me to stand behind something I can't even have, lol. However, the unique thing about this brewery is that it is 100% gluten free! Based on my conversations with the founder and my own research, there are only 18 other gluten free breweries in the country (no others in the state of Michigan). So now I am very interested. Also, I tried the beer and I like it!

It would be $50k investment for 5% ownership. I have gone over the financials and I don't see any real red flags. I reviewed their business plan and feel confident the founder & brewer have a good plan in place.

Now it's just whether I pull the trigger. I have friend that is in the business and when I asked for his advice, he mentioned he was prepared to tell me to not do it. His rationale was that it's hard to break into a saturated market. In addition, the global issues with tariffs and inflation eat away at profits. However, he really liked the niche market that GF offers. So he considers it could be worth the risk.

Has anyone in this group have experience with brewery investments? If so, is there any advice you have?

 

[Aerides]

GF beer is far from new or really unique. I know of at least 3 or 4 brands as FiL and SiL are both avoid gluten (there are dozens, as you probably know).

Do they already have connections with distributors? A foot in with places like Total Wine and Whole Foods or some local specialty markets? That's the part of the plan I'd be interested in. How to get the beer in front of buyers. All those places already have partnerships and carry a lot of choices.

The part that gets me is your opening line...You were approached. What's your connection to them? Why did they approach you? Who are the other investors? Have you done a background check on the principals? What other businesses have they ran with results? That's what I'd be looking at.

Other than that, $50k isn't terribly huge of a risk, but so far it sounds like you're interested in the emotional side of things (nice product, people, plans) but none of those things have a great impact on success.

 

[latexman]

If this brewery survived through Covid, when a good many bars and restaurants did not, that would be a pretty good litmus test for the downside.

 

[Mr._Graybeard]

Most gluten-free beer I've had is not great. Kind of like no-alcohol beer. Consider how hard a sell no-alcohol beer would be to the mainstream population. There is a niche (a friend loves beer but can't drink because of a medical condition) but it is small. Respectfully, gluten-free may be an even smaller niche. Most gluten-free brewers offer a single product among numerous brews that appeal to a broader market. There is a reason for that.

I live in beer country (and love beer), and I see microbreweries come and go all the time. For many producers it's more of a hobby than a business seeking growth. They may make great beer, but it can't be found beyond the county line because the brewers literally have to beg individual reatilers for shelf space. If you can cut a deal with a distributor, life is a lot easier.

Questions I would have: is this a brewery only, or brewery with brewpub attached? How long has it been selling beer? What is its distribution network like? Wisconsin has some odd laws regarding distributors that benefit established businesses (go figure). How easy is it to get beer into the coolers of local liquor stores and supermarkets?

We have a very popular microbrewery in Wisconsin, New Glarus. It has a cult following, but its only sold in Wisconsin. People cross state lines to buy it. I believe the company decided that the bureaucratic requirements of going interstate weren't worth the trouble. So that's a distribution issue worth considering, especially for a niche product.

Even the biggest brewers are dealing with a flat market. Little guys occasionally can buck the trend with a good product that builds a loyal following. But it takes lots of time. You may be able to shortcut that a bit with some aggressive marketing, but that can be expensive with uncertain results.

Personally, I would consider this a hobby rather than an investment, even a speculative one. Hobbies are fun; I blow money on hobbies all the time.

 

[Sunset]

The brewery is worth $1M after deducting debts ?

I wonder why they would give up 5% for an amount that could be borrowed, unless of course the banks won't lend due to financial numbers being poor and already in debt ?

 

[ScoopKona]

This was my industry for 20 years. I wouldn't do it. Here's why: In the late 1990s, everyone and their brother was opening a brew pub. The numbers penciled out great. Raw materials were inexpensive. Profits were high.

The glut of new breweries caused owners to put out screwy "fad" beers -- chili lime, hemp and similar. These beers weren't very good. It was all about who could be the most outrageous. And there was a massive contraction at the turn of the century. For awhile, used brewhouse equipment was selling for pennies on the dollar as a third of all micros went bankrupt.

