Paul Tomaszewski

Read this if you are new to commercial distilling

25 posts in this topic

The first thing I want to lay out is that in no way, shape or form do I consider myself a know it all. But due to some recent postings on this forum, and just people who have approached me in my local area about opening a distillery, I figure I'll do us all a favor and throw down some info based on my experiences over the past few years. Take them for what they are. If you disagree, feel free to post.

If you want to open your own distillery, this is what I suggest. In my case, I don't come from money and didn't have the opportunity/ability to get a bunch of well-endowed folks to throw down a shipload of cash. I got a bank loan and used my personal funds that I had set aside during my time in the military. I won't go very far into how much I had, but the total allowed me to do some work on our site to set it up (those figures will obviously vary based on your individual circumstances), get some bargain equipment (total was about 20K) and then make it all work with almost daily trips to LOWE's (not being paid by them) over several months. So, if you have 500,000 dollars or more and don't need to start seeing a return for quite a while, then more power to you. But if you're on a limited budget and enjoy working 18 hour days, here's what I did:

***IMPORTANT STARTING NOTE: In 2007 (when I started to work on our business plan) there were very few options out there as far as educational opportunities for those interested in smaller scale distilling aside from books, the internet, and visiting working operations. However, there are now many, many options ranging from 1 or 2-day courses that may cost a few hundred dollars all the way up to full blown internships that are in the thousands. Case in point, I personally hold a 1-day workshop a few times a year (Camp Distillery, info on our website at www.mbrdistillery.com, and we fill up several weeks in advance). We specifically do this to help those seriously thinking about getting into the business that don't have a full week to spend on a course. I don't do it for the money, I do it because I literally have individuals wanting to stop by and meet with me on the matter at least every 2 weeks and I just honestly don't have time to entertain that many people for free. I can obviously vouch for our course that I teach, as I have had nothing but positive responses on the quality of instruction from those that have attended. Before you do get knee deep in a business plan, look into AT LEAST a one or two day workshop and attend it. The few hundred dollars you'll spend will save you either 1. At least tens of thousands of dollars in avoided mistakes or 2. You'll learn that getting into this business may not be for you BEFORE you start spending too much time and money. The longer I'm in this business, the more I honestly believe that there's really nothing quite like it, even beer and wine are usually very different from the spirits business both on the production and marketing sides. Plus, the amount of regulation and taxes we, as small-scale operations, pay is like the NFL compared to college or high school football.

1. Make yourself a REALISTIC business plan, then make several alternates in case you can't do it the way you want. I had plans A, B and C. I ended up going with plan C due to lack of funding. If you don't know accounting, teach yourself or find someone that can produce good financials for you if you're going to present things to either the bank or investors (or even just yourself). However, even if you have someone else produce them, you or they need to be able to explain them in detail if you're going to ask anyone for cash. Those two items (business plan and financials) are your foundation. You need to live and breath them and know them left, right, up and down. Working on those were pretty much my only hobby while I still had a day job, I spent the better part of 18 months on mine and it paid off because my numbers were almost dead on, and that was quite impressive when the bank or investors were trying to take me seriously about the business.

2. Start researching the art of distilling. Get books, go on sites, talk to other distillers, but don't expect to learn how to distill by reading. If getting hands on experience means visiting several distilleries, see below. Go to TTB.GOV and start reading, the regs are there. You can't know the regs well enough. I'm not lying when I say that I go on that site probably once a week or more to lookup info or just to go over things to ensure that they're fresh in my mind. When you get licensed and you produce a product, you are swearing under law that you are making that specific product according to the federal (and your state) regs. Your state may have some additional regs (mine does) that add to the federal regs, look them up as well. In essence, you are getting into a socialized business. It doesn't matter how much money you make (even if it isn't enough to keep the lights on), if you sell product, you pay the man. In most cases you have to "ask" the fed govt for permission to do certain things and, even if they're wrong, they're right. You can argue with them all you want, but you could be heading down a slippery slope to do so. IMHO, the only way that I would ever challenge the feds is if they were TRULY mistaken about something and (hopefully) I really won't upset anyone. In most businesses you don't have to ask the govt permission to make a product a certain way, to increase your production amount, or to change the setup of your facilities. In this business you do.

