Brewery Finance – How we are going about raising money to build Black Hops

On the Black Hops blog, we like to tackle questions that we and other new breweries found it hard to find answers to when we started. Raising brewery finance is one of the biggest examples of a topic like this. Before starting Black Hops none of us had ever had to deal with raising finance. But the nature of building a brewery and the way the industry works, means raising money is an unavoidable and almost constant issue on our radar.

Not only is raising money kind of misunderstood, it’s also something that people tend to be pretty secretive about.

At Black Hops we’ve considered and utilised a bunch of different finance options, and in this post I’ll run through all the options I’m aware of and when you might want to consider using them for your brewery.

Please remember this is general information, and this is not the sort of topic that I’m qualified to be giving advice on, so please don’t take anything in this post as advice. It’s really just documenting what we have learned about financing a brewery, in the last year since starting Black Hops.

Let’s get into the options.

Founder investment

When we started Black Hops, we were able to get most of the money from the founders to open the doors. This is a great way to start, because it means you don’t have to give up too much equity in the business early on. Since you don’t have any proof that the business is going to work, it’s not easy to sell a high valuation to investors. That means if you can avoid selling equity early, and you are able to build the business quickly, you could potentially sell equity later for a much higher valuation.

But of course building a brewery is very expensive, and often you can’t get all of it together from the founders.

Investors

For us to get the total amount to open, we got 2 investors on board early on. To do that, we came up with a number that represented what we valued the business / idea at, and we started talking to friends about investing.

This was a year or so ago, but if you are interested in how the process worked for us at the time, you can check out:

The beauty of getting other investors on board is you can utilise their skills in the business when you need them. We were lucky enough to get 2 guys, Sam and Paul who both have different skills which we’ve drawn upon from time to time when we needed them.

The downside is you do have to give up a percentage of ownership when you do it, and it’s much easier to give equity away than it is to get it back. You have to be conscious about how far the founders and existing investors get diluted when you do new rounds, and careful not to give up too much ownership too early.

The process of fundraising also takes some time, and there are some pretty comprehensive legal and accounting processes involved. For that reason it’s not something you want to do often and not something you want to do for small amounts of money, if you can avoid it.

At Black Hops, we are currently in the process of expanding and raising more money from investors to fund the expansion. If you are interested in learning more about investing in Black Hops, register your interest here.

Founder loans

At other times while we’ve been building Black Hops, we’ve had a few cases where we needed some short term cash, but didn’t want to go to the effort of raising another round.

In cases like this, it has made more sense for one or more of the founders to temporarily loan the business money. The way we have this working is if one of the founders makes a small loan to the company, this goes against their loan account and the founder earns interest on that money. It’s not much, but it means they aren’t completely losing out by helping the business out with some funds when needed.

Over time the loans can add up and it becomes a debt to the business that is on the balance sheet and accruing interest. This is OK but at some point, loans need to be paid back and debts will make it harder to borrow more money in the future, so you need to keep that in mind.

Deferred wages

A more indirect way to help fund the brewery, is with the idea of deferred wages for the founders. When we started Black Hops we weren’t able to afford to pay all of the founders their market value. But we were also in a position where not all founders needed to be paid a full rate, because they either had income from other sources or living expenses low enough to not require a full wage.

So instead of rewarding founders differently, we used deferred wages for some of us. The founders who needed their full wage would be paid their full wage. The founders who didn’t, would be paid what they needed (if anything), and the unpaid portion went towards their loan account. So they are effectively still earning the money, they just aren’t receiving it yet.

There are tax implications for doing it this way, but it’s one way to reduce monthly costs while making sure all founders are rewarded equally. The cashflow advantage might mean you don’t have to get finance from other sources.

Short term credit

There are often instances in a business where you need cash short term, that you will be in a position to pay back quickly. An example in brewing might be buying Growler bottles. We have to outlay a few thousand dollars for them but we can reasonably accurately predict that in a few months we would have sold enough of them to cover the cost.

