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Guide to Starting and Owning a Brewery

The explosion of craft breweries across the country might have you daydreaming of leaving cubicle life to brew beer for a living. You’re not alone — 1,000 new breweries opened in the U.S. last year, bringing the total to more than 6,300. Craft brewers produced about 25 million barrels worth an estimated $26 billion, according to the Brewers Association, a trade group representing small and independent craft brewers. Business increased by 5%  even as overall beer sales declined.

But there’s a sobering note to the frothy growth: Increased competition means many breweries aren’t seeing the growth they did a few years ago. And brewery closings have slowly ticked up since 2012 with 165 closings last year, a 43% increase from 2016 when 115 closed.

There’s more than great beer that goes into launching and owning a brewery. In this guide, with the help of craft brewers who have been there, we’ll break down the major steps to getting started and how to stand out from the crowd.

The craft brewing industry

What defines a craft brewer? To be considered a craft brewer in the U.S., a brewery must annually produce no more than 6 million barrels. A brewery must also be independent with less than 25% owned by a beverage alcohol industry member who is not a craft brewer. The majority of total beverages must be beers whose flavors derive from the fermentation of traditional or innovative brewing ingredients. For example, flavored malt beverages are not considered beers.

California has the most craft breweries of any state in the U.S. at 764 breweries. Washington is in second place with 369 craft breweries and Colorado is in third with 348 craft breweries.

The craft beer industry is broken down into market segments based on how much beer a brewery produces:

Microbrewery: A brewer that produces less than 15,000 barrels per year and 75% or more of its beer is sold off-site.

Brewpub: A combined restaurant-brewery selling 25% or more of its beer on-site.

Contract brewing company: A business or brewery that hires a separate brewery to produce beer or additional beer.

Regional craft brewery: An independent brewery producing between 15,000 and 6 million barrels annually.

Craft beer continues to grow, though at a slowed pace. Craft beer reached 12.7% of the U.S. beer market by volume in 2017. Retail sales increased by 8%, up to $26 billion, making up 23% of the $111.4 billion in U.S. beer sales. However, growth per brewer has declined in recent years. Growth per brewery was less than 200 barrels last year, compared with nearly 900 barrels in 2014.

8 steps to starting a brewery

If you want to start a brewery, knowing how to brew beer is not a prerequisite. Although the operation revolves around beer, there are plenty of other pieces of the business to focus on as well.

Chris Goulet, co-founder of Birdsong Brewing Co. in Charlotte, N.C., worked as a mortgage banking executive at Bank of America before opening the brewery with his wife, Tara, in 2011. Goulet was a craft beer enthusiast and thought the Charlotte community would appreciate a homey, neighborhood brewery. He relied on homebrewer and family friend Conor Robinson to handle beer production while he and Tara set out to establish the business.

Similarly, Karen Hertz didn’t know how to brew beer before opening Holidaily Brewing Co. in Golden, Colo., in 2016. She spent 10 years working in distribution for MillerCoors before a series of health complications motivated her to launch a gluten-free brewery.

Here are some steps Goulet and Hertz took when starting their own breweries.

Research. Goulet first began thinking about opening a brewery in 2009 when there were few craft breweries within city limits. He looked at cities that were comparable to Charlotte in terms of size and demographics to get a sense of how many craft breweries could be sustainable in the area. He then began working on a 12-page business plan forecasting what it would take to open a startup brewery.

Hertz also took several years to complete background research before taking any concrete steps. Since she wanted to make gluten-free beer, Hertz had to learn about the different ingredients and processes she would need to use.

Hire a consultant. If it’s in your budget, hiring a brewery consultant could smooth out the process. Hertz hired Marc Martin of Northwest Brewery Advisors, and he remains involved in the business to this day. Martin helped Hertz iron out the details of opening a brewery, such as finding a location and hiring a head brewer.

Figure out your financing. In Charlotte, Goulet took his business plan and a six pack of Robinson’s beer to friends and family asking if they wanted to be a part of the business. With a small group of investors, the Goulets opened Birdsong entirely with cash. The team anticipated the initial startup cost would be between $50,000 and $60,000, but it ended up closer to $110,000 for the building alone. They renovated an existing building, adding the necessary equipment and piping. The Goulets then relied on an American Express business credit card to cover other expenses, such as ingredients, glassware, bar and office supplies, kegs, tools and repair materials, during the first six months of operation.