I'm seeing similarities right now -- screwy beers that are clearly just clickbait. Lots of new breweries opening. And owners who are in it for the profit, not because they love to make beer. Brewers asking homebrewer questions in a probrewer world.

If you really, really want to own part of a brewery:

1) Get on Untappd and read all the reviews. Throw out the best and worst of them in your mind. But see if there are any patterns -- especially with packaging problems. "I took the beer home and it was flat and tasted like skunk."

2) Get on Facebook, join the Craft Beer Professionals group, and just lurk. Read about the problems others are having.

You could do this in an afternoon. That would give you a solid information foundation.

 

[street]

One of the things that would concern me is being sued for something related to the operation etc.

 

[Magus]

The going joke in my MBA class 10 years ago was "The best way to become a millionaire with a Brewery or Winery is to start with at least $10 million!"

It's an extremely saturated market and they really would either need a successful restaurant and/or distribution/retail partners to do well - and a restaurant also increases the risk of failure. And even when they do well for a while, sometimes the shine fades quick. The weird thing about beer drinkers is that except for lower income drinks like Bud and Miller lite, they are constantly trying new types and therefore are not loyal at all. So they may do great one year and then sales fall heavily the next.

If its a very small part of your net worth and don't care if you never see it again or get a very small return over a long time, go ahead. Otherwise I'd pass.

 

[youbet]

It would be $50k investment for 5% ownership. I have gone over the financials and I don't see any real red flags.

Unless you share a few of the numbers, it's impossible to make informed comments.

Are you going to be strictly a passive investor or perhaps be semi-active?

How will you be compensated other than the value of your 5% ownership increasing over time?

Is this strictly a brewery or is it combined with a retail bar/restaurant?

If strictly a brewery and its GF product turns out to be popular, is there any barrier to entry from future competition or a major brewery entering the GF beer marketplace?

 

[OldShooter]

Experienced with private placements, though not breweries. Thoughts:

There may be very few GF brews offered because the market is too small to support many brewers. You need to make a deeper dive into the market. Maybe talk to a few of this brewery's wholesale customers.

In our area, at least, small breweries are at and beyond the saturation point. Larger ones are diversifying into food and entertainment. I would try to talk to few biz bankers and ask about the current market. If you can find ones who have breweries in their books of business, that would be frosting on the cake. It wouldn't hurt to talk to your brewery's banker, too, though he has a conflict of interest.

Any private placement is a highly illiquid investment. Assuming the investment ends up in your estate, how will your executor liquidate it and at what price?

What is the company's exit strategy? IOW how will you get your money back? Company to be sold? To crank along paying dividends? To go public? Is the strategy realistic? Every deal I have been in has had a clearly articulated exit strategy and I would not consider a deal without one.

That one likes the products is possibly the worst reason to make an investment. Even good companies are not necessarily good investments. I suggest that you look hard at @Sunset's questions. Is the company generating enough profit to support a $1M valuation?

 

[Youngblood]

GF beer is far from new or really unique. I know of at least 3 or 4 brands as FiL and SiL are both avoid gluten (there are dozens, as you probably know).

Do they already have connections with distributors? A foot in with places like Total Wine and Whole Foods or some local specialty markets? That's the part of the plan I'd be interested in. How to get the beer in front of buyers. All those places already have partnerships and carry a lot of choices.

The part that gets me is your opening line...You were approached. What's your connection to them? Why did they approach you? Who are the other investors? Have you done a background check on the principals? What other businesses have they ran with results? That's what I'd be looking at.

Other than that, $50k isn't terribly huge of a risk, but so far it sounds like you're interested in the emotional side of things (nice product, people, plans) but none of those things have a great impact on success.

100% gluten free breweries are rare. Yes, there are other breweries out there that make gluten free beer, but the fact they brew other beers with gluten in them, there is a high risk of cross contamination. People with celiac need to be wary of those types of risks.