Obviously paying for as much as you can with business revenue is the best option, but sometimes you just don’t have the money there.

In these cases you could look at more short term options. Here are 3 options:

Credit cards

Clearly not the best way to get into debt, but for small purchases, credit cards can make sense. Don’t let the debt get out of hand and be careful what you use credit cards to buy. For small amounts of money they offer some strong benefits such as being able to get approved quickly, and accessing the funds easily.

However there are downsides as well. Interest rates and fees can be high. They can be hard to get for a business with no trading history. You can get personal ones and use them for the business but this puts the risk back on whichever founder gets out the card in their name.

Overdrafts

Overdrafts work in a similar way, where you can spend money out of your normal account even if the account isn’t in surplus. Typically you will have to have some trading history to get approved for an overdraft. Most of the pros and cons for credit cards also apply to overdrafts.

Online short term credit services

There are also a bunch of online short term credit services, such as Moula. I haven’t used it but the idea seems interesting. You enter a bit of info, they connect to Xero and analyze your data and they approve a loan within a day.

moula

Another example is PayPal Working Capital, which has a similar premise.

The money has to be paid back within a year so you’d only do it for a really short-term cashflow issue that you knew you could easily pay back. But you’d be surprised how often situations like that come up in a business like brewing. The interest rates are very high also.

Asset finance

Asset finance is something we are currently looking into for Black Hops. When a bank loans money, they want to know what happens if you can’t pay it back. People can borrow money against houses because the bank can always sell the house to recoup the money. The same thing goes for business equipment. If you are buying equipment and need to borrow money for it, the bank can always sell the equipment if it goes to shit.

There are a few things that we’ve come up against with asset finance.

  1. Our bank wanted to deal with a local supplier or at least a local distributor, which makes it difficult for us since we deal direct with the Chinese manufacturer for our tanks.
  2. Asset finance will only cover the purchase price of the equipment, which if often less than half the cost of actually getting it delivered and commissioned onsite.
  3. You will have to go through a process with the bank that involves pulling together a lot of info like a business plan, projections, P&L, Balance Sheet as well as a lot of detail on the equipment itself. Their asset teams will have to know something about the industry to make an assessment on whether the purchase is a good fit for asset finance.
  4. Banks generally are not too keen on risk so this will be hard to get for a new business. You may have to wait until you can prove a good history before they consider it, even if they are comfortable with the assets being purchased.

For asset finance you can approach your bank, a finance broker or even the equipment suppliers will sometimes have relationships with finance companies for financing their equipment.

Since brewing is such an asset heavy business, this kind of finance is definitely worth looking at.

Reward-based Crowdfunding

Crowdfunding is another way we’ve raised money for Black Hops. When we decided to buy a bottling machine before opening, we needed some extra funds to pay for it and the first bottling run, so we ran a Pozible campaign to raise it.

crowdfunding

Reward-based crowdfunding means when people back your campaign, they get something in return. In our case it was shirts, our book, a carton of beer etc. While we were able to raise just under $18,000 of our $10,000 goal, there is a big cost to fulfilling the rewards. All of the ingredients, packaging, excise etc on the beer was a big expense, then we had the bottling machine, delivery of the beer and all the work around the campaign itself.

In the end, the $18,000 didn’t go that far, and while it helped build our audience and spread the word about our brewery, we more or less broke even on the whole campaign.

We learned a few lessons out of it, the big one being that if you do it, you really have to give it a good crack with a high goal and try to raise a lot more money than you think you need. It was a lot of work and I’d probably suggest chasing a goal of $30,000 or $50,000 depending on what you need.

Equity-based crowdfunding

One of the more interesting changes coming up in Australia is the legalization of equity based crowdfunding. This is going to have a huge impact on the Australian brewery scene. With equity based crowdfunding, you don’t have to give away rewards to backers, instead you give away equity in your business (you may give rewards as well). So it’s similar to raising money from investors, but instead of having to know 1 or 2 keen investors, you call on your customers and audience to try to get a lot of smaller backers at once.

