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2 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Introduction
• Matthew McLaughlin, Baker Donelson
• Alan Lange, Grits Capital
• Keith Merklin, Live Oak Bank
3 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Introduction
• Matthew McLaughlin: Discuss five areas of focus in getting your
brewery or distillery ready to raise capital from an organizational and
legal readiness perspective
• Alan Lange: Provide insight as to what his organization looks for
from an investment perspective and issues to consider when
bringing in an equity investor
• Keith Merklin: Discuss the different types of bank and non-bank
financing that are available for breweries and distilleries
4 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Introduction
• Before we get into the substance of the content, everyone should
recognize that regardless of whether you are raising startup capital
or raising capital for an expansion project…
− Raising capital takes time
− Raising capital is a process
− Raising capital is relationship driven
“It’s almost always harder to raise capital than you thought it would
be, and it always takes longer. So plan for that.” – Richard Harroch,
Venture Capitalist and Author
5 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
The Team
• Going at it alone is never a good idea
• You must always start with a good team; a team is made up of many
different individuals
• At the core of the team are the brewery or distillery founders
− The hipster, the hacker, and the hustler
− Experienced management with industry success
− Contractual agreements in place that set forth the roles and
responsibilities of the founders
6 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
The Team
• Key Employees
− Head brewer or head distiller
− Sales team
− Contractual agreements in place that set forth the roles and
responsibilities of the key employees
• Mentors
− Other brewery or distillery founders
− Industry experts
− Demonstrate an ability to leverage the knowledge of others and
an ability to collaborate
7 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
The Team
• Advisors that know the industry
− Financial advisor
− CPA
− Attorney
− Demonstrate an openness to coachability
Your mentors and advisors not only add value, but also provide your
brewery or distillery credibility with investors and lenders
8 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
The Team
• Ultimately, your team needs to be reflective of skills and experience
in the brewing and distilling industry.
• Investors are investing in a business and lenders are lending to a
business, but both are making bets based on the teams.
9 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
The Capital Strategy
• Formulate a strategy around raising capital
• Understand the differences between equity and debt and know
where and when to look for both
• Be able to provide a clean, projected capital stack and a clean,
existing capital stack
− Founder equity
− Friends and family
− Outside investors
− Debt
10 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
The Capital Strategy
• As a startup, develop a sound business plan or as an existing
production brewery or distillery, develop a sound expansion plan
− Competitive advantage
− Value proposition
− Defensible business model
Brewpub, production brewery or distillery, plan of distribution,
sales and managing retail accounts
• But most importantly, make sure you have…
− Sound and vetted financial projections
− Reasonable and realistic valuation
11 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
The Capital Strategy
• Ensure that the capital you are seeking fits together with all of the
other sources of funding
− Pre-emptive rights
− Loan covenants
• You are adding another piece to a puzzle, not cramming a square
peg in a round hole
12 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
“Clean” Business Looking Back
• Investors and lenders are underwriting deals based on going
forward risk and do not want legacy risk
• Look back from the current point in time to inception and try to
identify potential risk
− Was stock issued pursuant to securities laws?
− Have you protected existing intellectual property?
− How have you handled problem employees?
− Are you complying with all federal, state, and local permits?
− Can you demonstrate TTB and state regulatory compliance,
excise tax payments, reporting, and recordkeeping?
13 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
“Clean” Business Looking Back
• Have your advisors “audit” the business to determine whether
remedial action is necessary if anything appears to create any
legacy risk
• You unequivocally do not want…
− An investor or a lender to find a problem during the diligence
period
− Or even worse, discover a problem after closing that was not
discovered or disclosed during the due diligence process
14 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
“Clean” Operating Business
• An investor or lender is going to perform a significant amount of due
diligence on your existing operations
• The starting point is almost always your company’s organizational
documents, which need to be…
− Thoughtful
− Deliberate
− Artfully drafted
− Industry specific
15 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
“Clean” Operating Business
• Do the company organizational documents address key issues?
