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  • New Brewpub Ownership Structure Question

    Greetings everyone! Long time professional brewer first time poster so I apologize if I didn't post this in the right area. I had an ownership structure question for you all. I'm going to start my own brewpub but I don't have much restaurant experience. I've approached the three owners (they are also the chef's) of a local, very successful restaurant/taphouse about partnering up with me on this venture. My question is what would be fair for ownership rights and split of the profits?

    My idea was that I would handle the brewing side of the business (my own recipes and ideas, do all the work involved on that side of the business) and they would handle the restaurant side. I really want this brewery to be my baby but I know that I can't do it all and need some partners with knowledge of an area I don't have and I am willing to collaborate and learn. When it comes to ownership and profits, what does everyone think is a standard or fair agreement for a situation like this? On a related question, would it change the ownership percentage if I'm the one doing most of the business planning and investor sourcing? I have a meeting with them on Monday so thanks in advance for all your advice!

  • #2
    Create stock shares. Cash investment buys the stock shares. Whoever invests the most cash owns the majority shares. If you want to own 51% majority or better, buy more shares than they buy. That is pretty much the way it works unless their investment is in the form of loans.
    Todd G Hicks
    BeerDenizen Brewing Services

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    • #3
      It may not be that simple, but that may be a good thing

      Corporate (or LLC) structure can be as complex or as simple as you want it to be. I believe Einstein said "Make it as simple as possible, but not simpler." The idea is that simple and elegant is good, but not so simple that you overlook something important.

      Focusing on just "shares" may be an example of over simplification. It sounds like you've got two things to think about here:
      1) Be careful about offering them ownership in the company, depending on your state regulations, it may be difficult or impossible for them to own part of a brewery if they already own a retailer selling alcohol (like a restaurant!). On it's face, that's a violation of the Three Tier system. Some states have carved out exceptions or administrative ways to deal with this, but each state is different in how this is handled.

      2) It's hard to talk about retaining "control" or having "ownership," depending on what you want to achieve (I use the phrase "what behavior do you want to incentivize?"). So, here's the thing: with an LLC, you can split the different *kinds* of ownership (like, right to distributions/profits, right to vote or make management decisions, or right to distribution in the event of a sale or liquidation). I have several clients who have a right to X% of profits by to Y% of management/voting (where X<Y), so they receive less of the profits but keep more of the management/control. Also, with an LLC, you can then tailor the Operating Agreement to phase out people over time or build in options for the company to buy back those interests - so long as everyone agrees to those terms at the beginning.

      I say all that to say that "structure" is not necessarily as simple as it sounds - and you may want to think carefully and creatively about how you want to structure the company and its ownership before pouncing on a single (even if it's elegant) way to go.

      Let me know if there's anything we can do to help!
      Cheers!
      John@beerlawcenter.com
      John Szymankiewicz PE, Esq
      Beer Law Center
      www.beerlawcenter.com
      john@beerlawcenter.com

      Comment


      • #4
        the LLC format is going to be the easiest in CA. and like noted above, there can be different % shares for the same person when it comes to voting rights, profit share, etc. or maybe no voting rights at all (good for small investors under 10%)

        my personal feeling is that unless you found some amazing brewer/chef/manager who just happens to be broke (are they really that amazing then?) then nobody should own any of the company unless they pony up some cash. have to have skin in the game. otherwise too easy to walk away.

        you can give these chef guys a better deal than more "silent" type investors as they'll be actively working. but you should have a process in play to remove them from the kitchen if it ever comes to that. clear, and in writing. same for all major actors- brewer, manager, chef, etc.

        have a predefined cost for buybacks. maybe you not only need to get him out of the kitchen, but even out of the company. or you end up wanting to sell one day and some 5% owning bastard wont sign off of the license and let the sale go through.

        what about when members want to sell down the road? does company get first rights at buyback? the other members? what if 10 people want to buy only 5 shares? how do you split it? or does it go auction style?

        try to see about selling some initial/original shares to investors at a higher rate than your friends/family/partners. this can get you some "sweat equity shares" you can keep and reward yourself with, or even sell those shares later to raise more funds if needed.

        as you get closer to being open for business, raise those share prices. risk=reward. someone in from the beginning who took nearly all the risk alongside you should get a better deal than someone who kicked the tires for months and then finally got out the checkbook a week before the opening party.

        lastly, remember that business partners are like spouses. once you tie the knot, its typically messy and expensive to separate. the operating agreement should be like a prenup that spells it all out if it ever comes to that.

        it can get a bit expensive, but this is one area where paying for some legal help is a good investment.

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        • #5
          Originally posted by brain medicine View Post
          have a predefined cost for buybacks. maybe you not only need to get him out of the kitchen, but even out of the company. or you end up wanting to sell one day and some 5% owning bastard wont sign off of the license and let the sale go through.

          what about when members want to sell down the road? does company get first rights at buyback? the other members? what if 10 people want to buy only 5 shares? how do you split it? or does it go auction style?
          This is why we went with a local attorney to set up our Sub-S corp. We had special requirements in addition to the above (involving each partner's spouse's rights), and wanted to make sure it was enforceable "down the road", and not just based on how we thought it should be written. Just because it's signed, doesn't mean you can enforce the terms. These types of arrangements take it out of the realm of a "standard" agreement.


          Originally posted by brain medicine View Post
          it can get a bit expensive, but this is one area where paying for some legal help is a good investment.
          What he said! Can you imagine losing control of your company because you can't enforce the buyout clause?

