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Sunday, 10 May 2015 22:00

Tapping Capital: More options available to quench craft brewing industry’s growing thirst for funds

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Tapping Capital: More options available to quench craft brewing industry’s growing thirst for funds PHOTO: SETH THOMPSON

Money is pouring into the craft beer industry these days, as players from across the capital spectrum open their spigots to fund startups, expansions and a growing number of liquidity events.

Once the realm of local angel investors and Kickstarter campaigns, the financing of microbreweries has gone mainstream as banks, credit unions, family offices and private equity firms have discovered the industry dynamics and sheer size of the $19.6 billion craft beer business.

Plus, the microbrew business is expanding at a rapid pace. The number of craft breweries in the U.S. has doubled over the past five years to 3,500 and the industry’s expansion shows no signs of slowing anytime soon. Another 1,000 microbreweries are currently in planning stages, with some 700 expected to open in 2015.

There’s also tremendous growth among established craft breweries, which are adding production capacity on a near-annual basis and, in some cases, building new breweries across the country from their flagship operations to deliver fresh beer to new markets.

“Craft’s phenomenal growth is still turning the industry upside down, and people with money see this,” Benj Steinman, president of Suffern, N.Y.-based Beer Marketer’s Insight, told some of the 11,500 attendees of the Craft Brewers Conference sponsored by the Brewers Association last month in Portland, Ore.

As evidence, he points to deals involving nine of the top 50 craft brewers in the country that sold at least a stake in their companies since the start of 2014. That includes Grand Rapids-based Founders Brewing Co., which recently sold a 30-percent share of the company to Spanish brewer Mahou San Miguel.

Locally, Perrin Brewing Co. in Comstock Park was acquired in late March by a top 25-ranked Colorado brewery, Oskar Blues Brewery, with funding from a Boston-based investment firm and an executive from one of Michigan’s largest beer distributors.

With more potential merger deals on tap and money flowing, this may be the beginning of a particularly frothy time for the craft beer business.

“Believe me, there are more big ones coming,” Steinman said.


Considering the real estate and equipment needed to start a brewery that intends to offer at least limited distribution, the minimum capital investment for a startup brewery is around $1 million, said Joe Infante, a Grand Rapids-based attorney who leads the alcoholic beverage regulation team at Miller, Canfield, Paddock and Stone PLC.

In the past, raising that type of sum from friends and family would have been challenging, at least. But in recent years, banks and investors have been more willing to finance breweries — in part because of a change in perception about the industry.

For years, craft breweries were viewed as specialty restaurants rather than the manufacturing companies that many of them eventually become once they start bottling, canning and distributing.

“Banks had lumped breweries in with restaurants, but they now see that they’re different and successful, and they’re more willing to lend,” said Brandon Finnie, a business valuation specialist at Grand Rapids, Mich.-based Hungerford Valuation.

Banks and credit unions have been aided by the U.S. Small Business Administration, which guarantees loan repayment on SBA-approved loans.

Nearly all startup craft brewery financing deals involve SBA loans, said Kenny Leonard, vice president for commercial loan services at Kalamazoo-based Educational Community Credit Union.

Leonard, a veteran SBA lender, has worked on six brewery projects in his career, including Tapistry Brewing Company, which started production two years ago in Bridgman, Mich., about 15 miles south of Benton Harbor. Leonard said he’s comfortable lending to the industry because he’s done multiple deals and all have succeeded.

Compared to other industries, “breweries are an anomaly in their growth,” Leonard said.

In the last five years — from 2009 to 2014 — the SBA backed 68 loans to craft breweries in Michigan, including 19 across the state last year, according to data supplied by the agency.

In 2014, 456 microbreweries opened in the U.S., but just 23 companies closed, according to the Brewers Association. Closings have averaged just 22 per year over the last five years.

As a lender, Leonard said he has a responsibility to strike a balance between continuing to provide debt capital for expansions and helping companies realize when they might be better served in paying down their debt — all while ensuring that they maintain their momentum with their brands and with customers.

Balancing growth and risk is a key consideration for Tapistry Brewing these days, co-founder Greg Korson said.

In March, the company started canning its beers using a traveling system from Michigan Mobile Canning LLC rather than investing in its own filling system.

Through its distributor partners, Tapistry has also ramped up packaged sales to accounts in West Michigan, Lansing and metro Detroit.

