The Challenge of Staying Independent

Before you jump to conclusions, we aren’t selling!! OK read on….

Ever since we started Black Hops as a Gypsy brewer back in 2014, the topic of independence has been on our radar. Whether or not a company is independent is not something we’d thought too much about before starting a brewery. I always thought it would be a dream as a business owner to start a business that’s good enough to sell and then sell that business. It’s a perfect end to a story and hopefully a decent reward for the huge amount of risk and effort it takes to start a business.

Back then the local association was known as the Craft Beer Industry Association. They even had one of their meetings in the co-working space I was working in.

Me and my mate Luke (who later started Currumbin Valley Brewing) shared a fishbowl office working on IT projects. Luke was an avid homebrewer and told me about this wonderful concept of a kegerator. I told him to bring it in immediately and so in our tiny office we had a kegerator with Luke’s early homebrew (Punk Piss Beer) and my contribution (Black Hops’ first Eggnog Stout). On Friday arvos we’d supply beer to other people in the co-working space.

When the CBIA had their meeting onsite it was an exciting day. I got together the courage to go over to them after their meeting and give them a try of the local’s finest home brew.

Brendan Varis (Feral Brewing) and Chuck Hahn (do I need to spell out what brewery he started?) were 2 of the people present at the meeting. Chuck ducked out before I got the beer to the table but I poured the rest of them a glass of our first Eggnog Stout. I’ve since been told that the fact that Brendan didn’t tip it out in front of me was an enormous compliment.

Shortly after, the association changed to the Independent Brewers Association, and guys like Chuck and Brendan, having exited their companies, weren’t welcome anymore.

There’s something a bit upsetting about that. Good on them for selling their business!

As time went on we opened a brewery and continued on our journey. But we didn’t join the IBA for quite a while. We figured it was the quality of the beer that mattered, not the ownership structure of the company.

And to be honest we were probably a bit bitter about how they treated the OGs of our industry. For the first 4 years of Black Hops, we weren’t members.

To us, the product was and always will be the important thing. Businesses have to make a great product in order to stay relevant. The ownership is secondary. I use products all day every day and often don’t consider who owns the companies behind the products. We want the best products. That’s the way it should be.

The problem is that without independent companies starting up and making beer, we wouldn’t have the best products. We’d just be getting lagers dressed up by marketing like we have been from the major brands for as long as we’ve lived. These days with 700 odd independent craft breweries in Australia, it’s easy to find great beers. Without those companies, it would be near impossible (as it was before).

So there IS something to say for local ambitious startup independent breweries!

I’m also conscious of the fact that Australia seems to make and own a lot less than they did when I was growing up. When the car industry started to die, I figured it made sense. Overseas companies could make cars cheaper and better than we could in Australia, so be it.

But where does that lead? A situation where we make nothing and own nothing? That’s not great either.

Multinational conglomerates own 90% of the beer consumed in Australia. The brands we know and love and grew up on. Out of the top 15 Aussie beer brands, one is independent (Coopers)! And they have an iron-clad Constitution that basically makes it impossible for them to sell out.

The rest are owned by Lion, Asahi and (recently thanks to a recent ACCC ruling that prevented Lion and Asahi owning absolutely everything, Heineken).

That’s not great.

So as we look at our business and our position in the craft beer industry in Australia in 2021, we have a bit of a different perspective on independence. It’s important. We are happy members and contributors to the IBA and supporters of local independent businesses.

That said, it’s always a pretty tough ongoing challenge to stay independent and we thought it would be useful to share some of those challenges in a post. So here it is.

Why do breweries sell or sell out?

Every time a brewery sells, you seem to see the same comments from the brewery owners. “Nothing will change”, “We did it to secure the future of our brand and our team”, “this is a great partnership” etc.

But why do breweries actually sell?

I haven’t sold a brewery before but I did sell my last business and I know a bit now about what it takes to build a craft beer brewery, so I’ll take a stab at some of the possible reasons.

By the way, there’s no judgement here. To me these are all extremely valid reasons for selling.

Because they make money

Let’s not forget that when the larger brewery brands sell, the owners are given what to most people would be considered a hell of a lot of money. Like I said before, I have no problem with that. If you start a business like this and everything falls your way and you end up in a position to sell it, you should have the chance to be rewarded for all that risk, sacrifice and hard work.