They are early into their second year, but they are working with local retailers for their canned beer (some whole food and specialty retailers). The tap / tasting room opens in a month or two.

 

[Trailwalker]

Gluten free breweries are rare because it's a small market. There's one here in Madison, Wisconsin, a city of about 300k in an area where there are a ton of other breweries and brewpubs. I haven't been there because I'm not gluten intolerant and have lots of other choices. Alt Brew has been around since at least 2016, has won some awards, and did make it through the pandemic, but I don't have the sense that they are growing. Self-described as a nano-brewery.

 

[Youngblood]

Gluten free breweries are rare because it's a small market. There's one here in Madison, Wisconsin, a city of about 300k in an area where there are a ton of other breweries and brewpubs. I haven't been there because I'm not gluten intolerant and have lots of other choices. Alt Brew has been around since at least 2016, has won some awards, and did make it through the pandemic, but I don't have the sense that they are growing. Self-described as a nano-brewery.

Agree, GF breweries are a small market. However, with awareness of celiac, more and more people are getting diagnosed with it (7.5% every year - link below). We will see if that translates to more GF beer sales, but I would think having good GF options out there will help.

https://celiac.org/about-the-founda...idence-of-celiac-disease-steadily-increasing/

 

[Youngblood]

Lots of good insight and good questions I need to get some answers for. I will be meeting with principal owner (founder) in a couple days. I'll work some of those questions in. Thank you all!

Like some have mentioned, the $50k is not a make-or-break investment for me. The fact that I actually enjoy the beer and it's 100% GF is a big deal for me. Like Mr. Graybeard referenced, the other GF beer hasn't been very good. I'm excited that I have another option (besides just certain liquors) and the fact that I could be a part of that.

 

[OldShooter]

100% gluten free breweries are rare. Yes, there are other breweries out there that make gluten free beer, but the fact they brew other beers with gluten in them, there is a high risk of cross contamination. People with celiac need to be wary of those types of risks.

They are early into their second year, but they are working with local retailers for their canned beer (some whole food and specialty retailers). The tap / tasting room opens in a month or two.

Agree, GF breweries are a small market. However, with awareness of celiac, more and more people are getting diagnosed with it (7.5% every year - link below). We will see if that translates to more GF beer sales, but I would think having good GF options out there will help. ...

@Youngblood, with all due respect IMO you are starting to show symptoms of falling in love with this deal. Never fall in love with a deal. It is dangerous to your financial health. You have gotten a lot of good comments here and I encourage you to think about them, work on your due diligence, and suspend judgment until you have a lot more information. The existence of a good GF market is important to this brewer, but by itself it is far from sufficient to make your proposed deal a good one. Sorry to be grinchy, but it is a tough world out there. Something like 50% of small businesses fail by their fifth year. To expect to get return on your investment you need to do whatever you can to determine whether this brewery will not be one of them.

Or, as @Magus suggests, if this is not serious money to you and you are attracted by the potential fun of being involved with the company, then pull the trigger for those reasons. Coincidentally, DW and I put $50K into a fun-looking restaurant deal actually recommended by our CPA, who was also in. The restaurant was dead and buried within 18 months. Return? Zero. We ate there once though, and that was kind of fun.

 

[savory]

Make sure your discussion includes their distribution model. Mr Gray Beard mentions New Glarus desire not to expand do to the distribution issues for alcohol. Another very good beer from Milwaukee is Sprecher. Having known their sales manager, they elected to focus on root beer given the difficulty of distribution.

A another couple of thoughts, I would not over estimate the purity of food production. Peanuts seem to be isolated. And so is all Kosher/Hallal food made in many different plants.

Finally, it is possible for a small brewery to find their niche. But, I would take a close look at small brewery success. It's a non-proprietary product. If the big boys want to duplicate it, they will. As a former product manager of national brands (not food), if there was an overlooked opportunity, it could be acquired or it could be financially buried. Given no patent protection for a beer, I expect the big boys would simply invest in their own similar product if your friends 'test market' worked out for them

 

[still_working]

If this is a hobby rather than an investment, follow your heart.