With taproom sales up 35 percent versus last year’s first quarter and demand growing for its canned beers, the company expects to run into capacity constraints. Tapistry plans to add more equipment “in the next couple of months,” Korson said.

“It’s been a whirlwind,” he said. “We want to time it just right.”


Given the industry’s track record, more startups these days are banking on future growth and buying bigger systems right away to avoid the crippling delays of waiting for additional equipment. That’s especially important as lead times for brewing equipment have begun to extend to nine months and longer, according to industry sources.

For their part, lenders also tend to look favorably at financing equipment purchases because the pieces are mostly raw standard stainless steel, which has a high scrap value if a business needed to be liquidated, said ECCU’s Leonard.

He noted the secondary market for brewing equipment remains strong, particularly given the long lead times to order new production equipment.

“Most people in the industry say don’t start with a 7-barrel system because … you’ll still run out of beer, so a lot of guys are going with 12- or 15-barrel systems,” attorney Infante said.

It’s just not a sustainable model for a production brewery to start small and expect to have enough equipment — or beer — to meet demand, said Hungerford Valuation’s Finnie.

“It’s not uncommon that within six months they’ll be maxxed out, so they’re going big up front,” he said, adding that having more options for capital has started to drive change in the craft brewing industry itself.

“Breweries are getting more sophisticated at the startup level,” Finnie said. “They’re smarter out of the gate.”


That sophistication level — and the need for outside capital — tends to ramp up quickly as the more established breweries ride the wave of growth.

As a segment, craft beer grew 18 percent in volume to reach 22.2 million barrels or 11 percent of the overall beer market, according to the Brewers Association. Meanwhile, retail sales were also up 22 percent for the year.

It’s also in the growth phase of existing breweries where banks, private equity and other alternative capital sources have started to pay the most attention, sources said.

“It really is one of those industries — because of that growth — that very quickly brings a lot of high-level financing type programs right to the forefront,” said Matt Hoeksema, chief commercial banking officer at Holland-based Macatawa Bank. “You can work with a small tool-and-die shop for years and not see the growth that some of these companies will show you in 18 or 24 months.”

It’s also at this stage, when breweries’ distribution revenue tends to surpass their pub’s food-and-beverage sales, that they start to look more like typical manufacturing businesses, he said.

“The larger breweries here in Michigan, they’ve even gone beyond light manufacturing to where it’s a very capital-intensive, high-growth manufacturing company with ongoing equipment needs that banks are becoming more a part of,” Hoeksema said.

Growing breweries that distribute packaged beer have the most need for capital because of the amount of brewing and packaging equipment required.

But they also face key challenges around the timing of investments in new equipment, which might not start generating returns for a year or more.

“This industry, more than others, becomes really a microcosm or a proving ground of a traditional financing structure,” Hoeksema said.

With success comes a desire to grow, and that creates a continuing cycle wherein breweries need more and more capital as they scale up production and packaging lines and warehousing to move more liquid to customers. Many have also started to open satellite locations, which require additional investments in real estate and equipment.

Hoeksema also cites the growing practice of breweries producing barrel-aged beer such as New Holland Brewing Co.’s Dragon’s Milk or Founders Brewing Co.’s KBS. While mostly a niche product, the aged beers can complicate a brewery’s finances since the barrel-aging process can add 90 days to a year to the cash-flow cycle, “and banks don’t like that.”

“There’s a perfect example of where they need equity dollars sitting so they can maximize their bank debt on the more traditional, faster-turning cash flow cycles,” he said.

As a result, Hoeksema said he’s seen more mezzanine and subordinated lenders getting involved in the industry.


With plenty of deployable capital on the table, private equity firms have started to seek out investment opportunities in the high-growth craft brewing industry, sources told MiBiz.

According to Steinman of Beer Marketer’s Insight, it’s an opportunity more and more PE firms are comfortable making, despite having to pay multiples in the range of 15 to 20 times EBITDA (earnings before income taxes, depreciation and amortization).

Of the 13 deals in the craft brewing industry Steinman tracked over the last 15 months, six have involved a private equity firm, either entirely or in part.

Macatawa Bank’s Hoeksema said he’s seen private equity firms “poke around at some of the larger companies” in West Michigan, too.

“Venture capital and private equity are starting to take notice that this is a growth business that has a need for what they’re offering and they are now looking to companies in our community as to where they could strategically invest their dollars,” he said.