Because they can’t afford not to sell

Most of the brands that have sold, have been companies that have been growing very quickly. Running a fast-growing company is an extremely difficult task. Doing it in the alcohol industry in Australia is near impossible. Every one of the highest cost inputs to a business you can think of exists in this business. Our wages bill is over $3.6m per year. Our excise is over a quarter of a million dollars per month. We have 10 physical property leases. We have Hop Contracts in the millions of dollars and deals where even if we don’t need the hops, we still have to pay for all the hops in the contract. We get invoices for hundreds of thousands of dollars for hops that are part of our contract that we don’t need but we have to pay for. We have to manage the fact that as a business that does 80% of their revenue as wholesale, we don’t get paid when we produce our product, we get paid a lot later (sometimes never at all).

We have over $4m in equipment which is a bare minimum to enable us to produce what we are currently producing. We are actually very tight on funding for a brewery doing 200,000+ litres per month.

Then add growth into that mix. We’ve doubled every year for 6 years. How do you fund that growth? Our next phase will likely require close to another $4m to get to the next tier of manufacturing required for us to continue our growth.

The financial year just gone is the first financial year we’ve been profitable in our almost 7 year history.

Not that we’re complaining! This is the absolute best case scenario for a startup like ours. We’ve had an incredible run. We could never have imagined things going as well as they have for us.

But just to say that keeping this going is not easy. We’ve done crowdfunding, equity crowdfunding, pre-selling, lease finance, invoice finance, asset finance and 9 private investment rounds. Every time we close a finance round, we are onto the next one, often we’re pursuing multiple types of finance at once.

We are only able to keep doing what we are doing due to a lot of smaller investors and great support from banks. And even then there is compromise. When you raise equity you give up ownership in the business and when you borrow from a bank, you have to pay it back! And put everything on the line if you don’t.

We are almost 7 years in (5 if you count when we physically built the brewery) and I can fully understand when companies cannot keep this treadmill going any longer.

Related: Brewery finance.

Because they don’t want to do the work anymore, or they want to do something else

When I sold my last business, I did it mainly because I wasn’t really interested in doing the work in that business anymore.

It was a website support business, it wasn’t super fun, I was ready to move on and do something that excited me again.

This is pretty common. If founders and major shareholders are engaged in the business and excited about the work then you’re good, but keepin that going is not easy. You can’t begrudge a founder for wanting to move on when their heart isn’t in it anymore.

Because they don’t want their investment to go to zero

This is a big one. If you build a solid craft beer brand in Australia, with high growth and a lot of attention, it’s not long before you start comparing yourself to other breweries that have listed, or raised money at high valuations or sold. Black Hops these days is worth a decent amount of money based on those comparisons and as founders who hold the majority of the business, we find ourselves in a position where we never would have expected to be in. Being in control of an asset potentially worth millions of dollars. Me and my 2 co-founders have never been particularly well off and have never owned anything worth this much money.

And the scary thing with a business that is worth a lot of money is there’s a very fine line between something worth millions of dollars and something worth zero. It’s not like property. With a house if you have to sell it, you might get a bit less than you hoped, but you’ll never get zero or close to zero. With a business like this that’s only just profitable, has enormous cashflow challenges and only potentially 2 or 3 possible buyers, there’s a real chance that if you can’t continue profitably, or you can’t exit to the stock market or find cashed up private investors, you will be left without options.

There’s also a chance that something really bad and unforeseen happens. We definitely had a moment in March last year when COVID shutdowns hit when we thought that was our moment. A moment when the biggest risk and investment we’d ever made was possibly going from super exciting, high growth and high value, to zero. We had a moment where we did our normal founders meeting and had nothing to say, all thinking this could well be over.

There are many things that could happen to cause a challenging business like this to go to zero. I try not to think about them too much but I’ve certainly lost a lot of sleep over the last few years about financial concerns, and quality issues, and potential safety issues and expansion challenges, bank loans, the list goes on and on.

