By Patrick McCarthy
For the Oregon Beer Growler
Given how intensely expensive a brewhouse is, brewery operators face the tough question of whether to purchase or lease new equipment. Balancing cash flow and cash reserves with the projected return on capital equipment investment will help you reach that decision.
Key questions include:
—What equipment investments offer the best value for short- and long-term savings?
—When does it make more sense to rent equipment?
—Can investment in equipment solve the pinch point in production?
—How quickly will additional equipment pay for itself?
When evaluating whether to buy or rent equipment, factors such as the projected life of the machinery, its value as used, and ongoing relevance as the brewery expands must also be considered.
The goal for nearly all breweries is to be relatively free of debt and produce a strong internal cash flow. Unless the brewery ownership team funds the business directly with contributed equity or existing cash flow is sufficiently strong, some form of borrowing is usually required.
Financing Equipment Rental or Purchase
Typically, banks and leasing companies provide this debt capital for credit-worthy borrowers. Equipment is financed, usually on five- to seven-year loans or capital leases. With these debt structures, the brewery holds title to the equipment and makes fixed payments during the stated loan/lease term and has title to the equipment from the beginning. These forms of debt financing are a tried and true formula that remains the primary approach to brewery equipment debt financing today.
An alternative is an operating lease. Think of an operating lease like a two- to four-year auto lease where the car/equipment is returned to the dealer at the end of the lease term or is purchased at a fair market value. The leasing company owns the equipment throughout the lease term, unless sold to the lessee at the end. Advantages of this approach include: a) much lower capital investment into equipment that is generating strong revenue and profit margin to the brewery coupled with b) the ability to use equipment for a short term with the flexibility to return, replace or buy the equipment in the future. The return on investment dollars (security deposit and monthly operating lease payments) is much greater in an operating lease scenario as monthly operating lease payments are typically lower than equivalent loan or capital lease payments and required down payments.
While not applicable for all business arrangements, an operating lease can be a good fit for a brewery, cidery or winery that is: capital constrained, leveraging investment dollars for rapid growth, or has short-term plans for the equipment.
Patrick McCarthy, Manager
Practical Fusion Capital, LLC
By Maria Young
For the Oregon Beer Growler
Some of the most important professional meetings in our lives are the ones we look forward to least: the dentist, the attorney, the tax professional. But imagine finding a professional service provider who feels like an integrated business partner. How could it change your experience? Could it help you feel empowered rather than intimidated? I don’t know how to give advice on finding other great professionals, but as a CPA I can share thoughts on how to find an accountant best suited for your needs and personality.
First, consider the size and scope of your business. When new or very small, it's hard to decide how to handle the accounting. Do it yourself? Hire an in-house bookkeeper? Outsource it? The best investment a small business can make is in a good bookkeeper. In the early stages, a solid bookkeeper can handle the day-to-day business. Then find a CPA to do your taxes and with whom you can consult on a quarterly basis. There's no widely accepted credential for bookkeepers, so you have to vet them rigorously to make sure you are getting someone worth his or her salt.
Finding a CPA is also a bit of a process, but at least there's a state-regulated license that allows you to feel a certain level of assurance about the individual’s skill set. That being said, you can count on bigger firms costing more than smaller firms, but bigger isn't always better. Ask around and talk to other people about their experiences with CPAs. In my opinion, technical skills are par for the course, but what really sets a good accountant apart from a mediocre one is communication skills. The individual you hire should be able to clearly tell the story behind the numbers. Does he or she explain concepts in a way that makes sense and feels approachable? Are they responsive?
Additionally, find someone who understands your circumstances. Are they interested in your business? Have they helped companies of a similar size and do they understand what growth looks like for a company like yours? How well does your prospective accountant understand your industry? The individual’s deep knowledge of your professional landscape will yield greater insight into your finances. When interviewing a CPA ask questions about how that person has helped companies like yours. Pose business questions and consider the answers offered. Ask the CPA to consider not only the financial advantage of a proposed course of action, but also the tax consequences or operational ramifications.
Hiring an accountant who can be a partner to your business can elevate your operation and empower you to achieve your goals. But finding the right fit is a two-fold effort that includes getting the right personality match and the right industry expertise. Always keep your eye out for the right fit, and when it comes along you’ll actually look forward to those financial conversations!
Maria Young is a CPA with Radix Accounting, which offers bookkeeping, payroll, contract controller services, and tax preparation for breweries.