3. Go visit SEVERAL distilleries in different states. When you do so, call ahead and make an appointment to meet with the actual distiller and/or manager. Take into account my initial statement about time with regards to those individuals. If they're busy, just take note of their setup during your visit. But, in general, get in and get out and realize that they're not there to be your personal consultant for 2 hours or more. In total, I toured about 20 craft distilleries prior to making the first move to get ours going. Different states have different licensing requirements and different distilleries will have different techniques. During those visits I also met several people that I can call (or they can call me) if I have a question about something. I won't mention some of the guys that have helped me out and probably will still call (maybe they don't want the publicity cause I'm sure they're as busy as me), but they have helped make our business to some degree (FYI, I still owe most of them a free bottle or two and a whole lot of appreciation). I would also add that it helps to go talk to folks that aren't across the street (and preferably are a state or two away) because common sense will tell you that they won't really see you as a direct threat to their business. I'm not saying not to tour any nearby locations, but I didn't spend too much time questioning them about too many things because they may see me as direct competition, particularly for their local distribution business. My biggest trip included a tour of 9 craft distilleries, lasted 5 days, was several thousand miles of driving, went from KY to NY and cost me a grand total of 500 dollars in gas, budget hotels, and food (pack an ice chest to really save). That being said, I do have a Honda Civic that gets 40 mpg on the highway. Also, there are the distilling workshops and the ADI conferences, but I still recommend you hit as many small-scale craft distilleries as possible to broaden your understanding of the business and to get as many points of view as possible. Even if you go to a workshop with several distillers there, it's not the same as seeing them at their location with their equipment and in full business mode. The small-scale distilling industry isn't near as well-developed as the wine-making or brewing business, you'll see some very interesting things at different operations.

4. Get your site (and if you don't know yet, YOU CAN'T HAVE A FEDERALLY LICENSED DISTILLERY AT YOUR HOUSE without a property subdivision of some sort, this ain't a winery or brewery kids, the law is gonna tax you and tax you again, they don't want you makin stuff in your basement), refer to CFR Title 27, Part 19, Subpart F, 19.131. And, just for some fun, go lookup the federal tax rate on spirits compared to wine and beer, it's about three times as much, and that's not even taking into account that small-scale wineries & brewers pay a fraction of that 1/3. Now, back to the whole distilling at home thing, you can subdivide property, put up a fence, or tell the feds that you have a "force field" separating the "house" from the "distillery" to get around that. But, BOTTOM LINE, you MUST GET FEDERAL APPROVAL FROM THE TTB, go talk to them because they only give that appproval on a case by case basis and don't expect them to snap to and give you an answer overnight. Furthermore, you have to deal with local zoning first and foremost because the feds WILL ask you about that. For all planning, I recommend you start locally, then go state-level, then federal. The feds EXPECT that you are in complete compliance with all local and state regs and will ask you about it when they interview you. Bare in mind that your location is one of your biggest factors that will allow your business to be successful. First thing is that the environment (city vs. country) will make a huge difference in the local requirements that can add tens or even hundreds of thousands of dollars difference to your startup cost. Second, state (and even local) laws will determine if you can sell your products from your gift shop/tasting room. You make up to three times the profit when you sell a bottle from your gift shop vs. to a distributor. Finally, if you are off the beaten path, how many folks will venture to come and see you? All of those factors are important to consider for your location, so setting up shop in one state that may allow tastings and product sale out of your facility vs. another state where you can only sell t-shirts can make the difference between needing to sell 500 cases or 2500 cases your first year.

5. Once you have a place that you can legally set up and is zoned appropriately and the townsfolk won't come at you with pitchforks and torches, set it up for distilling. What does that mean? Well, either you can hire a consultant (there are many out there) or you can do it yourself. We have started with some pretty bare bones stuff and when we are able to move along, we'll buy (or make) the "nice" equipment. Cost is up to you on all of this, but you are going to need at least SOME money, more power to you if you can make your own equipment.

6. Once your equipment is in place and your site is ready, send in your federal paperwork (the feds require that your equipment is in place prior to licensing). Again, if you have money, you can hire someone to do this part for you. The paperwork itself isn't rocket surgery. But, if you mess it up, it very likely can slow things down. For example, I had something on our permit changed, it took 3 months to add two words on our already existing permit. Plan for a 3-6 month wait, hope for less of course. I can't tell you about your state requirements, that's up to you to figure out cause each state does it their own way.