I’ve had friends who’ve had great businesses that were growing quickly and worth quite a bit who’ve ultimately sold just because it was their opportunity to really be rewarded for their effort. They no longer wanted to go to sleep every night knowing that their chance to get a significant amount of wealth from their most successful project, could go to zero with some small stroke of bad luck.

There are a lot of reasons to sell and to be honest they are all very relevant and legitimate reasons.

But you get through all of that and you don’t want to sell, it still isn’t super easy. In the next section we’ll go through some of the challenges.

The Challenges of Staying Independent

Even if we ignore all of these very legitimate reasons to sell, staying independent is enormously challenging. Here are some of the ongoing challenges in staying independent.

Investors

Our business would not exist without the backing of investors. Early on it was just Sam and Paul who helped us get the doors to Black Hops HQ open. In the years since, we’ve done 9 investment rounds and an equity crowdfunding round. We have almost 50 traditional investors and over 500 crowdfunding investors. Some have put in $100, some have put in $250,000. That’s a lot more than any of us founders put in.

Our founding investors invested a valuation of just under $1m. As time went on our investment rounds attracted higher and higher valuations. Our Crowdfunding investors invested a valuation of $18m. Shares have been issued since at more than double this amount.

If you’re an investor who invested early in Black Hops, you would see your ‘on paper’ value of your stock go up considerably. It’s reasonable to expect that at some point you’d want to cash in. After all that’s the whole point of investing in something – to get a return.

Thankfully we haven’t had much of this. We’ve always pitched the idea of a very long term investment and always given the expectation that this would not be a good investment to make if you are after a short term reward.

But ultimately investors will want some return and ‘long term investment’ doesn’t mean ‘forever’.

Financing expansion

We feel like we’ve done pretty well with the other challenges to date, but we again find ourselves with a new challenge in 2021. How do we upgrade our manufacturing facilities to achieve our next level of growth? Our brewery and tank space are reasonably future-proofed but packaging beer into cans (which is now 80% of our business), is extremely challenging and costly.

Our current canning machine comfortably sits at around 65 cans per minute and cost us around $300,000. To go to the next level, we are looking at a much larger rotary canning line that could fill 200-250 cans per minute. With all the equipment needed before (depalitiser etc) and after canning (case packer, paktech applicator etc), we are looking at something well into the millions, most likely over 10 times the cost of the current line.

Related: Canning More Beer – Black Hops’ $3m Packaging Line Upgrade

These are big numbers and while we have solid support from the bank, it presents a pretty big challenge to get that expansion done without some big compromises.

Staying interested

Obviously the main shareholders and founders have to stay interested to stay independent. It has to still be the preferred way for us to spend our time. If it’s not, we might as well sell and do something else like other business owners regularly do. We are now almost 7 years into Black Hops which is no small amount of time. When Mountain Goat announced their sale and copped considerable flack for it, they had existed for 18 years. It’s a big ask for a group of founders and shareholders to do something for that amount of time.

At Black Hops we aren’t showing any signs of wanting to do anything else, but it’s definitely something to stay on top of. Making beer is fun, but it’s still work. Work needs to stay fun and interesting and challenging for people to want to keep doing it, and no one wants to do the same thing forever.

Not having the desire to cash in

Obviously getting a whole bunch of money is appealing. How do you make it less appealing? Of course there’s the fact that if you wait until the value goes up even more you’ll get even more money. But there are other ways to make the thought of selling out and getting a bunch of money not so appealing.

Paying founders a good wage for their work is a good start. For all of our history, the founders have been paid well below market rates. For a decent chunk, some of us weren’t paid at all, and have recently and consistently taken hits to our pay to keep the company alive. We are now finally working on a more market-based approach for remunerating founders and Directors. Being paid a reasonable amount for your position is a good start for achieving job satisfaction. Drastically underpaying founders through necessity and holding out for a big pay off is a recipe for selling out.

It was hard to make the decision to start paying the founders market rates, but it was the right decision.

We are also chatting to Birchal about looking into the option to allow shareholders to buy / sell their shares. The legal system needs to change for this to happen but if it happens it would give current investors the opportunity to sell some of their shares, providing the chance to get some of their initial investment back while still holding stock in the company longer term. This will all help towards keeping current shareholders more engaged and reducing the desire to cash in.