Martin Stein, the founder and managing director of Grand Rapids-based private equity firm Blackford Capital, takes a measured view on the craft brewing industry, noting the high-growth sector is more suited for the risk profile of venture capital investors.

While his firm has certainly taken notice of the growth in the industry and the level of startup activity, it’s not a sector in which Blackford is “aggressively” seeking out deals.

“We would look at larger, more established players, but then it’s a hot, high-risk bet because the multiples are so high,” Stein said. “When you’re looking at multiples that are trading at 8, 10 or 20 times (EBITDA), the growth requirements for an investment in a company at that multiple are so great that it just seems very challenged to be a success for an organization like ours.”

However, Stein was also quick to note that private equity partners could be a good solution for breweries that are looking to bring in more sophisticated management and operational best practices to help continue to grow their companies, especially once the current period of rapid expansion begins to slow.


The increased PE activity in the industry is a sign that craft brewing has started to mature, said Gary Fish, president of Bend, Ore.-based Deschutes Brewery and the current chair of the national Brewers Association, based in Boulder, Colo.

“It had to happen because of the success the industry has had,” Fish told MiBiz. “People are making money and that’s going to attract other people to make money. We got into this to make beer and (along the way) we made some money. The others are getting into it to make money — and it doesn’t matter how.

“PE is not a threat, and I can’t do anything about it, but they’re not going to be as successful as they think because there’s no passion (for brewing). There’s no path to a quick dollar here.”

Others in the industry have also started to watch closely as some of the larger multinational macrobreweries — namely Anheuser Busch InBev (ABI) and MillerCoors — have scooped up a handful of craft breweries in recent years.

Over the last 15 months, ABI has been particularly active, acquiring Seattle-based Elysian Brewing Co., Bend, Ore.-based 10 Barrel Brewing and Patchogue, N.Y.-based Blue Point Brewing Co.

“(T)hey’re out there shopping assiduously for more and plan to do more — maybe until the government stops them, maybe until their corporate mandate says, ‘Hey, we want to see results before you can buy more,’” Steinman said.


As the industry matures and the first generation of craft brewers begin to approach retirement age, sources expect the pace of deals and the need for capital to only continue to ramp up.

“We’re just at the precipice of seeing some of these breweries selling or bringing on new generations of the family to run it,” said ECCU’s Leonard.

While the PE firms and mega-brewers may come with open checkbooks, many owners in the fiercely independent industry might look instead to have their legacy carried on by someone more aligned with the passion and craftsmanship they brought to the business.

In some cases, that might mean selling the company to employees via an employee stock ownership plan — both Deschutes Brewery and Ft. Collins, Colo.-based New Belgium Brewing Co. have ESOPs in place — or selling to another independent craft brewery.

“One of the things we try to work on is preparing them for the future, wherever that may be,” said Dustin Hopkins, a commercial lender with First National Bank of Michigan in Grand Rapids who’s dealt with breweries in the past. “When they get to a certain size, a lot of these companies take on a manufacturing mentality. They start to think about retiring, handing the company to a second generation, forming an ESOP. As much as possible, we try to talk with the companies to try to figure out what their plan is.”

The bankers said it’s important for craft brewers to prepare well in advance for any sort of transition. That often means cleaning up the capitalization table and getting the debt-to-equity and leverage ratios in order, sources said.

“For the most part, the guys I’ve talked to, they’re more of an artisan type. They take pride in brewing, in the product, not the focus on the financial operations,” said Bob Wilson, senior vice president of corporate banking at Citizens Bank in Southfield. “But it’s a different dynamic to go from an entrepreneur at the microbrewery level” to a larger, more sophisticated manufacturing-driven corporation that needs strong financial management.

Stein of Blackford Capital believes private equity could have the most impact on the industry in a decade or so via leveraged buyouts when the initial wave of craft brewing entrepreneurs look for liquidity and as the accelerated growth rates begin to drop into the single digits.

Regardless of how the transitions shake out, Deschutes Brewery founder Fish said he’s confident that craft brewers will continue to innovate the corporate structure of the industry.

“There are lots of different business models,” he said. “As creative as we are with the beers, we’ll be creative with the industry as well.”

Brian Edwards contributed to this report. 

Read 9621 times Last modified on Monday, 12 March 2018 08:58

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