By Douglas D. Morris
For the Oregon Beer Growler
Brewers may need to devote time and attention to other aspects of their business, besides making great beer, as the craft beer industry continues to be in transition.
After multiple years of double-digit production growth, that paced slowed in 2016, and production growth could be in single digits again in 2017. This slowing has many craft breweries rethinking their strategy. Breweries that have been using fast-growing revenue to pay for new facilities and equipment might need to raise future capital from new investors.
Also, recent sales of numerous craft breweries have attracted a lot of attention. There is every reason to think that those acquisitions will continue. These transactions may have some breweries considering a sale or merger of their own.
In this climate, it is important to discuss practical steps to take to be ready for a strategic transaction, such as a new investment or sale. The bigger questions of "Should you bring on new investors?" or "Should you sell your brewery?" need to be examined and discussed among the ownership group and perhaps a qualified business adviser, so we will forgo that discussion here.
A typical investor or buyer will conduct a due-diligence investigation into your business as part of any transaction. The investor or buyer will look for any risks that might affect the value of your business during an investigation that can be quite detailed and thorough. But the process will go more smoothly if certain issues are addressed before your first meeting with a potential investor or buyer.
Clear Ownership of the Company
Start-up breweries may have some ambiguity about who owns what. Some friends and family may have provided start-up capital; were those amounts loans or equity investments? Some contractors might provide artwork, design or construction services; were they going to be paid in cash or equity? People's memories may change when money is on the line. Now is the time to sit down and put any oral agreements and understandings in writing.
Clear Ownership of Brands
Branding and trademarks are as valuable to brewers as their great recipes. Obviously, breweries should ensure that their brands are protected in the places where they currently sell product. Breweries should also confirm that there is a clear path to protection in places targeted for future expansion after an investment or acquisition. A brand idea that works great in Oregon might not be available in Idaho or California. It is frustrating to invest in a brand that cannot work in the long run. Reviewing your brand and product strategy with an intellectual property lawyer will help your brewery plan for future growth and resolve potential difficulties early on.
Good Business Policies and Legal Compliance
Good general operating practices and legal compliance will naturally help lead to good business results, less risk and better profitability. Proper financial and accounting reporting and procedures will help you stay informed about your company's business and help reduce fraud and embezzlement. Appropriate insurance coverage is another important layer of protection.
Naturally, legal compliance is important as well. One vital component of this is following updated employment policies. As your brewery grows, you may add more staff. And as your staff head count increases, more and more federal, state and city employment laws will apply to your company. It can be especially difficult to track the different laws relating to medical and sick leave. Reviewing your current situation and future growth plans with professionals who track and understand these laws will help to ensure that your business has the right policies and procedures in place and to minimize claims and liability.
Understanding Important Agreements
It is also important to review the brewery's key agreements, such as leases and distribution. Good landlords and distributors will want to be good business partners with your brewery and help you grow your business. The language in some distribution agreements may unintentionally interfere with that growth by making it difficult to expand with new products, owners or in different territories. For example, contracts might limit changes of control or assignments, or might grant exclusive rights. As your brewery's strategies shift, it will be helpful to review your key agreements to ensure that they are flexible and meet your needs.
Some of these projects might take some time to address. Meanwhile, you also have the rest of your brewery's normal day-to-day operations to handle. It could benefit both you and your business to begin to resolve any issues now rather than waiting until a transaction is underway. If time is urgent, then you might be forced to make rushed decisions and unnecessary compromises.
You may ultimately decide not to bring on investors or sell your brewery. But if you consider these suggestions, and run your business so that it is attractive to investors or buyers, it may make your business run more smoothly and profitably for your current ownership group.
Doug Morris is a member of Miller Nash Graham & Dunn’s business and alcoholic beverage law teams in Portland. His practice focuses on general corporate representation of businesses, from high-technology and high-growth companies to breweries, nonprofits, and social enterprises. Doug can be reached by phone at 503-205-2533 or by email at email@example.com.
By Maria Pearman
For the Oregon Beer Growler
Know your numbers. This is a maxim that breweries — or any businesses for that matter — need to stick to if they stand a chance at achieving growth and sustained profitability. Producing a great beer is one thing. Growing a great beer-brewing business is another thing altogether.
