By Douglas D. Morris
For the Oregon Beer Growler
Brewers may need to devote time and attention to other aspects of their business, besides making great beer, as the craft beer industry continues to be in transition.
After multiple years of double-digit production growth, that paced slowed in 2016, and production growth could be in single digits again in 2017. This slowing has many craft breweries rethinking their strategy. Breweries that have been using fast-growing revenue to pay for new facilities and equipment might need to raise future capital from new investors.
Also, recent sales of numerous craft breweries have attracted a lot of attention. There is every reason to think that those acquisitions will continue. These transactions may have some breweries considering a sale or merger of their own.
In this climate, it is important to discuss practical steps to take to be ready for a strategic transaction, such as a new investment or sale. The bigger questions of "Should you bring on new investors?" or "Should you sell your brewery?" need to be examined and discussed among the ownership group and perhaps a qualified business adviser, so we will forgo that discussion here.
A typical investor or buyer will conduct a due-diligence investigation into your business as part of any transaction. The investor or buyer will look for any risks that might affect the value of your business during an investigation that can be quite detailed and thorough. But the process will go more smoothly if certain issues are addressed before your first meeting with a potential investor or buyer.
Clear Ownership of the Company
Start-up breweries may have some ambiguity about who owns what. Some friends and family may have provided start-up capital; were those amounts loans or equity investments? Some contractors might provide artwork, design or construction services; were they going to be paid in cash or equity? People's memories may change when money is on the line. Now is the time to sit down and put any oral agreements and understandings in writing.
Clear Ownership of Brands
Branding and trademarks are as valuable to brewers as their great recipes. Obviously, breweries should ensure that their brands are protected in the places where they currently sell product. Breweries should also confirm that there is a clear path to protection in places targeted for future expansion after an investment or acquisition. A brand idea that works great in Oregon might not be available in Idaho or California. It is frustrating to invest in a brand that cannot work in the long run. Reviewing your brand and product strategy with an intellectual property lawyer will help your brewery plan for future growth and resolve potential difficulties early on.
Good Business Policies and Legal Compliance
Good general operating practices and legal compliance will naturally help lead to good business results, less risk and better profitability. Proper financial and accounting reporting and procedures will help you stay informed about your company's business and help reduce fraud and embezzlement. Appropriate insurance coverage is another important layer of protection.
Naturally, legal compliance is important as well. One vital component of this is following updated employment policies. As your brewery grows, you may add more staff. And as your staff head count increases, more and more federal, state and city employment laws will apply to your company. It can be especially difficult to track the different laws relating to medical and sick leave. Reviewing your current situation and future growth plans with professionals who track and understand these laws will help to ensure that your business has the right policies and procedures in place and to minimize claims and liability.
Understanding Important Agreements
It is also important to review the brewery's key agreements, such as leases and distribution. Good landlords and distributors will want to be good business partners with your brewery and help you grow your business. The language in some distribution agreements may unintentionally interfere with that growth by making it difficult to expand with new products, owners or in different territories. For example, contracts might limit changes of control or assignments, or might grant exclusive rights. As your brewery's strategies shift, it will be helpful to review your key agreements to ensure that they are flexible and meet your needs.
Some of these projects might take some time to address. Meanwhile, you also have the rest of your brewery's normal day-to-day operations to handle. It could benefit both you and your business to begin to resolve any issues now rather than waiting until a transaction is underway. If time is urgent, then you might be forced to make rushed decisions and unnecessary compromises.
You may ultimately decide not to bring on investors or sell your brewery. But if you consider these suggestions, and run your business so that it is attractive to investors or buyers, it may make your business run more smoothly and profitably for your current ownership group.
Doug Morris is a member of Miller Nash Graham & Dunn’s business and alcoholic beverage law teams in Portland. His practice focuses on general corporate representation of businesses, from high-technology and high-growth companies to breweries, nonprofits, and social enterprises. Doug can be reached by phone at 503-205-2533 or by email at firstname.lastname@example.org.