If you're looking at this as an investment, many good points have been raised by others in this thread. I'll add a few of my own. I'm no expert but have two friends who are minority owners in two different breweries, and for my part I contributed materially to keeping the industry afloat during COVID with my purchasing and consumption.

Is it a taproom only, or do they can/bottle, or have local accounts that take kegs? Margins in the tap room are strong. Canning increases your reach and provides to-go options but significantly erodes the margin due to packaging costs and rental of the canning equipment. Local accounts with kegs means lower margins and you're fighting with the other local breweries for the one or two tap handles they allocate for locals to compete with the dozen+ handles taken up by the InBev and others.

If it's a tap room, consider what generates the foot traffic needed to drive sales. Most small breweries are in business parks; if too far off the beaten path even the 'regulars' may not be consistent when traffic/weather is bad, etc. Sometimes having a couple other breweries in proximity is helpful as patrons will hop from one brewery to the next.

Costs are skyrocketing, particularly if canning and/or shipping. I'd ask them how much it takes to make a pint, and how that compares to a year ago. If they don't know, it would be a red flag for me.

The brewer in a small brewery is a single point of failure. He can take a role elsewhere and even if he's generous and gives 30-60 days notice, that's not much time to find a good quality brewer to take his/her place. You'll want to know they have a contingency for this.

Ownership structure is worth looking into as well. Presumably both the owner and brewer are shareholders. They're probably pitching it like "we always get along" but as one example, if your brewer wants to experiment and create all these new beers and the owner wants to focus on five core beers to make sure you're covering the overhead, who wins?

--------------------------------------------------------------

Just re-read the thread before posting this and see that you mentioned they're just over a year old, canning their beer, and opening a tap room in a month or two. Based on that I'm curious how they came up with $1M valuation ($50k stake for 5%). If you plan to invest (and it seems like you really want to), your $50k is probably worth considerably more equity.

Good luck with your decision.

 

[Magus]

Agree, GF breweries are a small market. However, with awareness of celiac, more and more people are getting diagnosed with it (7.5% every year - link below). We will see if that translates to more GF beer sales, but I would think having good GF options out there will help.

https://celiac.org/about-the-founda...idence-of-celiac-disease-steadily-increasing/

If its in the grocery store or Total Wine or wherever, no one will know if it was only GF or not though at the distillery (at least to an overwhelming # of customers - just like food products). So only locals would know for the distiller, and even then would be hit or miss.

And the problem is drinking beer at a distillery is a social event - you need the person with celiac to convince their beer friends to come drink only GF beer, which is a tall task....they are far more likely to convince their GF friend to come drink their GF beer at their brewery while they drink their normal IPAs and blondes. And in the extremely unlikely event this takes off, the big guys will copy you.

In the event this doesn't fail, this would be a niche success at best IMO and not worth the risk for any business, much less one that's way overcrowded (beverages in general). If you have a ton of money you need to put to work and don't care if you lose it - go ahead - breweries can be fun - but I would not invest thinking you are going to make a lot.

The other question is - why are they raising capital? Return to owner? Expand the brewery? Expand in retail? Running short on cash?

 

[jazz4cash]

I found your brewery easily on google. That answered many of the questions posed here. It looks legit with some promising retail partners. I suspect this is more along the lines of a hobby/project for you. Only you can evaluate the numbers so good luck and keep us posted.

 

[COcheesehead]

Having owned an eventually highly successful business for 27 years I will tell you my experience.
Sales are #1. Nothing happens without sales. Make sure you know where your first dollar is coming from. Sales is hard, good sales people are rare. I would not invest in something without a really good understanding of the sales model and who will be driving the model.
People are #1A. Good people are hard to find. Employees will challenge your existence daily. If you have to manage hourly employees to staff a tasting room, good luck.