Hertz took out a business line of credit with her existing bank to cover her first-year expenses, which totaled $500,000. She also had help from a few investors of family and friends.

“It all adds up pretty quick,” Hertz said.

Apply for permits. All businesses producing malt beverages must obtain a permit from the Alcohol and Tobacco Tax and Trade Bureau, or TTB, within the U.S. Department of the Treasury. You can submit permit applications online — it’s free to apply. It took Hertz a few weeks to gather the necessary documents, such as a copy of her lease, bank statements and floor plans. Once she applied, Hertz received her permit in about 60 days.

Brewery owners also have to apply for a permit from their city. Cities often restrict where alcohol can be made and sold, and Hertz suggests doing your homework before buying or signing a lease on any property. Owners also have to apply for licenses, which vary by state, Hertz said. In Colorado, for example, Hertz needed a state liquor license, a manufacturer’s license and a wholesale license to sell beer in the tap room and to retailers. Hertz hired an attorney to help her navigate the legal requirements.

You should also prepare for a visit from the Food and Drug Administration. All breweries must register with the FDA – no fee required – and pass an impromptu inspection. The FDA requires breweries to have Good Manufacturing Practices for Craft Brewers in place, which are federally mandated standards including sanitation and employee hygiene. The FDA could visit at any time, so it would be smart to have your GMPCBs in place from the start.

Buy equipment. Although expensive, brewing equipment is a worthwhile investment, Hertz said. Because there are so many breweries opening, you could easily sell pieces if you outgrow them or if the business folds.

Here are some basic pieces of equipment you’ll need:

  • Mash/lauter tun: A tank that infuses grains and water, creating wort, which is a bittersweet liquid that becomes beer after fermentation
  • Boil kettle: A pot that boils wort
  • Heat exchangers: Quickly cools wort
  • Fermentation tank: Holds wort as it ferments into beer
  • Brite tank: Clarifies and carbonates beer
  • Kegs, cans or bottles: Containers in which you store and distribute your beer

Most large brewing equipment is made to order and it could take a few months before it’s delivered, Goulet said. Used equipment would be available right away, but it’s hard to come by with so many breweries opening up, and it often costs just as much as brand-new pieces. You should anticipate long lead times on equipment when setting up your brewery, Goulet said.

Set up an insurance policy. You should have a business insurance policy in place before you start brewing, Hertz said. Brewery owners need liability insurance to cover any damage or injury related to workers or intoxicated customers, as well as business interruption coverage to take care of equipment failure. Contents insurance would also cover interruptions in supply chain, such as a delay in ingredient delivery.

Build a tap room. New brewery owners should expect to make a big investment in their tap rooms, Goulet said. Before you establish your distribution system, the tap room will be where most people find your beer.

“For better or for worse, you’re going to have to have a badass tap room because that’s going to be 80 to 90% of your sales for a while,” Goulet said.

“Own-premise” sales, or sales made in the taproom, have been on the rise and reached 9.5% of craft breweries’ domestic sales volume last year. Own-premise sales made up 1% of overall beer sales volume in the U.S. in 2017.

The profit margins in the tap room are larger than from distribution because you don’t have to pay for packaging or delivery when serving beer on tap, Hertz said. Although she didn’t initially plan to build a tap room, she quickly saw the value in having a gathering place to serve her beer.

“It really gives people a place to build a relationship with the brand,” Hertz said. “It gives people an opportunity to build a deeper relationship with your beer and your brewery.”

The ABCs of distribution

To get your beer into the hands of more people, you will need to start distributing. Alcohol distribution is regulated at the state level within a three-tier system. All beer must pass through these three levels before reaching consumers:

The producer: Breweries that brew and package beer, from large national brands to neighborhood microbreweries.

The distributor: Distribution companies ranging from those with a small fleet of trucks or those running a multi-state operation.

The retailer: Off-premise alcohol retailers, such as liquor stores, supermarkets and convenience stores, and on-premise retailers, like bars and restaurants.

The producer makes beer then sells it to distributors, which deliver the beer to retailers where consumers purchase it. The three-tier system allows large and small distributors to compete fairly, Marc Sorini, a partner at McDermott, Will & Emery in Washington, D.C., and lawyer for the Brewers Association, told LendingTree.

“It creates an open architecture of independent distributors that have the muscle to go up and down the street,” Sorini said.

Most states also allow self-distribution, permitting brewers to deliver to retailers on their own. Self-distribution is a good option for brewers first entering their local market, Sorini said, but it could be hard to scale the business without outside help.

