Undertaking any entrepreneurial endeavor can be a daunting task. It can get very complicated when doing so in a highly regulated environment, such as the one that governs the manufacture and sale of alcohol related products. And while every company founder will inevitably make some mistakes, the following are the top 12 mistakes I see most prevalent with startup breweries and distilleries.
1. Choosing the Wrong Legal Entity
There are a slew of issues one must consider when deciding on the appropriate legal entity through which to own and operate a brewery or distillery. Some of the primary considerations are the number of owners, the role those owners will play in the business, how profits and losses will be allocated, the ability to attract outside capital, and tax issues. Other considerations include the cost of the organization, the formality of governance, the transferability of ownership, the continuity of existence, and the attraction and retention of management and key employees.
Without analyzing each of these considerations and other relevant factors, it is difficult to prescribe one type of business entity for a brewery or distillery to the exclusion of others. In some instances, a limited liability company may be the better choice, and in other situations, a corporation may be optimal. It is a fact dependent analysis and making the wrong decision can have consequences later on down the road.
In almost every circumstance, however, it is advisable to incorporate earlier in the process and do so well before licenses and applications are filed with federal and state regulators. Also, once the entity is formed, the founders and other management need to abide by corporate formalities.
2. Ignoring Securities Laws When Raising Capital
Whether you are raising money through Kickstarter or another crowdfunding platform, a convertible note with friends and family, or selling equity to investors, startup breweries and distilleries should not ignore the rules that govern raising capital. Whichever method of raising capital is utilized, analysis of the applicable securities laws, as well as non-securities laws, is inevitable.
Many breweries and distilleries are having success raising a pre-seed round of capital through Kickstarter or some other crowdfunding platform. These platforms do not involve a sale of a security; therefore, securities laws do not govern these transactions. However, many states prohibit breweries and distilleries from giving away beer or liquor, so startup breweries and distilleries should be mindful of this when offering products in a Kickstarter or similar campaign.
Raising capital through more conventional methods will almost certainly require complying with federal and state securities laws. No startup should endeavor to raise capital through a public offering; but Regulation D provides startups with a number of exceptions to the general registration requirements.
Raising equity through a Regulation D exemption requires certain company disclosures and thorough recordkeeping. Startup breweries and distilleries should be very careful about how information concerning the equity raise is transmitted, especially as it relates to social media. In addition, startup breweries and distilleries need to be aware that some investors must be treated differently than others.
3. Failing to Obtain the Proper Licenses and Permits
The manufacture and sale of alcohol products is highly regulated in the United States. From filings with the TTB, the FDA, the IRS, and the SEC to all of the state and local specific applications, startup breweries and distilleries need to make sure that all federal, state, and local permits and licenses have been obtained prior to manufacturing and selling a product. Getting cross with a federal or state regulator before a product hits the market is never a good idea.
4. Neglecting or Undercapitalizing an Intellectual Property Strategy
An intellectual property strategy is much more than simply filing trademark registrations. When it comes to craft breweries and craft distilleries, an intellectual property strategy should include the protection of copyrights, trademarks, and trade secrets. The strategy should be a multi-faceted strategy that starts immediately upon formation and continues throughout the life cycle of the brewery or distillery.
Upon formation, every founder, employee, or independent contractor should assign all of their rights in any brewery or distillery related intellectual property to the company. All future employees should also be required to execute assignments of rights as a condition of employment.
As the craft beer and craft spirit markets expand, the potential for intellectual property infringement increases as well. Protecting and defending intellectual property by craft breweries and craft distilleries has become increasingly more important. As brands and concepts are designed, the brewery or distillery should seek appropriate intellectual property protection through the registration of copyrights and trademarks.
Founders, employees, and independent contractors should also be subject to non-disclosure and non-competition agreements in order to protect the trade secrets of the brewery or distillery. No brewery or distillery wants to invest significant sums of money in human capital only to ultimately finance the competition.
There is so much value created in the brands and story of a brewery or distillery, yet these are routinely the least protected assets. Great lengths should be taken to protect all forms of company intellectual property.
5. Entering into Contracts without Advice from Legal Counsel
Some contracts appear undemanding and benign, while others appear overly and unnecessarily complicated and somewhat hostile. Regardless of appearance, all contracts carry significant legal consequences, some of which might be obvious to everyone and others might only be obvious to the legally trained. Unequivocally, entering into any contract without the advice of legal counsel is a bad idea.
