Start up cash

[mbartole]

I've been researching costs for the last year for my business plan to open a microbrewery w/ tap room; equipment, supplies, fixed costs, variable costs, taxes, construction, consultation and on and on. I've estimated that I will need abou $400,000 for start up. My calculations are for the 1st 2 years. 1st year costs - before doors open for purchase equipment, licensing, lease, loan payments (principle will actuall depend on suggestions here), construction etc. Included in the $400,00 are second the second year when doors open. These costs are for inventory, insurance, monthly variable expenses and monthly fixed expenses. Paying back any loan and lease as well - basically everything I an think of as an expense.

My actual question: What amount of cash do you feel is the minimum I would need to put the plan into action? I'm not saying I'm going for the minimum, but I want to know what the minimum would be so I can see where I am with cash, what I will need to obtain. I want to go into business where I have a decent chance for success as it pertains to debt financing. Thoughts? dollar amount? ratio? percentage of debt vs. equity financing?

TIA

[swami]

double it

and be prepared to show a heavy paper trail for every penny. Its what Im dealing with now. What size system are you running?

[mbartole]

I have not decided: Its between 7BBL, 10BBL, 15 BBL - I've read and understand the benefits of going bigger, but it will also depend on $$$

Best of luck with the paper trail - I plan on getting QuickBooks and using it heavily as well as an "anal" filing system. Which isn't quite what it sounds like.

[Dogwonder]

Interesting...I'm looking at a brewpub with some bottling and the number I'm starting to get comfortable with is $1.5M. Granted I may have a little too much fluff but a leading reason for new businesses failing is undercapitalization. I know a brewpub and microbrew aren't exactly apples and apples, but I would expect the numbers to be a little closer...

PM me if you want to chat about assumptions...

[jrdamas]

you have to give us more to work with here. How many sq feet is your project? How much do you plan to do to the interior space as far as tenant finish? How much is your brewing system going to cost? Is it an existing space or are you new const.?

From my experience....you cant do much with 400k. Some stuff that caught me offguard: to turn on the electricty the downpayment alone was $12K...10 grand for legal fees.....25 thousand for signage.....another 25 for plasma tv's and the list goes on and on. For my last project for everything from tenant refinish, debt service, preopening payroll, signage, flatware, inventory, permits, all that shit...my parnter and I ended up at ~$450/per sq. foot. And that is just remodeling a previous space not from the ground up. the $450/sq foot number left us with about ~75k in the bank for post opening payroll, bills, etc.

[brewer2001]

I see that you are here in Washington. As you know floor space is quite costly. When I was doing my apprenticeship I was told that the retrofit of the brewery floor (circa 1996) was around $40K for an area not more than 450 sq. Ft.

You are farther along with your business plan than I am. What production rate are you projecting? How do you propose to sell you product?
The reason that I ask is the intended scale of the equipment. For containing cost smaller would be better but in a pure micro you will need to produce volume, once your product is introduced to the market. For instance a good kettle design would be steam fired with an upper and lower jackets that are individually controlled. This would allow you the flexability of producing a full (15 BBL ) batch or a smaller (6 or 7 BBL) batch of specialty beer.

As you know compitition here in Washington is tough. You may need to extend the length of time that you will need to carry the business. Your product will be marketed at a wholesale rate which will lower your profitability per unit and require that you make up the difference with volume.

Which brings you to another concern: need for rapid expansion.
Assume that you start with a 10 BBL system and by the second year have eclipsed its maximum production but do not have the capital to replace it, what will you do? Just some food for thougth.

I have a three BBL system with 7 BBL tanks currently in storage that is looking for a place to land......

Good brewing.

Tom F.

[pennbrew2]

Interesting thread. For a microbrewery of any size, with a pub and packaging, $400K sounds low. Of course I don't know your whole situation.

In any event you're looking at a substantial amount of money even if you can do it for your estimate. For a start-up brewery, carrying a large debt can be a crushing load. Sales are difficult and expenses add up at frightening speed.

Have you considered starting something far smaller (and cheaper) and growing it from there? This is something I'm considering, I'd be curious to find out the least amount of money a brewery used to start up. If I do something again I would try to set the record for lowest-cost startup.

I've done it the other way, $2.4 million in equity and $1.1 million in debt. Let's just say it didn't work out very well...