We recently surveyed our investors and only 1% said they wanted to sell their shares. This is pretty encouraging, we will put out a post about this shortly.

Losing control

If you no longer have control of your business, you really no longer have a say in whether or not you sell. When we started Black Hops in Govsie’s garage, we obviously owned 100% of the business. When we wanted to do our first contract brewed batch, we put in $2,000 to get it done and we still owned 100%. When we wanted to open our physical brewery we couldn’t afford it on our own and couldn’t get any loans, so we found support in Sam and Paul. The first time we got any finance from the bank (other than car loans), we closed the week before we opened BHII quite a few years later, a $3m facility.

At every expansion, we’ve given up more and more equity.

These days the 3 founders still own over 50% of the business. Much more capital raising and the 3 founders could no longer hold a majority ownership in the business. This is a situation we are very much trying to avoid, but every way of raising money has compromises, and giving up equity is sometimes the best option.

Outside the original founding investors, we have only ever sold very small chunks of Black Hops. No shareholder outside the original founders and founding investors holds more than 2%. We’ve aimed more at smaller family and friend investors as opposed to Private Equity firms or large high net worth investors (partly because we didn’t know any).

This isn’t always the case. Sometimes in order to get the finance you need, you need to take on investment from larger players. When you do this, you often give up a decent chunk of equity, a board seat and ultimately you take the first step on the walk to giving up control of the company. Or said another way, the first step on the walk to selling a company. Some of the bigger independent breweries in Australia are on this path. They will be independent until the influential backers decide they no longer want to be independent (again no judgement here).

We are very keen to not lose majority founder ownership at Black Hops and very keen not to lose control of the company as we grow. Whether we are able to achieve that, given the expansion coming up, remains to be seen.

The options for staying independent

It’s not all doom and gloom. There are ways to stay independent and still keep original founders and investors happy. Here are a few of the options:

Be profitable and pay dividends

When you put your money in the bank you don’t aim to one day sell the holdings for a huge return, you just hope to get ongoing and consistent returns for having the money there. That’s a very valid investment strategy. Coopers have paid a $12-$13 dividend per share every year for 26 years. Not the easiest company to invest in, but I imagine the family investors are pretty happy with that deal!

Related: Cans and DIY home brew save Coopers Brewery

I don’t know a lot about what other breweries do, but in the publicly-available information from some larger craft beer breweries (like Stone & Wood), I understand that there are at least some who are profitable and have been consistently for quite a few years. I don’t know if they are paying dividends, but it’s certainly a worthy pursuit to aim for this outcome.

This is what we are aiming to do at Black Hops, create a sustainable and profitable business. It’s not easy. We feel like we have made it through one of the hardest stages on that path which is the path to achieving a reasonable amount of volume and distribution and coming back to profitability (the valley of death).

Related: Navigating the brewery valley of death

That said, using profit to pay back shareholders just means you can’t use that money to chase opportunities, and this is something you see with larger companies, they are slow to move on opportunities and sometimes struggle to remain relevant. Dividends and growth don’t mix. Being fiscally responsible has its downsides!

Second Market Equity Crowdfunding Options

Other than just working on being a financially responsible and profitable company, another thing that would help would be allowing current shareholders to buy and sell shares. We have been talking to Birchal for a while about this but for now at least it’s only available to public companies and it’s too much work to change structures just for this. If the laws change, we will be keen to participate in this.

Equity crowdfunding comes with its challenges. One of the main ones is how do you get people to invest in something when there is no visible path to getting a return in the future. We have been able to get people to invest in Black Hops. But we wouldn’t feel right if we also didn’t explore the possibility of allowing investors to get a return without waiting decades.

We think as investing becomes more and more democratised, platforms will emerge that allow investors to divest as well. Mini private stock exchanges. There will be challenges of course, but this is a future that is going to help companies like ours navigate this difficult issue.

IPO

As a business founder I still have a bit of love for the old idea that you start a business and list it on the stock market as your ultimate result and end to the story. The stock market has some great advantages, but also comes with some downsides.

The great thing about being on the stock market is you have a live and liquid tradeable asset. Anyone can buy shares at any point and any current shareholders can sell some or all of their stock as they wish to (within some reasonable parameters). This means it’s a great exit opportunity for investors who want to move on with some of their stock.