6. Entering a New Market without a Sound Understanding of that State’s Laws
Many states appear to have similar statutes and regulations when it comes to franchise laws, tied house prohibitions, and other laws that govern the manufacture, sale, and distribution of alcohol.
From how a state taxes the manufacture and sale of alcohol, to what statutory provisions suppliers and distributors can contract around, to what alcohol content limits might apply, the laws governing breweries and distilleries are fundamentally different regardless of appearance.
It is never advisable to start selling any product in a jurisdiction without a sound understanding of the laws that govern that sale, especially when it comes to alcohol products.
7. Neglecting a Social Media Policy
More so than many other industries, craft breweries and craft distilleries have embraced the power of the Internet and social media as a means to shape the public perception around their companies, products, and people. Leveraging this power for brand promotion and company storytelling can be instantly impactful, but also carries certain risks.
First, every startup brewery and distillery should have a social media policy that provides a baseline set of rules for all employees as it relates to personal social media accounts. This policy should specify what is allowed and what is not allowed as it relates to employees use of their personal social media accounts.
Second, every startup brewery and distillery should have a social media policy that provides a set of rules for those employees charged with the responsibility of implementing the social media strategy for the company. The individuals managing the social media strategy for a brewery or distillery should also have a sound understanding of copyright and trademark laws, privacy rights, and the laws that govern advertising.
8. Neglecting Labor and Employment Issues
Very few founders are ever taught how to manage people or the laws that surround that relationship. Yet, mismanaging people, misclassifying workers, and neglecting necessary written policies and procedures can lead to unnecessary risk and ultimately catastrophic consequences.
Hiring workers and treating them as independent contractors or leasing labor may appear to be more cost effective than hiring W-2 employees, but doing so limits the amount of control a brewery or distillery has over those workers. It can also limit the ability of the brewery or distillery to obtain or enforce restrictive employment related covenants, such as non-disclosure, non-solicitation, and non-competition, with those workers.
Every brewery and distillery should have an alcohol manufacturing industry specific employee handbook. The handbook should not only address labor and employment related matters germane to any manufacturer, but should also address issues related to the handling, disposal, and consumption of alcohol.
9. Not Planning for Growth
Breweries and distilleries require significant outlays of financial capital. These are capital-intensive industries requiring expensive equipment that may have long manufacturing lead times. Founders of breweries and distilleries should have realistic projections about growth as it relates to plant, equipment, and inventory needs.
No manufacturer wants to introduce a viable product to market and not be able to keep up with the demand 6 months later. Planning for early stage capital needs as it relates to growth is critically important.
Generally, during the earlier stages of a brewery or distillery life cycle, capital is not as easy to access as it may be a few years down the road. Breweries and distilleries should begin projecting capital needs and shopping expansion financing early so as to minimize the impact of growing consumer demand on a maxed out manufacturing process.
10. Not Leveraging Non-traditional Financial Resources
Earlier stage capital for breweries and distilleries can be challenging. Many breweries and distilleries raised enough equity capital to start manufacturing, but need additional equipment or a working capital line of credit in a very short period of time after opening.
A brewery or distillery may have trouble raising additional capital from the initial investors and may not meet the underwriting requirements of more traditional lenders. While both of these options should be explored, craft breweries and craft distilleries should also actively pursue state and local economic development incentives and state sponsored small business investment products.
Many states are starting to understand the impact a brewery or distillery can have in a particular community and are starting to incentivize the industry. There is a long way to go for these industries to be incentivized to the degree of other manufacturing industries, but the conversation has certainly begun nonetheless.
11. Going at it Alone
Regardless of the industry, going at it alone almost ensures failure. This is especially true in the brewing and distilling industry. The overwhelming majority of success stories in this industry are those of teams, teams of founders with teams of third party service providers, such as consultants, lawyers, and accountants.
It is unlikely a founding brewer would bring on a working partner that had very little to no knowledge of the brewing industry. Likewise, founders should engage third party service providers that also have high levels of industry experience. With few exceptions, the value of the industry knowledgeable third party service provider far exceeds the cost.
12. Not Engaging
The legal, regulatory, and policy landscape of the alcohol manufacturing industry is changing on a daily basis. As the owner of a brewery or distillery, it is critically important to not only stay abreast of these changes, but to have voice in them.
Consider joining a national trade association like the Brewers Association or the American Distilling Institute. If your state offers a similar trade association or guild, join it as well. If your state does not offer such, consider starting a trade association or guild with other brewery or distillery owners in your state.
