April 3, 2014
With the craft beer business booming, there is continued increase in demand for product. Breweries continually face the challenge of being able to produce this ever increasing demand. In such a capital intensive industry, there is often not a lot of free cash flow. So, how can a brewery expand? There are several solutions, each with their own pluses and minuses.
The easiest way to fund expansion is through utilization of free cash flow to fund capital purchases, including buying a new fermenter here or a used bottle line there as cash becomes available. This method can keep the company solvent by not acquiring debt or diluting the ownership through an equity offering. However, this can be a slow process and may make it impossible for a large scale expansion into a new facility.
Bank debt is probably the most common method for fueling a brewery’s expansion. This is a good way to spread out the cost over a longer period of time, depending on repayment terms. Debt financing can help with large expansions or transitions to new facilities. Some of the costs can be offset with potential tax savings related to large acquisitions of equipment. It’s important to be aware of covenants contained within the loan agreement. The bank may require certain financial ratios to be maintained or that CPA prepared financial statements be provided. Discussing these items with the lender up front can alleviate surprises later on.
A third method for funding expansion is through equity financing. This involves getting outside investors involved in exchange for a partial ownership in the company. This can work well because no additional debt is taken on and the monthly outflow of cash is not significantly affected. Any tax savings generated by the acquisition of equipment is unchanged in this type of funding. The potential downside for some owners, particularly where there is only one or two, is that it will dilute their ownership interest in the company. Outside investors may also want to see a quicker return on their money and may want to exert more control over the company to ensure that this happens.
Companies looking to expand should also look at other opportunities available to them and do their research in this area. Oftentimes, their city, county or state will have business incentive programs that may have grant money or very low interest options to encourage a stimulation of the local economy. Small Business Administration loans are another good way to fund a lower interest expansion. Both of these should be looked at on a stand-alone basis or in conjunction with the above options.
Before undertaking any type of business expansion, it is important to talk to your financial and legal advisors to understand all of the ramifications of the various options, as well as short term and long term advantages and disadvantages. It is always exciting to see breweries successfully expand and be able to fulfill the growing demand in the marketplace.