In Australia, equity based crowdfunding for Pty Ltd companies is looking like becoming available early to mid 2018. The process involves legalisation (which recently occurred for public unlisted companies but not Pty Ltd companies), and then guidelines need to be written and agreed upon.

Where this has been legal overseas, we have seen a lot of interesting campaigns with the big standouts being BrewDog. But there have also been some very successful campaigns in New Zealand including Yeastie Boys and Parrot Dog (who raised over $1m in one day).

What I’ve also noticed about equity based crowdfunding campaigns, is they are able to raise money at very good valuations.

Here’s a bit of a summary of a few funding raises that I knocked up when researching valuations. Note that I’ve pulled these numbers from a bunch of different sources and made a few assumptions, so just use it as a rough guide. If you want to do your own research, most of these raises have publicly available documents that show the company financials, amount raised and other details. The valuations are rarely specifically documented when they raise money, you have to calculate those based on the % equity they are making available and the amount of money they require for that equity.

brewery_valuations

Revenue multiples this high for traditional businesses are not normal in my experience, so equity based crowdfunding seems like it has a few benefits over traditional investment. I suspect individuals value the idea of owning a brewery higher than a typical investor, who is only interested in financial returns.

When equity crowdfunding does become legal next year, we will be planning our own campaign. You can register your interest for that here.

Borrowing against real estate

If any of the founders have their own houses, you can also consider borrowing against the equity in the real estate. There is a lot you would have to consider before doing this, you might be able to use the real estate to get approval for the loan but it might not be fair for one founder to put their house on the line and others not. A way around that could be for the founder to get a loan with their house as collateral and use that money to buy more equity in the business. That would make their repayments higher and might mean their founder wage wouldn’t spread far enough to cover the new repayments.

You also have to consider the amount of risk you are prepared to take for your business, and whether you want all your eggs in one basket.

I think a lot of businesses are started by the founders taking out bigger mortgages on their property because it’s a pretty straight forward way to access funds. In our case only one of us owned a property when we started, so it wasn’t really an option for us.

Pre-selling

Pres-elling is another thing we use, to help bring cash forward on smaller purchases. For example a few times we’ve wanted to order some merch for our online store, but haven’t had a few thousand dollars lying around. So instead of not going ahead with the order, we’ve run a pre-sale online. With our hoodies for example, the cost to order and print 50 hoodies was about $2,000. By pre-selling 40 of them at $50 each, we were able to raise the $2,000 a week before the order and use that cash to put the order through.

Crowdfunding is also a form of pre-selling, and when we do small pre-sales for merch, it’s much like a mini crowdfunding campaign.

Pre-selling is a good option but it’s really only for small amounts of money, and fast turnaround projects. You don’t really want to build up a huge debt you owe to customers, and there is a little bit of risk you take in taking money first and putting orders through later.

Conclusion

In this article I’ve focused mainly on the brewery finance options we’ve either used or considered at Black Hops. There are many other ways to get money. Debtor financing for example is one that I know other breweries have used, but hasn’t been something we’ve wanted to look into, so I haven’t covered it here.

So explore what options you have available to you. Obviously the absolute best case scenario is to not start a brewery until you have well and truly enough money to do so. But for us, we’ve always cut it very fine with finances.

It’s also super important to make sure you have a good accounting and bookkeeping system so you know your numbers backwards. For bookkeeping we have had Meryl from Bean Ninjas on board from day 1 to help with all of that and we couldn’t recommend her enough. We’ve also had Ben McAdam from McAdam and Co as our accountant who has helped us navigate through this as well and has again been great.

I hope this has been useful, if you have any questions please feel free to ask them below or join our free ambassador Facebook group and ask us in there.

If you want to express interest in investing in Black Hops, you can fill in the form here and I’ll get in touch.

When equity crowdfunding does become legal next year, we will be planning our own campaign. You can register your interest for that here

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