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Thread: brewery partner structures

  1. #1
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    brewery partner structures

    I'm in the process of getting all kinds of information for putting a business plan together for a new brewery in the Chicago area. I was wondering if people could share some of their business structure setups with me and the reasons why they were set up that way. My thinking is telling me since I would be heading the whole operation (with "passive" investors) I should get a majority of the ownership even though I will not be putting up the majority of the start up funds. Is my "logic" flawed? I'm really interested in hearing how others have approached it. Thank you.

  2. #2
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    Two classes of shares. Equal in value. One class votes (yours) the other class doesn't.

    Various formulas based on above share class structure.

    Liam
    Liam McKenna
    www.yellowbellybrewery.com

  3. #3
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    It's best if you keep in mind that there is a difference between investors and employees.

    Imagine 2 conference rooms.

    In one room, you have some people sitting around the table discussing how much capital will be needed to run the company, how much each is willing to put up, what the equity percentages will be, shareholder meeting and voting issues, election of board of directors, growth plans, internal capital reinvestment goals, distribution of potential dividends, etc. In the end, these people end up with stock in the company and a Shareholders Agreement (in the case of a corporation), or Membership Units and an Operating Agreement (in the case of an LLC).

    In another room you have some people sitting around who are going to be employees of the company. They're going to do the day to day work. The CEO of the company (who may or may not be a shareholder but has been elected to the position by the Board of Directors and who would typically also be an employee) negotiates an agreement with each of the people sitting in this room for specific employment responsibilities and a specific rate of pay. The employment agreement may be written or not (I personally believe a good written agreement is always better, especially for a certain level of positions and higher, but that's just me from experience).

    There's nothing that says someone can't be a shareholder and also an employee, but the point is not to confuse the two roles, because there will very possibly be much angst and knashing of teeth develop as a result of such confusion.

    I've witnessed people who were good friends put cash up to start a brewery and just trust that the whole employment thing would work itself out. Guess what... it never does. In that case, friendships have already been ruined and there's an undercurrent of talk behind the scenes about each other that will probably only get worse. Inevitably someone becomes a bitter complainer about the other investors not carrying their weight, or just a divergence of thought about how things should be or someone starting to think another one is being a douchebag... they're just not on the same page. Or the shareholders who do the most work decide to make a dividend distribution to themselves but not the others, which is a violation of the Shareholders Agreement. This is a recipe for disaster.

    If you have people who want to invest money to start a brewery, their role is as shareholders, and their reward is one day selling their shares for a profit, or possibly before such a sale there may be dividend distributions following appropriate voting procedures if there's extra cash at the end of the year that will not be used for growth, which is rare.

    If you have people who are willing to work, their role is employees and their reward for their work is wages. This labor cost should be built in to the business plan of the company, and the shareholders need to be prepared to invest enough money in total to cover the plan. There are other rewards that the company can give to employees as part of the employment agreement, such as stock, or stock options. Be careful, there are income and payroll tax implications to paying an employee in stock. It can be like winning a brand new $30k car and not having the money to pay the tax on it.

    But the point is avoid confusing the two roles or shareholder and employee... always keep them in mind, and you can avoid alot of grief later.
    John Little | Auburn, Alabama
    General Counsel, Southern Farmhouse

  4. #4
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    Let me throw this out there:

    I could only contribute, say, 10% of what I am estimating we will need to get up and running. Would it be fair (or unfair) of me to demand 51% ownership of the company?

    I will be the sole guy sourcing equipment & location, I will be doing the actual work of setting up and maintaining the equipment, running the day-to-day operations, keeping the books (in QB), and most of the sales (we are planning on self distributing in IL).

    My logic is that my sweat equity and determination in getting this from plan to action is crucial, therefore, it deserves a majority stake. Without me driving this, the other investors would not see their dream of investing, thus being part owners, of a brewery. All comments both positive and negative are welcomed. I currently own a small manufacturing company an am used to doing most everything on my own. Also used to the freedom of not having to consult when a major decisin needs to be made. Am I suited for a partnership at all? Please discuss. Thank you.

  5. #5
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    My Real Estate LLC Company structure

    I formed a real estate venture (property rentals) with a partner who put up all the cash and I put in the sweat equity rehabbing and managing the rentals for a 50/50 split in ownership. He wanted 51% controlling interest, but conceded to the 50/50 split after the capital was deployed and properties refinanced (year two). If I were the investor putting up all of the cash, I think that I would want a controlling interest as well, 1) to receive the majority of the tax breaks during the first year or so, and 2) to have control over how my capital is spent.

    Now, of course, the risk in starting up a micro-brewery might be quite a bit more than investing in real estate, since a large chunk of the capital will be spent items that will have little or no resale value (attorneys, licensing, advertising, mechanical infrastructure, etc) but in either case, once the business is established and cash flow positive, the risk diminishes substantially. You will of course still be involved and responsible for the day to day operations, while the silent partner capitalizes on the equity growth (and hopefully cash flows) from your labor.

    In this case, I don't think that it is out of the question to demand equal ownership of the business, but a controlling interest might be pushing it with only a 10% capital contribution. It is certainly worth a try. If it doesn't work, you might try the sliding scale as well - a 40% ownership the first year or two, moving higher as the business matures.

    BTW, I am by no means an attorney or accountant, nor do I play one on TV, so any advice given in the above paragraph might be total BS.

  6. #6
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    Quote Originally Posted by bmason1623
    Let me throw this out there:

    I could only contribute, say, 10% of what I am estimating we will need to get up and running. Would it be fair (or unfair) of me to demand 51% ownership of the company?
    They need you for sure for all the reasons you mentioned. You need them for a million reasons as well ($'s). It is unreasonable to expect 51% for 10% equity contribution ($'s). Sweat equity is worth something but I would suggest somewhere in the 5-15%. No more. My opinion obviously. You are replacable, their money, not so easy. Especially this early in the game.

