Understand the legal ramifications before you take the leap.
Obtain legal advice before you buy or sell a craft brewery.
We know the “big boys” are buying craft breweries like crazy the last several years. And, even with the “review provision” of the AB-InBev / SABMiller acquisition deal, I really think the larger breweries are going to still move to acquire additional craft breweries. And, in fact, most of the larger breweries have said that the majority of their profitability growth is coming from the “super-premium” or “craft beer” segments. They know how to purchase and integrate smaller breweries – it’s been their game for years – so I don’t see that changing in a fundamental way for sometime. In the meantime, we’re seeing more and more consolidation and purchases among craft breweries as well.
That said, it’s important that brewers and brewery owners understand the mechanics and what to look for if they’re thinking about selling their brewery or buying someone else’s. Here are my Top 4 Tips for buying or selling a brewery and why they’re important for each side.
No. 1: Know what you are buying.
The first question you have to answer is: WHAT is being bought or sold? That may seem like a “duh” question, but it’s really important to fully understand what you getting into.
The two major ways that a purchase can be structured are that either:
- The Buyer purchases the Assets
- The Buyer purchases the Business.
If you’re buying the Assets, that normally means you’re buying more than just the equipment. You’d also be buying the trademarks, the “goodwill,” the reputation, the digital assets and accounts, the customer and marketing information, etc. When purchasing a brewery by purchasing the Assets, you’re normally looking at purchasing all the stuff that makes the business that business.
So, if you’re buying the Assets, what that means is that the Seller is the company (the corporation or the LLC) and they’re selling all their “stuff” to someone new to run a new company (i.e. the same business owned by a different company).
On the other hand, if you’re buying the business, well… you’re buying the business or company as a whole. If you’re buying the business, the Seller is/are the owners of the company and they’re selling you their shares/interest in the company and you’ll be the new owner of the company (i.e. the same business owned by the same company, which is owned by someone new).
Why do we care? Well, one major reason is that – in most cases – the liability or debt follow the company, not the assets. If I run a brewery for 10 years, I’ve accumulated 10 years of potential liability (“Tonight on Nightline: John’s Brewery Causes Cancer. Millions drank Cancer Beer. Details at Eleven.”). If I sell the Assets of the business to Mollie – well, the liability doesn’t follow the fermenter – all those people are going to sue John’s Brewery LLC, not the new owner of the assets of John’s Brewery (which Mollie now runs as John’s Brewing Company LLC).
But, if I sell Mollie the business as a whole, then the liability goes with the business. I sell all my interest in John’s Brewery LLC to Mollie, then Mollie is the new owner of John’s Brewery LLC. When the lawsuits come, Mollie and John’s Brewery LLC get to deal with them, not me*.
*Lawyer’s note: That’s true so long as I didn’t do it intentionally and I didn’t do something that specifically made the liability stay with me.
So, as a Buyer, Mollie wants to buy the Assets – why should Mollie have to tote the liability and debt that John racked up over years? As a Seller, John wants Mollie to buy the Business – I’m retiring, why would I want to worry about liability from a while back?
Know what you’re buying or selling and negotiate accordingly.
No. 2: Initiate a Contract for Purchase; Regulatory
Buyer and Seller can make an agreement to sell or purchase. Then what? There better be a written agreement that outlines the terms of the sale, what transfers and what doesn’t and what happens between the agreement and “closing.”
Two major issues in this period:
- regulatory approval
- “risk of loss.”
In terms of regulatory approval, there are two sub-issues that you have to contend with:
- TTB approval of the ownership change
- Your local ABC approval of the ownership change.
The TTB is very clear on this point: The submission of the amendment to change ownership needs to be submitted and approved before the transaction takes place. Does this always happen? No. Does the TTB like it when they’re the last to know? No.
And, each state is different in how it handles ownership changes. So you need to research and plan for what ever hurdles you have to cross in your particular situation.
The point here is that you need a Purchase Agreement that takes into consideration these issues, the time it takes to get the necessary approvals, and a contingency plan if there are unforeseen problems, you can’t get the approvals you need, or your financing doesn’t work out – do you have a way to escape the agreement without enormous penalties?
No. 3. Initiate a Contract for Purchase; Risk of Loss
So, here’s the thing: after there’s an agreement to purchase, the Seller still owns and runs the brewery. A Purchase Agreement needs to make very clear what the condition of the brewery at the sale will be and what the expectations are during this period.
Here’s an example: Mollie agrees to buy John’s Brewery in 90 days. We have a Purchase Agreement, but the agreement doesn’t say anything about risk of loss. Thirty days before the closing, the brewery burns to the ground, the equipment is a total loss. John receives a check from his insurance for $1,000,000. Does Mollie still have to buy the not-a-brewery-anymore? The answer is two-fold: a) “maybe” depending on the agreement and b) you don’t want to litigate to find out. So, you have to be sure that these items are addressed in the Purchase Agreement.
Another example: Mollie agrees to buy John’s Brewery in 90 days. The agreement doesn’t say the precise assets that transfer. John immediately starts selling off excess equipment. Mollie’s left buying a brewhouse, one fermenter, and two kegs. Bummer.
Last example here: Mollie agrees to buy John’s Brewery in 90 days. The agreement doesn't say anything about how the business is to be run until the closing. John proceeds to take a two month vacation financed by a huge loan he just took out on the equipment Mollie is going to inherit. The business goes down because the taproom isn’t open for two months and Mollie takes possession of a brewery with no customers and a ton of debt she didn’t agree to. Bummer.
There are some general rules about who’s responsible for what in these pendant periods, but I guarantee you those general rules were not written for you and your breweries. The general rules are the best that judges or legislators could come up with after the businesses imploded. You want to be proactive.
No. 4. Read the Fine Print at the Time of Closing
Have you ever bought a house? Do you remember the pages and pages and pages of documents that you had to sign? That described every aspect of the transaction, the title, the financing, the pre-sale, the post-sale, the warranties, etc? I remember that.
It always amazes me that people spending, maybe $500,000-$1,000,000 on a business don’t think that they need the same level of protection as when you buy a $150,000 house.
The Closing is important, it’s the actual handoff of ownership from one person/company to another. That means this is the time to make sure that all of the documents line up, all of the keys and access to premises or digital assets are handed over, that all the leases or contracts have been updated, all the approving people have approved, etc. This is the time to make sure that all your i’s are dotted and t’s are crossed. After you’ve handed over a big check, it’s a lot harder to pressure the seller to help with things that still aren’t done – especially if it’s a really big check and they’ve fled to a country without an extradition treaty.
Don’t overlook the importance of the Closing and make sure that everything is the way you need it before marking things as “done.”
There are, obviously, lots of other questions, nuances, and details that come up as you complete the due diligence process (non-compete agreements, non-disclosure agreements, trademark assignments, etc.). There are (what seems like) hundreds of tiny moving parts and purchasing or selling something that you depend on for your livelihood is not the place to skimp on attention to detail or diligence. If you’re looking at being a buyer or a seller, get help.
If you liked this article, you may also like: Top 5 TTB Application Tips.