“A lot of craft brewers can’t nationally distribute on their own,” Sorini said. “You need the critical mass of a third party.”

Once brewers sign on with an outside distributor, they often have misconceptions regarding what the distributor provides, Sorini said. Many assume the distributor is going to promote their brand, but that responsibility still belongs to the brewer.

“You have to invest in the market and be ready to promote your brand,” Sorini said. “You shouldn’t think you’re saving on the cost of having a salesman.”

Another distribution mistake brewers make is expanding geographically too quickly, Sorini said. Selling your beer in a new territory doesn’t make sense if you don’t have the resources to build brand awareness in that market.

“Being wise about geographic expansion is very important,” Sorini said.

Some states enforce beer franchise laws, which require brewers to strike an agreement with a distributor that would mandate a brewer to legally prove “good cause” before terminating the relationship. These laws were passed in the 1970s and 80s to protect small distributors from large, powerful breweries, but the power balance has shifted and distribution companies are often larger than craft breweries. Brewers could now get trapped in a bad relationship, Sorini said. Proving “good cause” requires an extensive legal process to provide evidence, which many brewers don’t have the resources to complete.

“Once you sign up with a distributor, you’re going to be with them for a long time,” Sorini said. “You can’t afford to demonstrate good cause.”

In 17 states, the government maintains control over the sale of distilled spirits, sometimes including wine and beer. In these states, government operated stores are the only entities allowed to sell liquor, and sometimes that rule extends to beer and wine. Find your state’s regulations here.

Costs to start a brewery

Like Goulet and Hertz, owners often end up spending more than they anticipated to open their brewery. The equipment and building requirements are among the many factors that contribute to the overall costs, which can add up before you brew your first batch of beer.

Equipment

If you plan to only sell beer in your own tap room, you could probably get away with spending $100,000 or less on equipment, Goulet said. But if you want to incorporate packaging and distribution, you should expect to spend about $500,000 on the equipment needed to produce a larger amount of beer. When the Goulets started Birdsong, selling beer in the tap room and self-distributing to locations across Charlotte, basic equipment cost about $150,000.

Commercial space

Turning a space into a brewery – hooking up pipes, tanks and drains while keeping the building up to code – can be a costly endeavor. Chris Farmand, an accountant and founder of brewery consulting firm Small Batch Standard, told LendingTree that in the weeks leading up to a brewery opening, cash begins to vanish and construction is often the biggest culprit. He’s seen brewery projects that have gone $200,000 to $800,000 over budget, mostly because of construction-related costs.

Purchasing a location would come with additional real estate fees, loan fees, building permits and inspection fees. Leasing a space would include the cost of rent, utilities, maintenance, building insurance, and any build-out costs. You may be responsible for a portion of property taxes as well.

Licensing

Brewery owners need several licenses in addition to the federal permit from the TTB that clears them to sell beer. Individual states also require brewery owners to obtain a license from the Alcohol Beverage Control board, or another state entity, which would require a fee. In Florida, for example, brewery owners are required to obtain a state manufacturers’ license which has a $3,000 annual fee.

“It’s definitely something to budget in,” Farmand said.

Taxes

The taxes associated with running a brewery would depend on the state you’re operating in and the business entity you’ve chosen, but all brewery owners could expect to pay federal excise tax on beer that has been sold, Goulet said. The Craft Beverage Modernization and Tax Reform Act, which went into effect in January, reduced the federal excise tax from $7 per barrel to $3.50 per barrel for brewers producing less than 2 million barrels annually. All other brewers owe $16 per barrel on the first 6 million barrels, and $18 a barrel if they surpass 6 million.

Other taxes for brewery owners could include:

  • State excise tax
  • Sales tax
  • Property tax
  • Tangible personal property tax
  • Equipment tax
  • Federal, state and local income taxes

Financing the costs of a brewery

For new brewery owners, Farmand suggests starting with private investors, such as friends or family, and then securing a business line of credit if more capital is needed. New businesses should avoid debt as long as possible, only turning to financing when it’s time to expand the operation.

Farmand recommends brewery owners stick to this timeline: Open with enough cash to run the operation for three months, break even by month five and be cash flow positive by month eight.

Although Goulet relied on investments from friends and family to launch Birdsong, he eventually had to find additional financing. When the brewery expanded to a larger location in 2015, he got a 7(a) loan from the Small Business Administration. The loan helped him purchase additional equipment and build out the new space. While SBA loans have competitive rates and limited collateral requirements, there are several other financing options out there.