It also provides a virtually immediate exit for original investors or founders who want to exit the business. There are some rules around this but there are no earn outs or clauses that say founders have to work in the business for 5 years after listing. These clauses are common, if not completely standard when you sell a business to a major corporation.

But there are downsides. It’s a very expensive process to go through, companies often raise a good chunk of money before a listing just to pay for the listing!

There are some pretty stringent documentation and reporting requirements for listed companies. For a company like ours who has no problem being transparent about what’s going on, this isn’t a big concern, but for others it might be something that weighs in on the decision.

The valuations aren’t great. As a brewery owner it would probably be much more financially beneficial to facilitate a sale to one of the major beer companies than it would be to list on the ASX.

It also doesn’t suit that many companies. I’m only aware of 3 craft beer companies on the ASX, and really only 1 company that looks and feels somewhat like a craft beer brewery (Gage Roads). To get the interest of institutional investors and to provide a reasonable investment proposition to the people and institutions who buy into IPOs, you need to present in a certain way. For starters you probably need to be doing decent volume. You probably have to have reasonable distribution around the country. It would help if you had multiple brands and a strategy for building a multiple-brand business. It would be super helpful if you had an experienced management team and board who could navigate the journey with you and make the significant leap from private company to ASX listed firm. These aren’t small things and definitely aren’t things that most craft beer breweries would find in their DNA.

So there are options, but each comes with its own set of challenges.

Conclusion

If you are a Black Hops investor, thank you, we appreciate your ongoing support and understanding. We would not be anywhere near here without you.

If you are a brewery founder, we hope this content will help you making decisions about the future of your brewery. We would have certainly liked to read something like this when we started.

If you are an investor in a craft beer brewery we hope this will give you some insight into what goes into our decisions and encourages you to offer support and patience to the brewery owners who are working hard on their businesses to ultimately get some reward for you as an investor.

If you are a drinker of craft beer who is quick to judge founders who sell their businesses, we hope this article will give you a different perspective. As a supporter of independent craft beer businesses, I’m always a bit bummed out when people sell. But I understand why they do and I don’t begrudge them for it. Whether you keep drinking their beer or not is up to you, but I hope some of these ideas will help you understand why the decision to sell is sometimes the best decision for them.

If you are a drinker who goes out of their way to support independent breweries like Black Hops, then cheers to that too, we very much feel the love and appreciate the support.

Will we sell Black Hops?

Ever since the first investor considered investing in Black Hops (btw the first few said no), this question has come up consistently. ‘What is the end goal?’.

We’ve never had a good answer. Investment round after investment round and investor after investor we have never been able to answer this question. But we’ve still been able to get the right people to invest in the business at the right time. We’ve always been honest in saying that we don’t know what the end game is. We want to build a great business with great investors, ultimately we want to become profitable and sustainable and an industry leader. Not the sexiest language for the average investor and I know for a fact we’ve lost more than a few opportunities with potential investors as a result of being honest.

In the end, people want to believe in the future of the business. They want to be excited about being part of the journey. Our investors, who we have hand picked and grown the business alongside, love being part of this journey.

We don’t want to sell Black Hops and even if we did, no one has ever offered to buy it. But we have many owners and for all the reasons written above, there may be a multitude of reasons why a point may come where it makes the most sense to sell.

If that did ever happen, we would absolutely celebrate it as a very significant win.

Right now we are happily independent. We support independent breweries and support the idea of independence. We also support business owners starting a business and achieving an exit.

It used to be the case that breweries would sell and all of a sudden the products would slide backwards. It’s been encouraging in recent years some of the best craft breweries have sold and continue to make bloody solid beer (Pirate Life & Balter are good examples). These are great signs and knowing the people behind these businesses and the work they do, makes us fully understand their decision to sell.

That said, we absolutely appreciate the craft beer drinker that supports independent breweries. Doing so creates an environment of creativity and entrepreneurship and experimentation that simply would not exist without the concept of independence. We are always happy to be considered independent and we are very much aiming to stay that way. We also hope you will consider some of the points in this post when considering whether or not to support breweries who have sold.

Cheers to great beers.