    If you are just seeking to retain control, there are many other ways to do that both through employment contracts and shareholders agreements.

    If it makes you more comfortable, you should build a facility to buy back shares with no argument from your shareholders at some agreed formulaic value.

    Pax.


    Liam
    Liam McKenna
    www.yellowbellybrewery.com

  7. #7
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    Another option, if you definately want controlling ownership: take the money as a loan with higher than normal dividend/interest percentage.

  8. #8
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    Just not a good idea for a company to give stock to someone in exchange for a promise to perform work in the future.
    John Little | Auburn, Alabama
    General Counsel, Southern Farmhouse

  9. #9
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    I would be offended if you offered me only 49% in exchange for nearly all of the capital needed for your brewery. Assets = Liabilities + Equity. You currently have no assets or equity.

    If you work at the brewery, you should get paid a wage or salary, not equity.

  10. #10
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    The thing is that without me driving this whole process they won't do anything. I have worked for someone else and I hated it. If I can't get at least 51% then I want no part of it. I have worked for someone else in the past and have no desire to ever do that again. This business opportunity is for the passive investor not one who wants to be actively involved. I think I wasn't clear on that. this is more complicated than I initially thought.

  11. #11
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    If you presented me with this plan, my answer would be "Not just no, HELL NO!"

    Pay yourself a slightly lower than average wage out of the brewery, and insist on an equity buyback plan over time to compensate for your sweat equity. Then eat ramen noodles and live in the dodgy part of town so you can actually buy stake in the company.

    10% seems reasonable as a start, ending with a max of 49%. You're asking to play with other people's money. Give that investment the respect it deserves.

  12. #12
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    In a classical brewery structure, the brewmaster is not a shareholder of significance. He/she is chairman of the board and is compensated to reflect that they ARE NOT ALLOWED TO BE A SHAREHOLDER OF SIGNIFICANCE.

    WHY?

    Because he/she is charged with the health of the beer which is accepted by the board as ultimately the driver of overall health of the company. Sometimes beer quality can be corrupted to meet the financial needs of the company by short sighted shareholder brewmasters. I have seen this a few times in my career (much to the detriment of the company).

    Virtually impossible with the classical structure. The only option if the board wants to supercede the decision of the brewmaster is for the board to fire the chairman (brewmaster) which takes some work and is not undertaken lightly.

    Pax.


    Liam
    Liam McKenna
    www.yellowbellybrewery.com

  13. #13
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    This discussion is interesting to me. I'd like to hear more about typical (is there such a thing?) equity/share buyback programs.


    If I'm interpreting bmason's questions properly, it sounds like he's interested in learning how the mastermind of an operation, even if he can only put up a small minority of the required startup capital, can some day end up as the majority owner.

    Will investors readily accept an opportunity wherein their return is specifically capped at a certain amount because of a pre-existing buyback agreement?

  14. #14
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    I am not a lawyer.

    And I thank the fates for that.

    Shareholders agreements generally follow similar basic structures for all sorts of regulatory and ease of use reasons, however, they can be written to reflect pretty much any structure that you and your share holders find acceptable.

    Will investors readily accept an opportunity wherein their return is specifically capped at a certain amount because of a pre-existing buyback agreement?
    Depends on your investors but there is not necessarily a 'cap'. It could go something like this: you reserve the right to repurchase shares at fair market value or the principal investment + guaranteed 7% (or some other mutually agreeable percentage) growth per year, whichever is greater. 7% is not bad. Don't underestimate the emotional reasons for investing in a brewery.

    If the shareholder wants to cash out, they get fair market value only. (based on acceptable valuation of the company). You can also limit the 'windows' where investors can even contemplate cashing out (ie. not for five years or some other term)

    In terms of retaining control and preventing the board from firing you as you work towards buying back equity, only a solid employment contract and a solid shareholders agreement will allow you to achieve your goal. One without the other in this situation is folly.

    Pax.

    Liam
    Liam McKenna
    www.yellowbellybrewery.com

  15. #15
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    May 2011
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    I know some entrepreneurs who started their business a couple years ago and have been in ongoing fund-raising mode since. They have spent a lot of time at this aspect of the business, have had lots of advisers, have met with lots of high-net-worth individuals, etc. The company today is worth millions and the kind of fundraising they're currently looking at is in the $2-million-a-pop range.

    I was asking one of these ladies some general questions along the lines of what's been discussed in this thread. I was asking about structuring investment solicitations, buyback programs, majority shares, dividends, etc. The basic takeaway, which I found interesting, was that according to her, you can go after whatever you want and you may even convince others to agree to it. In their case, they put up a little bit of cash for the operation but by far a minority. Still, they have maintained majority ownership from the very beginning, something they insisted upon. She told me this is unusual but they've been able to pull it off.

    I asked about dividends/ROI for your shareholders and again it seems like there's flexibility here. You could, say, offer a 30% return (this is a number my acquaintance threw out) plus the original investment and there may be people satisfied with that. I guess partly it comes down to how much risk your investors perceive there to be, and what their overall expectations are. Certainly, putting money into a brewery project is a lot riskier than a bank savings account. But then, savings accounts hardly pay any interest.

    Bottom line, I was interested to hear about these women's experiences raising money to launch and grow a business and how they've been able to stick to a lot of conditions that are important to them. I'm sure if you talk to enough would-be investors, you'll find a variety of opinions/priorities/goals represented among them, and you may be able to put together a capitalization plan that suits everyone.

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