− Management, corporate governance and voting
− Capital and subsequent contributions
− Distributions and dividends
− Tax and accounting matters
− Transfers and pledges of equity
− Intellectual property matters
− Investor representations and warranties
Tied house issues
Ownership in other breweries or distilleries
Felony convictions and other bad boy acts
16 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
“Clean” Operating Business
• Permits:
− Compliance with all federal, state and local permits
− TTB, state license(s), FDA, EPA, DEQ, local zoning and land use
• Policies:
− Industry specific employee handbook
− Effective training programs, i.e. manufacturing, handling and
serving alcoholic beverage products
17 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
“Clean” Operating Business
• Processes:
− Brand development and ideation
− Protection of intellectual property and trade secrets
− Managing distributors
− Managing retail accounts
− Dealing with troubled employees
18 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
The Process
• So, once you have effectively addressed all of the previous issues,
you must be prepared to manage the process:
− Confidentiality agreements and non-disclosure agreements
− Transmission of meaningful and confidential data through email
or data rooms
− Due diligence
− Term sheet
− Closing document negotiation
− Closing
− Post-closing compliance
19 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Final Thoughts
• You must be unbelievably organized
• All money is green, but it is not all the same
• If you have nothing at risk, do not expect anyone else to put
anything at risk
20 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Startup Phase: $0 to $1,000,000 in Revenue
• What investors are looking for:
− Skin in the game
− Market validation
− Can you execute?
− Is it scalable?
− Solid management team
− Sound legal and accounting foundation
− Profitability
21 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Startup Phase: $0 to $1,000,000 in Revenue
• What is the payoff?
− Be realistic
− No “dreamy” valuations
− Accurate projections
− Your key advantages
− Assigning risk
− Mature multiples 5-8x
22 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Startup Phase: $0 to $1,000,000 in Revenue
• Strategies
− Equity early
− Really good organizational documents
− Get good advisors
− Look for “deals”
− Live off less than you make
− Good debt v. bad debt
− Building a brand
23 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Ramp Phase: $1,000,000 to $5,000,000
in Revenue
• What you do well
− Track record
− Market validates you
− Organic growth
− Less revenue volatility
− Is it scalable?
− Profitability
24 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Ramp Phase: $1,000,000 to $5,000,000
in Revenue
• How do you finance it?
− Asset based debt
− Incentive financing
Local (city/county)
▫ TIF and abatements
State
▫ Grants and guarantees
Federal
▫ SBA loan and NMTCs/HTCs
− Equity
25 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Ramp Phase: $1,000,000 to $5,000,000
in Revenue
• Strategies
− Lock down key people
− Be super efficient
− Build capacity
− Stay liquid
− Solidify brand
26 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Mature Phase: $5,000,000+ in Revenue
• Possibilities open up
− Bank rate working capital
− Lateral acquisitions
− New markets to sell
− Bigger platform
− Exit opportunities
27 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Lender’s Perspective
− Bank Loans
Conventional – Traditional Bank Loan
SBA – Small Business Administration
− Non-bank loans
− Qualifying for a loan
− Business Plan
− Case Study
Expansion
Start-Up
28 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Bank Loans - Conventional Loans
• Risk to Lender – Low
−Mitigated by historic cash flow
−Mitigated by collateral
• Structure
−Down payment 20-25%
−Longer Amortizations
• Advantages
−Usually lower rates and fees
−Quick closings
• Disadvantages
−Balloons
−Down payments
−Require banking relationship
−Covenants
29 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Bank Loans – SBA Loans
• Risk to Lender – Very Low
− Mitigated by historic and projected cash flow
− Mitigated by U.S. government guarantee
• Structure
− Low to no down payments
− Longer repayment terms
• Advantages
− Up to 100% financing
− Longest terms with no calls
− No covenants
• Disadvantages
− Higher fees and closing costs
− Longer closing process
30 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Non Bank Loans
• Risk to Lender – High
− Mitigated by shorter terms
− Mitigated high rates
• Structure
− Low to no down payments
− 1 3 Year terms
• Advantages
− Up to 100% financing
− Easy Qualifications
− Quick closing
• Disadvantages
− Unregulated
− Very high rates
− Short terms
31 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Banks Credit Decisions are Governed by
the “5 C’s”
• Character − Can you run the business? Are you a borrower the bank wants to be in business
with? Banks consider the long-term relationship.
• Capacity (Cash Flow) − Expansion – Will historical cash flows support the business, the debt and pay you
a reasonable salary? − Startup – Are the projections reasonable? Do they cover the business operations
and debt and pay you a salary?
• Condition − Understand the condition of the business, the industry and the economy; why it is
important to work with a lender who understands the beverage industry.
• Capital − What personal investment do you plan to make in the business? − Injecting capital - decrease the chance of default - ‘skin in the game.’
• Collateral − Generally very important in a conventional loan; not as important with an SBA
lender.
32 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Business Plan
• Executive Summary
• Market Analysis
• Organization and Management
• Marketing and Sales Strategies
• Funding Requirements
• Financials
33 www.bakerdonelson.com © 2016 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Case Study #1 – Brewery Expansion