7. Once you're licensed, make some hooch and sell it (probably to a distributor, or the state if you're in a "control state"), and start beating feet to get it on shelves. If you're not a natural or can't play the part of salesman/diplomat, find someone who can do a good job for you. Even if you can start up your operation on a very, very slim budget, you're going to need a few bucks for this part. I would plan for at least six months of not selling jack through distributors. These distributors manage many, many products and you are just one piece of their usually very large pie. You're going to have to make an effort to build a quality relationship with these guys and work around their schedules. Anything that seems like it should be easy with them WILL NOT BE. If you happen to be setting up on a location that will garner loads of tourist traffic, that's always a plus. But, even then, you're going to have do some sort of marketing (may not cost you a bunch of money, but some of it will) to get the word out that "there's a local distill'ry here" (so come and visit so we can keep the lights on). During this entire process you also need to keep your lights on at home on. In my case I have a wife that kept her day job for our first 4 years of business, so we were able to support ourselves with her income alone until the business could afford to pay us. When you start producing product, you need enough cash to run your business and your home expenses for six months or more. Basic business expenses will include but are not limited to the following:

lease/rent, insurance, utilities, payroll (if applicable), raw material costs (grain, molasses/sugar, yeast/nutrients, packaging, etc.), MARKETING (everything from signs and ads to travel brochures for nearby locations), EXCISE TAXES for product that you sell, items for your gift shop (if you have one), and some buffer for the honorable Mr. Murphy (he WILL pay you a visit at least once in your first few months, so be ready to throw some cash down for when he comes). A very realistic rule of thumb is to take your budget and cut it in half. Use half for your facility and equipment, then the other half for your initial production costs and unappropriated costs. But I'd say that advice is still marginal at best.

Finally, another important thing to think about is your workforce. I was the only full-time employee for our operation for our first 2 years. I served as distiller, bottler, tasting bartender, cashier, tour guide, sales rep (on the road to stores/on premises accts), accountant, handyman, groundskeeper, and whatever else needs to get done. Until we were able to begin hiring full-time employees, we had friends and family help us out with many different things. I'm sure that this experience is somewhat normal for many small businesses, but it seemed to take a while before we were able to truly afford standard employees. Again, this is just my experience, but that's something to think about.

NOTE: This forum has a wealth of information, so do other forums when it comes to techniques (homedistiller.org). I recommend that you read through it and others extensively prior to posting and, when you post, attack a single issue at a time. Don't ask something like, "How do you distill???" or "how do I start a distillery?" Look through the postings, get Bill's book (not being paid for that either), and any other references prior to posting. But, bottom line, be specific when you post so people don't have to write a book IF they do decide to respond. If you don't get much feedback, bank on the fact that you asked a question that already has an answer on the forum. If you really, really don't know anything about distilling or setting up a distillery, refer to steps 1-3. But, just because you can make a product, does not mean you can run a business that profits from that product. I know quite a few folks who can do some good things that they could turn into a business, but they don't want to or can't start a new business for whatever reason. Even when I was the only employee, I spent 75% of my work time NOT MAKING HOOCH. In most cases you are going to have to work at it to make some cash. But, know this, no matter what, the feds (and your state) WILL PROFIT IMMEDIATELY, but that does not mean that you will. From idea to an actual working distillery making hooch, my timeline lasted about 3 years. We're now beginning our 5th year in business and we have 6 full-time employees (including myself), and 6 part-time employees. I still drive a Honda Civic, but I work for MB Roland (consequently that's my wife's maiden name ;)). Good luck and I hope this serves as a good reference and starting point for those who need guidance on this topic.

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Paul,

Your comments to beginners is so good Im going to post it on the distlling.com

website.

bill owens

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All good points, but the most easily overlooked is that while you're working 18 hours per day, and making no money at all, your life and personal expenses go on. Don't forget to add that to your business plan...you need an income or your life will fall apart.

Paul's point number 7 is the most important. This business like all businesses is driven by sales. Sales is job one. Nothing happens unless something gets sold. If you're not good at sales, make sure someone on your team is.

Too often the focus is on equipment and process - the making of the product. That is essential, but sales is even more essential. After all, if you have a recipe and an order, you can get one of us who already has a license and equipment to make the product for you. Therefore the equipment and license, and all that stuff is secondary. Sales comes first.