          Regards,
          Mike

          Comment


          • #6
            Buyback clauses

            If you're looking at including buyback clauses, BE CAREFUL.

            Get a lawyer with experience in your state on drafting that Operating Agreement (or if you include it in a separate Member Agreement - whichever). The issue is that if you pre-define the cost of the buyback, you have ensure that your state is going to enforce it. The general rule is that if everyone agrees to it (as Members) the Court will enforce it. HOWEVER, I've heard of certain states starting to look at "unconscionability" as well, and throwing out clauses that are unconscionable. For example (stick with me, lots of details here):
            Let's say that your Operating Agreement calls for the investor to put in $100,000 for 25% of the LLC. And then the company can buy back the Membership Interest in 10 years for $1,000. In year one, that 25% is worth almost zero (it's a new company after all). By year 5 that 25% is worth $200k, and by year 10, it's up to $250k. In that time, the investor has been paid something like $50,000 in distributions. From a "return on investment" perspective this works out very well for the investor - they have an asset that's paid them, essentially $300k for an investment of $100k. Good news. BUT then, the buy back option kicks in and he has to surrender a $250k asset in the LLC for $1000. That would mean that for $100k, he only receives $51k in cash - not a great scenario.

            So a Court *might* find that paying $1000 for a $250k asset just "shafted" a member out of $249k and that doing so was an "unconscionable" act by the LLC (or it's other Members) and - therefore - the court would refuse to enforce that buy back provision. So, now, there is NO buy back provision (because the court threw it out) and you've now just alienated Members on both sides of the issue.

            Drafting that "reasonable" and not "unconscionable" buy back clause is very fact specific and needs to be tailored for your particular situation. Get a lawyer! (even if it's not me!).

            Cheers!
            John
            john@beerlawcenter.com
            John Szymankiewicz PE, Esq
            Beer Law Center
            www.beerlawcenter.com
            john@beerlawcenter.com

            Comment


            • #7
              also- be careful of using a S-corp. it has some negatives in CA. it gets taxed on profits, not sales. LLC and sales approach has a max tax limit of about $15k in CA as i recall. S-corp is unlimited since its based on profits.

              more importantly- at least for us- is that there isnt really a way to separate profit share vs. voting share in an Scorp as i understand it. so that limits your creativity in doling our shares in terms of pricing/control/etc.

              and i definitely should have mentioned the spousal consent- any good agreement will have some consent form for spouses to sign stating that in event of divorce(or even in case of death/incapacitation), if said spouse winds up with the shares the company has right to buy/take back the shares.

              and as noted above, make the process fair and reasonable. anything outlandish or "too good to be true" for company is asking for a lawsuit from a disgruntled ex-investor/spouse/widow etc.

              ask around of other business owners you know might show you a draft of their agreement. look at a couple, note the items you want covered, then get a lawyer to do it right the first time. it really is worth the cost.

              Comment


              • #8
                S-corps are very nice for startups, as was said, they are taxed on profits which are required to be distributed to the owners at the end of the year. This goes for the losses as well, so in a startup that is growing, taking a loss on purpose every year has some advantages, like negative income for the owners which reduces your personal tax liability. The downside is that you can't have different stock types, but you can always convert to a c-corp down the road.

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                • #9
                  Originally posted by jebzter View Post
                  S-corps are very nice for startups, as was said, they are taxed on profits which are required to be distributed to the owners at the end of the year. This goes for the losses as well, so in a startup that is growing, taking a loss on purpose every year has some advantages, like negative income for the owners which reduces your personal tax liability. The downside is that you can't have different stock types, but you can always convert to a c-corp down the road.
                  Some clarification on s-corps apparently is needed. S-corps are not required to distribute all profits. S-corps when they file do not pay federal or state income tax but the profit is allocated to the shareholders based on their percentage of ownership. This is vastly different than having profits distributed to the shareholders. If this is a growing company, typically most of the cash flow is plowed back into the company. This can result in a shareholder having a significant tax liability based on paper profits without having the cash from a distribution to pay the tax liability. Example is as follows: 4 equal shareholders. Profit of the company equals 1 million. Company does not have the cash to distribute 1 millions so they distribute 400k or $100k per shareholder. The K1 that is issued allocates $250k of taxable profit to each shareholder. In this case you may pay the top rate of 39% federal and 10% state (I live in Oregon) you are at 49%. I then have to pay taxes of $122,500 but I only got a distribution of $100k so as a shareholder I would need to dip into my own pockets for the $22.5k additional I owe and I ended up with no extra money. Now with that being said, money allocated as profit and taxable to the shareholder but not received gets recorded as retained earnings. Eventually when you exit and sell your shares you can offset gains on the shares by the retained earnings that have accumulated as you have already paid taxes on them. This is the same for any LLC, partnership, etc. that is considered a pass through entity where the entity does not pay the actual taxes but the members and / or shareholders do. As far as conversion from an S-Corp to C-Corp it can be done but it can actually be very expensive to do so. I was involved in a business that considered doing this and there was going to be over a $1 million dollar price tag attached to making the conversion as there are tax issues with doing so. All I can say is to involve a tax professional from the get go to understand the pitfalls of of different corporate structures and partnerships. It will not help to write into agreements that cash has to be distributed to cover taxes as there are many situations do to the need of working capital that you cannot distribute the whole profit that gets recorded.

                  Cheers,
                  John

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