Regardless of how many retailers or thirsty customers there are clamoring to fill their fridges with your tasty brew, if the numbers are off the margins will be too. In the beverage industry, margins can either catapult a business to profitability and growth or crush it into debt and submission. What’s more, once a business starts down the slippery slope of inaccurate inventory levels, a host of avoidable and costly issues begin to rear their ugly heads — obsolescence of overstock, shortages of raw materials, delays and shutdowns in the brewing process, loss of entire batches, off-target forecasting and erroneous re-orders.
Not surprisingly, then, how a brewery manages its inventory — from purchasing through production and packaging to sales and shipping — has a major effect on the business as well as the beer. Delays in production can put a dent in customer service targets and a single misstep in the ordering, production or distribution of products to customers can end up costing the business big time. This is why it is very important for breweries to exercise complete control over the flow of inventory.
Old School Won’t Cut It Anymore
When inventory managers rely on outdated, inefficient and inaccurate inventory control practices — think multiple spreadsheets, a small army of web applications, handwritten notes and data submitted from other departments — the business will begin to hemorrhage money.
Trying to accurately track, trace and account for perishable inventory without the right tools to do so will result in cost increases. If an inventory manager uses manual data entry to record the latest hop and barley depletions that are based off “best guess” estimates provided by the brewmaster, there is no way an accurate, real-time appreciation of the inventory can be achieved.
Why Accurate Inventory Matters
Maintaining accurate inventory levels is the secret of successful inventory management. Failing to do so results in a number of outcomes which all — in one way or another — contribute to ramping up expenses and driving down efficiency, productivity and profitability.
The challenge of ensuring inventory levels are accurate is more acute in the case of a brewery. This is because the ingredients are perishable. Not only is there a challenge in terms of ensuring synergy among the working parts in the buying, production and distribution of raw materials; the clock is against you as well. Therefore, it’s essential to know how much is on order and in stock as well as how much needs to be ordered to meet demand and incoming orders.
For instance, if the inventory manager is under the impression that the amount of hops on hand is sufficient when it actually isn’t, forecasting will be off and the next order will come up short. If this happens in a high-demand bracket, or if a large order suddenly comes in, chances are high that demand will be left unfulfilled — leading to lost sales and potentially the loss of a valuable customer. Conversely, if inventory is underestimated, the next order could bring in more hops than needed. This leads to an overstock issue where the hops may go to waste. It’s also worth mentioning that surplus inventory levels unnecessarily tie up cash flow, raise costs (labor and storage) and render the business unable to capitalize on sudden opportunities that may arise.
Apart from the tangible costs inaccurate inventory levels can have on a brewery, the intangible costs of poorly managed inventory can take a toll, too. If your inventory manager is constantly running from the office to the brewery to the warehouse in order to confirm or collect missing data, efficiency takes a nosedive, staff morale plummets and friction between department heads is likely to occur. In short, the sailors on the ship are driven towards desertion or mutiny. Taking stock manually is also unproductive and time-consuming.
The bottom line: If there is no way to integrate all the inventory control mechanisms at play — spreadsheets, accounting software, web apps, written notes — then the inventory manager can’t do his or her job. Losing highly-trained staff can prove to be a major setback.
Cloud-based software-as-a-service (SaaS) inventory management solutions allow for seamless integration between all departments in a brewery. With this type of management platform in place, inventory can be managed in real time, by all important team players, across departments and processes. For example, the brewmaster can input and update production data — how much and what kind of raw material — he or she uses in real time, from an iPad, tablet or even a smartphone. This works for a brewery that makes product at multiple locations, reducing waste and integrating multiple aspects, including accounting, analytics and e-commerce.
The net result is optimized efficiency, productivity and profitability and, of course, the production of high-quality, mouth-watering beer tracked, traced and accounted for down to the very last drop.
Maria Pearman, CPA, is the principal at Radix Accounting, an integrated accounting firm for craft brewers offering bookkeeping, payroll, contract CFO services, tax preparation and tax planning.