Sorry to burst the bubble, but it will cost you less money having it burst now, before you spend your life's savings.

Will

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Great post Paul.

I’m in between point six and seven, not licensed yet (still in paperwork) but experimenting receipts and stocking as I can produce free here in EC but have to have the license at the moment I sell in public.

I have a problem in pricing the product, knowing that it is better than an industrial made when it comes to hangover but I have to find the good reason to get a place in the shop shelves.

I didn’t talk with distributors yet, so I don’t know exactly what the margin they are working with is.

Can you or someone please give an example how you price in relation to industrial booze (let’s say a white light rum) and the stages to pricing like wholesale, end user and export prices that would help a lot in this topic.

Thanks in advance

Joe

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And could the administrator please correct my spelling on the topic? gotta love typos (commercial)

Excellent post Paul. I've corrected commercial and pinned the topic so it will remain at the top of this forum for all eternity (or until the server crashes).

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When we started in September 2007 it took us until March 2008 before we had anything to sell. You will find out that until you are taking up shelve space in 250 to 300 stores most distributors will not take you on. You must do everything your selves to get to the point that they are assured you have a good product and will be in business for a long time. We were able to make enough money to pay all the bills within 6 months, but nothing for us at all. Then it took three more years to get to the point that a real distributor came to us and ask it they could represent our products. Let me clarify "real distributor". We had several small distributors before now, and nothing worked out. They did not pay on time and we had to pursue legal means to get our money. We still had to do all the work to build our brand name. But remember if it was easy their would be thousands of us trying their hand at this. Coop

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Since we've been down this road before I want to clarify that the feds don't have any rules about a distillery and a residence being on the same piece of property, just that they may not be in the same building nor attached buildings. They do, however, as Paul rightly said, care very much that you comply with all zoning requirements and that's why it's best to start locally and work your way up to the feds. If you are cool with everything your city, county, and state want, you'll mostly be cool with the feds too. Many people think the feds will be the hard part but in many ways they're the easiest part of the permits, taxation and licensing process.

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Not to knock Chuck down, but they do care if the distillery is on the same legal piece of property as the residence. They are likely to require you to AT LEAST put up some sort of fence to separate the building(s) from the residence, but they may require you to subdivide. Another possible angle is that if one business holds the property and leases part to the distillery and part as a residence and they have a separate address, that could fly. Again, it comes down to a case by case basis and I am merely telling you about my experience with that matter.

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Amen.

Brilliant advice whether you're starting a distillery or a burger stand.

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Paul,

This is excellent advice. I wish it had been posted 4 years ago. But in the end it is almost exactly what I have done (only money was really out of my own pocket so I built my own equipment).

All you California folks thinking of starting a distillery, do me and a few other people here a favor and don't read this... JK - well, maybe not.

My advice to add would be;

Don't get in a hurry this takes 3-5 years. Licensing alone can take 6 - 12 months.

Reiterating the advice of one wise old codger (Bill Owens) don't quit your day job!!!

SELL, SELL, SELL, marketing and brand development can't be emphasized enough and will consume a good deal more of your time and money than you think.(thanks Bill Smith)

Distributors - wow, GREAT ADVICE COOP - thanks - I needed it.

You are your brand - clean up, speak well, get as much publicity as you can, figure out who you are marketing to and figure out how to market to them on a shoestring budget (unless you have gobs of money - if you do, we would all like to talk to you -but me first!)

Without good planning you are guaranteed to fail and with it you only have a chance of not failing - work hard and prepare yourself young padwan.

May the force be with you.

Lee

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Not to knock Chuck down, but they do care if the distillery is on the same legal piece of property as the residence. They are likely to require you to AT LEAST put up some sort of fence to separate the building(s) from the residence, but they may require you to subdivide. Another possible angle is that if one business holds the property and leases part to the distillery and part as a residence and they have a separate address, that could fly. Again, it comes down to a case by case basis and I am merely telling you about my experience with that matter.

Your experience is priceless, Paul, I just know what the rules say and they say nothing about property separation. Most distilleries in Kentucky have a residence on the premises because it was typical for a master distiller to live at his distillery. Separate building, of course, usually a hundred yards or more from the distillery, but not on a separate parcel.

