Focus, Law, and Manufacturing

Like hops or barley, profit must be ingredient for brewery success

August 28, 2015
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Michigan’s booming craft brew industry doesn’t have a problem growing, but it may have a challenge growing profitably.

In my practice, it’s not uncommon for clients to see 20 to 30 to even 50 percent growth year over year. These figures mirror an increasing appetite for craft brews of all kinds, growing 22 percent nationally last year.

Michigan is home to more than 150 breweries; their numbers are growing and their stories are great. We’ve heard them again and again: Buddies from college or close friends with a shared love of good beer put their heads together and decide to start brewing their own. Their formula meets with success and, before they can say IPA, they’re struggling with supplier headaches, trademark woes, intellectual property problems and other issues that come with growth.

Just like water, hops or barley, profit has to be an ingredient if craft breweries are going to succeed. Breweries must realize from the initial start-up phase just how they plan to be profitable — and then go for it by:

Protecting intellectual property: One of the most important things breweries need to do is to take the appropriate steps to protect their intellectual property and be diligent about registering their trademarks and brands. Any intellectual property that is particular — and critical — to the brewery’s success should be protected.

Considering noncompetes: Some breweries may choose to strengthen their IP protection through the use of noncompetes. In some industries, the very presence of a noncompete acts as a form of deterrent. But the taste for using noncompetes will vary widely from brewery to brewery: Some will be more aggressive and want the added protection upfront, while others may have no hard feelings if an employee chooses to leave for greener grass — or different suds. This industry has been built on a sense of community and collaboration, and I sense some internal assessment of those guiding principles as the sector matures.

Managing human capital: It’s important for breweries to understand their true labor costs and keep a handle on them as they grow past a tightly knit team of company founders and early fans. Some of the more successful brewers in our region have upward of 400 employees, which makes it challenging to maintain the tight bonds and loyalty the founders and first employees shared. As the workforce grows larger and more diverse, it’s important to focus deliberately and to create a culture where employees feel supported and recognized as well as accountable.

Revisiting corporate structure: If breweries are interested in attracting investors, it may be a good time to review the corporate structure to see if they can create another series of shares in the company that could be attractive from an investment standpoint. Breweries should look at their current operating agreements and bylaws to make sure they have the right management team and the proper capital structure in place. Those initial incorporation documents may have been fine for a small company doing homebrew out of a basement, but if you’re suddenly up to $1 million in revenue, it may be time for a second look.

Seeking incentives: How are we going to finance the next tank? How can we afford to expand our building? Brewers need to get a good handle on hard costs and then look to see what state and federal programs exist to help defray expenses. For example, if they are expanding on a brownfield site, they should look at leveraging tax incremental financing for the project. Or if jobs will be added as part of an expansion, consider reaching out to the Michigan Economic Development Corp. Small Business Administration loans for equipment come with very favorable interest rates and could be a great solution. There are a myriad of options available depending on the situation.

Securing financing: Before brewers go to the MEDC, their bank or another funding source, it’s imperative to have their story in order. Create a track record of year-to-year growth that can be documented. Be prepared to show how you have managed costs in a manner that the bank sees you’re a good steward with your funds. Sharpen storytelling skills and make sure you have your pitch down, including what you have planned for your next act.

Planning for succession: What happens when the founders are ready to hang up their hops and pack in their fermenting tanks? We are seeing a natural inclination to look at  employee stock ownership plans, or ESOPs. Not only can an ESOP be a great way to reward the hard work of loyal employees, they can allow a departing owner to extract an initial investment without financially stressing the business while positioning it for future success.

Ian R. Kennedy is a partner at Warner Norcross & Judd LLP who concentrates his practice in general corporate, employment and real estate law and chairs the firm’s Craft Brewery Industry Group. He can be reached at ikennedy@wnj.com.

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