[mbartole]

Thanks for all the great input. Here are some answers to a few of the questions:

1) I am not going to have a pub, just a tap/tasting room. No bottling.
2) I am thinking about how to start smaller, haven't figured out how to do that just yet.
3) I know that $400K is on the low side, and $800K would probably be more realistic.
4) Targeted production the first year 500-600 BBL. Second year 1000 BBL. Break even estimated to be 1112 BBL.

However, my question is more general:
Given X amount of start up cost, what amount of x would I need to have as capital investment to give myself a fighting chance at surviving the first 2 years.

I don't want to be under capitalized. Right now I have $20K cash which is 5% of $400K. I doubt this is enough. So what I need to do is set a goal for cash to raise and use that amount to determine what sources that cash is to come from and how much from each source. While the best answer might be "as much as you can get." I need a real goal to shoot for to complete my planning.

Thanks so much for the input already. You have answered a few other questions I've had and given me more food for thought.

[pennbrew2]

A business loan is not like a home mortgage, the lender is going to want to see you put in far more than 5 or 10%. More like 50%.

Rather than look for advice here, I think your best bet is to go talk to some lenders. Go in with a one page executive summary of your project (don't bring in your whole business plan) and tell the lending officer you're doing some background research on their lending guidelines. Ask for a copy of an SBA application.

Also find the local economic development groups. Around here we have a county economic development office, a small business development center at the local university, a chamber of commerce and a regional business development center. These groups can steer you to local and state lending programs. They can also give you an idea of which local banks may be willing to listen to your proposal.

Good luck!

[jrdamas]

lets make a huge assumption and say that your project will cost $1 million to get off the ground and leave enough hard cash in the bank to fund the project for the first year (which looks like what you plan on doing if you are only going to reach ~50% of your break even point during the corporation's first year of production) So in order to get that $ 1 million you will need to have 20%. For sure. So you need to have $200,000 cash. SBA will sponser another 20% and your lender will cover the 60%. You will also need some collateral (like a home) as insurance for the bank. The bank will want to see realistic cash flows in your bus. plan and will also want to ensure that the project is properly funded. To do this the bank may require that you show you have additional funds available (if neccesary...say the roof caves in or it takes 12 months to get open as opposed to 5 months.) the lender want to see that if the worst hapens you can still open and produce cash flows. I guess the bank dosent want to you to max yourself out-which is good. I hope some of this helps.

[mbartole]

OK. Now this makes sense, since the lender has risk invovled, the amount they will fund tied to the business plan and cash flow projections is probably the best way for me to find the information I'm looking for, rather than look for an "industry standard". The lenders, like myself, want to see me succeed so they get their money back so it would follow that what they will lend will be based on sound investing strategy.

Question though: If that assumption is true, how is it that (I keep reading) the primary reason restraraunt/beverage industry business fail is "under capitalization"/too much debt?

I like the suggestion about going to the bank/loan officer for research purposes. I'll be meeting with my accountant for my personal tax return in a month or so. I'll bring him my cash flow projections, make sure I've made no accounting errors and then follow up with the bank.

_________________
Milan Bartolec
Mukilteo, WA

[pennbrew2]

how is it that (I keep reading) the primary reason restraraunt/beverage industry business fail is "under capitalization"/too much debt?

Undercapitalization: It always, always, ALWAYS costs more to start up and to operate than you plan. Always. So it's very easy to run out of money before you've had a chance to succeed. And if you think it's hard to borrow money at start-up, just try to borrow it when you're 2/3 built (or 15 months into your 24 month plan) and you run out of cash.

Too Much Debt: It is extremely risky for a business with no sales history to carry a lot of debt. A 10-yr loan of $400,000 at 6% (it's been a while since I've researched terms and rates) has a monthly payment of $4440. If you fall short of your sales projections, your monthly nut (including utilities, rent, insurance, etc etc etc) will dig you a very big hole very quickly.

I'm not saying it can't be done but I am speaking from hard-earned and expensive experience.

---Guy

[Dogwonder]

I have done a lot of research in this field and here are my thoughts (and how I'm structuring my plan).

Capitilization - I've overestimating the amount equipment will cost because there are all the things you need to consider. Say you get a quote for $250,000 for a brewing system. The fine print says you need to pay for shipping, unpacking (and sometimes packing), and install. Plan on at least another $50,000 for that. Not to mention this assumes you have exactly the right infrastructure to support the tooling. Most likely, you will need to run some plumbing and electrical work for it all to work. More $$$. Put buffer in everywhere because this stuff will creep up on you. And you will need enough cash to make it through the first year. Plan on things going wrong, not running smoothly and less business than you think. You can always give back extra money (repay a loan early, buy back some equity), it's very difficult to try to get more.