Based on what you and others have said, TTB officers apparently have some leeway to make their own rules, if you want to call it that. Whenever you can just say "yes sir (or ma'am)" to a government official, that's your best course. But people shouldn't get hung up on this. Farm-based distilleries are encouraged, with the idea that a farmer can supply the farm's fuel needs by distilling some of the farm's produce into ethanol. What TTB primarily cares about is physical separation from the residence, not legal separation.

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If there are no specific regs requiring something to be a certain way, the TTB officials should have no authority to impose a set of rules of their own making without authority from Congress to do so.

If you are asked to do something specific by TTB, make sure you know what reg imposes such requirements. Ask where you can find that in the CFRs so you can understand it fully. If it isn't a matter of the regs, it ain't regulated.

The regs can't be arbitrarily changed or modified based on who is the reviewer.

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rocket surgery is my new favorite phrase.

Now I'm going to go wire my rotary pump; how hard can it be, it's not rocket surgery.

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Whenever you can just say "yes sir (or ma'am)" to a government official, that's your best course.

Stellar advice right there.

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Not to knock Chuck down, but they do care if the distillery is on the same legal piece of property as the residence. They are likely to require you to AT LEAST put up some sort of fence to separate the building(s) from the residence, but they may require you to subdivide. Another possible angle is that if one business holds the property and leases part to the distillery and part as a residence and they have a separate address, that could fly. Again, it comes down to a case by case basis and I am merely telling you about my experience with that matter.

Sorry to counter this disagreement, but there is no regulation which stipulates segregating a house/abode from a distillery located on the same parcel. Case in point, I live in a house that is no more than thirty feet from our distillery and no fence is required. The question never even came up, though we had two separate visits from investigators when we were in the licensing phase. It is possible that the requirement was something peculiar to the person dealt with.

R

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If there are no specific regs requiring something to be a certain way, the TTB officials should have no authority to impose a set of rules of their own making without authority from Congress to do so.

If you are asked to do something specific by TTB, make sure you know what reg imposes such requirements. Ask where you can find that in the CFRs so you can understand it fully. If it isn't a matter of the regs, it ain't regulated.

The regs can't be arbitrarily changed or modified based on who is the reviewer.

However, if you look at what Blanco Bustro (I don't have the magazine article at hand) had to go through to get their beer and spirits packaged together in each separate TTB district you wouldn't be saying that. Most of these issues arise because they haven't come up before.

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Paul,

I've been an entrepreneur my entire adult life (I'm pushing 72 now) and have started, invested in, bought or taken over many businesses (some were sick) in that time. I've great success' and, of course, some failures but each was a valuable lesson that went into my 'life experience' book (my head). I'm now looking at doing a craft distillery with my son, and as you have learned, a distillery start-up has many more variables than an ordinary "typical" business (if there is such a thing). However, your post is so spot on that I've copied and pasted it into a reference document for myself. I've also created reference documents from Ian Wisniewski's "production" articles in Whisky Magazine in my attempt to "educate" myself in the whisky distillation process. Bill Owen's books have been great along with several others in understanding the process but you have laid bare all of the bumps in the road that one will experience as they travel down the start-up road. Thanks for the effort and time to help others pursuing the same dream that you have. I've had a look at your website and look forward to trying your malt whiskey. Best of luck and best wishes for 2012.

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Sorry Newbie again, or maybe I just have ADD, anyway, i noted that you put together a business plan FIRST, but the argument i keep coming up with is should we not have a product first, at least an example of a product say gin of a certain flavor, then put together a business plan, just asking what folks opinion is on this plus what is the experience of having a company or consultant put together a plan for you with inputs from you of course....

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I too have been a entrepreneur my entire adult life and I have had more failures than successes, mainly because I tended to bin the failures pretty quick and keep the winners a while before selling them. But, after 25 years of making a living the hard way I have just found one of the most informative pieces of business build advice I have ever come across. I have read 100's of business, self improvement, management books but, this online FREE lecture series is gold for anyone reading this thread and thinking of going commercial. If you apply Paul's advice to the "How to build a startup" business series you will be way ready for the realities ahead. http://www.udacity.c...245/CourseRev/1

Cheers,

Mod

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This post is 4 years old and still relevant in all aspects to this day. In the past year the paper work on the federal level has become more organized and easier to access but this is the exact format we have been following.

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