Margins are slim in industries like this. The margin for error is slim. The chances of you getting your $50,000 back are slim, but go ahead if you feel confident in sales and the people component.

 

[WhenIsItTime]

I was recently approached about becoming a minority owner in a local brewery. I would have passed on this right away, because I have celiac disease and can not consume gluten. It would be hard for me to stand behind something I can't even have, lol. However, the unique thing about this brewery is that it is 100% gluten free! Based on my conversations with the founder and my own research, there are only 18 other gluten free breweries in the country (no others in the state of Michigan). So now I am very interested. Also, I tried the beer and I like it!

It would be $50k investment for 5% ownership. I have gone over the financials and I don't see any real red flags. I reviewed their business plan and feel confident the founder & brewer have a good plan in place.

Now it's just whether I pull the trigger. I have friend that is in the business and when I asked for his advice, he mentioned he was prepared to tell me to not do it. His rationale was that it's hard to break into a saturated market. In addition, the global issues with tariffs and inflation eat away at profits. However, he really liked the niche market that GF offers. So he considers it could be worth the risk.

Has anyone in this group have experience with brewery investments? If so, is there any advice you have?

You are getting good advice above. Why do they want your money? Do you have any related business insight to contribute or to have an informed opinion on their plan? Are they looking to make their money locally as many start or via distribution? Who are the key people involved and are they hype or actually worth investing in?

I'm in SW Michigan. You must be aware consolidation is occurring and several small to mid-size breweries have closed in the time this endeavor has been started.

You last question gets my attention where you said "investments". If this is a hobby and you get comfortable with the situation, go for it. If this $50k is important, tread lightly.

 

[ERD50]

@Youngblood, with all due respect IMO you are starting to show symptoms of falling in love with this deal. Never fall in love with a deal.

.... The existence of a good GF market is important to this brewer, but by itself it is far from sufficient to make your proposed deal a good one. ...

So I was curious, and also searched out the Brewery. Here's my concerns, from an article I found:

The fact that they are gluten-free won’t even cross your mind when you taste one of these three bad boys. They are full-flavored and full-bodied, and I would put them up against any other Michigan beer in a taste test.

OK, that's good. And I'm a little surprised if that is indeed true (and I won't rule it out). The gluten free beers I've tried ranged from pretty poor to OK (brewed with gluten free products, not gluten-reduced). But I haven't searched out others, there may be some great ones.

Now here's my big concern:

... “We have a lot more raw material," he added. "A typical 5.5% ABV beer is somewhere in the vicinity of 600 pounds (of ingredients) for a 10-barrel system. I build a beer with 1,000 pounds.”

barley and wheat will never even see the inside of the brewery.

“The level of effort versus the cost incurred to use these non-barley cereals is high,”

So it costs a lot more, and it's "just as good"? OK, they may be better for those who really want/need a gluten free beer, but that is really limiting your market. I'm not going to pay a premium for something that is "just as good".

That certainly doesn't mean they won't be successful, but I think that's a strong headwind.

Good Luck.

-ERD50

 

[COcheesehead]

Every business needs a compellingly value proposition. Just as good at twice the price just doesn’t have a good ring to it.

There are some new no/low alcohol beers being marketed to weekend athletes by professional cyclists and the like. Curious to see how those do.

One of our favorite brew pubs offers a GF beer, but alongside many others.

 

[ERD50]

I just had a follow-up thought to my recent post. Current good sales might be misleading. Like many others. I'd probably be interested in trying their beers, to see if they are "just as good". But after my curiosity has been filled, I'm not as likely to stop there again - why pay a premium price for "just as good".

So you might get early traffic from the curious, and then what?

-ERD50

 

[OldShooter]

... So you might get early traffic from the curious, and then what?

That's why I suggested that the OP talk to wholesale customers (liquor stores, etc.) about the product. That should result in information on the extent that repeat customers are buying.