Debt Structure - Do not borrow more than 50% of the money you will need. Some companies get away with high leverage but it's rolling the dice. As an earlier post stated, interest is a fixed cost and not one you want to worry about as your ramping prodcution. I'm planning on 2/3 of my capital from equity, 1/3 from debt (bank loan). I personally don't have all the cash for the equity and that is where I'm stuck now, trying to find investors. It isn't easy, I start where everyone else does (friends and family). There are a lot of good resources on the web and at the SBA to help with this but it will be the hardest aspect you deal with.

Another note on the loan, the bankers will nitpick every assumption you have in your plan and will torture you. Be sure to be able to defend every aspect of your plan and hard data is always good.

Resources / Assistance - Small Business Development Centers (SBDC's) are a great resource. They are around to help people just like you. They review plans, know bankers, can tell you about local laws and permits, and have a wealth of experience. I use one and highly recommend them. You can find a link to a local SBDC at the SBA website.

For what it's worth, I've budgeted about half of my start up cash for operating cash flow and keeping myself afloat and about half in equipment and pre-open expenses.

Also, how long have you assumed it will take once you start your business to when you will be bottling beer?

Jeremy

[jrdamas]

You can easily borrow 50% of what you need. If everyone took Jeremy's advice there would be alomst no small businesses in this country. My partner and I borrowed millions on a twenty year and meeting the monthly obligation for the debt service hasnt been a problem at all. In fact, every small business owner I know has borrowed ~50% of their project needs...usually more and are all doing very well. Thats the reason banks are there is to give people a chance to make their dreams become a reality (archi's & designers do a good job at this also) The bank wants to see you get the loan and will do what they can to make it work.

During the loan process I never felt like the bank (bank one/chase) was "nitpicking" away at my numbers/proformas. Hell they only read the cover sheet and the financials. Like I said they just want to see cash flows. They asked three questions and then I just had to wait for a week(maybe it was 2 weeks) while the loan went through. It was really easy....just a pain in the butt to get copies of everything (they need tons of copies).

From my experience, as long as you have the min. % (prob. 20%) of what the bank needs to authorize the loan, and your numbers make a little sense (+ cash flows) you are good to go. Don't kid yourself though...getting the loan will be easy just make sure you borrow the proper dollar amount. 400=not enough, 800=not enough, 1.5~maybe you can get something open.

[Dogwonder]

You can easily borrow 50% of what you need. If everyone took Jeremy's advice there would be alomst no small businesses in this country. My partner and I borrowed millions on a twenty year and meeting the monthly obligation for the debt service hasnt been a problem at all. In fact, every small business owner I know has borrowed ~50% of their project needs...usually more and are all doing very well. Thats the reason banks are there is to give people a chance to make their dreams become a reality (archi's & designers do a good job at this also) The bank wants to see you get the loan and will do what they can to make it work.

During the loan process I never felt like the bank (bank one/chase) was "nitpicking" away at my numbers/proformas. Hell they only read the cover sheet and the financials. Like I said they just want to see cash flows. They asked three questions and then I just had to wait for a week(maybe it was 2 weeks) while the loan went through. It was really easy....just a pain in the butt to get copies of everything (they need tons of copies).

From my experience, as long as you have the min. % (prob. 20%) of what the bank needs to authorize the loan, and your numbers make a little sense (+ cash flows) you are good to go. Don't kid yourself though...getting the loan will be easy just make sure you borrow the proper dollar amount. 400=not enough, 800=not enough, 1.5~maybe you can get something open.

Well I guess we are all entitled to opinions but I don't believe that having more in equity than in debt stifles small business growth. I stand by that if borrowing greater than 50% of your needs is playing with fire. I've seen enough businesses, both big and small, shut down because of too much debt. I recognize that some companies do it, but if you are just starting out, why put yourself in that potential prediciment? I'd rather err to the safe side and do the extra leg work lining up investors.

This is the first time I've ever heard of someone getting through a banker with that much ease. Every banker I've talked with tends to go through these with a fine toothed comb since they want to make sure you know what your doing. A bank is giving you a loan because it wants to make money. I'll admit they are a little less stringent knowing the SBA will guarantee some of the loan. Here's my thinking, I should perform extra due diligence on my own plan and if the bank asks about it I'm ready. If they don't, then great for me. But I don't want to be in the situation where a bank refuses a loan because I don't know my business.

Jeremy