Personal savings

If you have the resources, funding the business yourself could keep you out of debt. Self-funding would also allow you to operate the brewery without having to answer to investors. However, it’s unlikely you would be able to fully fund a brewery without incurring some debt. To avoid depleting all your personal resources, you could pair your own money with outside capital.

“I’ve never seen a brewery fund itself 100% in equity,” Farmand said.

Short-term business loan

Short-term loans offer quick access to small amounts of capital and come with repayment periods between three and 18 months. Compared with long-term loans, short-term loans have higher interest rates and generally require collateral to secure the funds. These loans could be used to cover inventory costs or working capital expenses. Before applying for a short-term loan with a bank or non-bank or online lender, you should be in a position to make daily or weekly payments to pay back the loan within 30 to 60 days. If you think a business loan may be a good option for your brewery, explore LendingTree’s overview of small business loans here.

Equipment loan

Equipment is an essential part of a brewery’s success. Purchasing items out of pocket could quickly diminish your capital, but financing equipment purchases would help manage cash flow. You could secure equipment financing from a bank or an online lender, and the equipment itself would act as collateral. You could pay off the purchase in monthly installments while using the necessary equipment to keep your brewery running.

Business line of credit

When Hertz started Holidaily Brewing, she opened a line of credit to cover her initial expenses. A line of credit offers immediate access to capital and allows business owners to draw from a pre-set limit as they need money. You would only pay for the money you actually borrow, making it a cost-effective financing option.

Crowdfunding

Crowdfunding enables business owners to collect public donations, usually through an online platform, to fund a specific project or venture. Sites tailored to breweries have recently popped up, giving beer lovers a chance to fund a new brewery in their area. CrowdBrewed, for example, gives brewery owners a platform to launch a fundraising campaign and ask for investments in exchange for some type of reward, like a discount at the brewery.

Home equity loans

If you have equity built up in your home, you could exchange part of that equity for cash with a home equity loan. You could use the lump sum of money to cover any brewery-related expenses and repay the loan in monthly installments. A home equity line of credit, on the other hand, allows you draw money from credit line backed by your home equity. Because your home secures the financing, you risk losing it if you default.

Friends & family

With Birdsong beer in hand, Goulet approached friends and family members about investing in his brewery. Like Goulet, you would need to present a business plan to potential investors. They would also want to see your financial statements, such as projected cash flows and net return to investors. Even though you have a personal connection with your friends and family, they would still need to know what they stand to get out of the investment.

Business credit cards

You could open a business credit card to cover your costs. With a business credit card, you would be able to keep your personal and brewery expenses separate. Business credit cards come with a higher limit than personal credit cards, but you may face higher rates and fees, especially with reward cards.

Personal loans

Personal loans could also be used to pay for brewery expenses. They are usually easier to obtain than business loans because personal lenders look at just your personal credit score without taking your business details into consideration. However, personal loans have lower limits and higher rates than business loans. Additionally, you would not build up your business credit when using a personal loan to pay for business expense and your personal credit would take a hit if you default on the loan.

Is the brewery business right for you?

Hertz and Goulet lacked firsthand brewing experience, but they both had a connection to the industry and a willingness to take risks.

“There’s a lot of trial and error and you have to be ready for that,” Hertz said. “So many people never open a business because they wait for everything to be perfect. It’s never going to happen.”

Do you have a way to stand out? In the ever-expanding Colorado craft beer market, Hertz leveraged her personal story to gain traction. Hertz battled melanoma and thyroid cancer about a decade ago, which resulted in her gluten-free diet. Dissatisfied with gluten-free beers on the market, she decided to make her own to share with others who have similar dietary restrictions. Hertz suggests new brewery owners find a way to stand out among competition.

“People like the story. I have to put myself out there,” Hertz said. “Find those groups that you’re tied to.”

Are you ready to connect with your community? As the craft beer market becomes congested across the country, it may seem like an intimidating space to enter as a new business owner. Goulet said connecting with your community is key. Although competition within the craft beer scene in Charlotte has increased since Birdsong opened, the team remains supportive of new breweries in town. Goulet is friendly with neighboring brewers, joining in on group orders of ingredients and teaming up for local charity events.

“We’ve seen how it’s changed in Charlotte. It doesn’t dampen our enthusiasm,” Goulet said. “It’s really cool to be part of that community”

 

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