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Top Reasons Why a Micro-Distillery would Fail?

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#1 OCS - Bear Wallow

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Posted 18 December 2012 - 03:35 PM

We have been planning for almost a year and are about to take the leap and open a micro-distillery. I would like to hear the reasons why people fail in hopes that we can avoid these issues? Thank you very much,

#2 paul@mbroland.com

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Posted 18 December 2012 - 04:40 PM

http://www.ehow.com/...anies-fail.html

It doesn't matter if you're making spirits or pencil erasers, it's all the same. I would challenge anyone doing a business plan for a microdistillery to pretend you're making something that you're NOT passionate about, thereby removing the emotion from your numbers. Your passion will help carry you through the process and allow you to enjoy what you're making, but in the end it's simply business. You're going to survive, thrive, or fail.

#3 Rickdiculous

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Posted 19 December 2012 - 01:41 PM

I would give you this little nugget I have gotten from many of the people on this board and in the business: "Remember you are in the business of selling Whiskey, more than you are in the business of making it." Making is the easy part. Do not short your advertising/marketing budget. Start checking out the facebook pages and presence of people like Headframe Spirits and Tuttletown Distilling. So many of the members here have great stuff they are doing on Facebook and the web. That connection to the audience is key. Good Whiskey won't sell it self if no one knows about it.

#4 nick jones

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Posted 19 December 2012 - 02:48 PM

I would like to hear the reasons why people fail in hopes that we can avoid these issues?


Undercapitalization is a big one.

I've heard people recommend the following:

Make a complete, thorough business plan, figure out every cent that the business is going to cost you (don't forget to include all of the red-ink years in the beginning where you're going to be continually throwing money into the business). Base your estimates on the best numbers that you can get. Talk to others in the industry; they may point out costs of doing business that you've overlooked.

Figure exaclty how much the business is going to cost. It is important that you believe that this number is accurate. Then double it. That number will be much closer to what the business will actually cost than the one that you started with.

Sounds scary, but I have seen this formula work too many times not to believe in it.

Good luck!

Nick

#5 paul@mbroland.com

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Posted 21 December 2012 - 06:00 AM

Undercapitalization is a big one.

I've heard people recommend the following:

Make a complete, thorough business plan, figure out every cent that the business is going to cost you (don't forget to include all of the red-ink years in the beginning where you're going to be continually throwing money into the business). Base your estimates on the best numbers that you can get. Talk to others in the industry; they may point out costs of doing business that you've overlooked.

Figure exaclty how much the business is going to cost. It is important that you believe that this number is accurate. Then double it. That number will be much closer to what the business will actually cost than the one that you started with.

Sounds scary, but I have seen this formula work too many times not to believe in it.

Good luck!

Nick


amen my brother.

#6 stevea

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Posted 23 December 2012 - 03:05 PM

I have some biz/sales arena background, I've been in several startups (not whiskey) and I like Paul's comments
a lot. The SWOT analysis is something we used regularly, but it takes some practice to do a good job. There are
a lot of good sources for creating a biz plan these days, Google's your pal, but some of the books are a lot
better. The biz-plan is nevere complete but you need to get your plan in front of educated disinterested parties
- not your wife or Cousin and not your pals, and then take the criticism to heart. Revise the plan and try again.

Whatever your plan - you have to expect that things not go according to plan. This is more like a battlefield than
a puzzle to solve. You have to react to changing conditions, and react well. That may mean making drastic
changes to the biz model. There will be unexpected problems - large and small.

Undercapitalization is a big one.

I've heard people recommend the following:
[...]
Figure exaclty how much the business is going to cost. It is important that you believe that this number is accurate. Then double it. That number will be much closer to what the business will actually cost than the one that you started with.

Sounds scary, but I have seen this formula work too many times not to believe in it.
[...]


First, I've never been personally involved in such a capital intensive business as distilling, but that 2X fudge-factor
looks dramatically high to me. That would seem to mean the fiscal plan or marketing plan was seriously defective.
Either cost or revenues are way out of whack.

I can imagine someone trying to startup small on a shoestring, ignoring the real costs of basics and not
making a good plan that incorporates these could get to 2X, but otherwise that seems pretty high. Some
of the small scale craft distillers (little local guys or wineries that make a few barrels a year) have, I imagine,
an expensive hobby more than a business. By the time you consider all the labor and capital and recurring
costs, and licenses, and infrastructure it's hard to see how they could make any profit without expanding -
and yes that can easily double the costs.

Can you characterize the size of these investments/businesses and the reasons they got to 2X Nick ?
Saying "it happens" isn't much help.

#7 bannonjd

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Posted 23 December 2012 - 06:05 PM

We are in the process right now. May options and issues. 1. Time: How long does it take to get local permits, state and federal licenses? Depends on if your trying to do it yourself or if you hire someone(lawyer) to do it. A liquor attorney can likely get your licensing faster but there are drawbacks as Ralph at Tuthilltown has pointed out. Need to communicate with your local guys and get to know them etc…Time is money though so you need to keep that in mind. 2. Equipment: Established companies for the still or smaller startup still/equipment manufacturer at half the price. Thats a question. Hard to answer but research and talking to distillers that have used the smaller manufacturers can answer that. A little complicated though. 3. Volume of product to turn a profit? Need to have a still big enough so that you can run it a couple days a week and spend the rest of the time marketing and other business. Small still can be a big mistake and the bigger ones don't cost that much more and have much more capacity to produce your money, spirits. This business is like being a surgeon. It's a give that you know what your doing in the operating room the rest is bedside manner. If your don't have that your in trouble. Your skills(spirits that you make) have to be good enough to get the job done and the rest is marketing…Winning a few awards is also helpful it seems. What is also helpful I think is a tasting room and store to sell product. Can be pretty profitable.

#8 nick jones

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Posted 24 December 2012 - 01:59 PM

Can you characterize the size of these investments/businesses and the reasons they got to 2X Nick ?
Saying "it happens" isn't much help.


I'm right there with you in being amazed at the 2x figure. After someone mentioned it to me once, I've made it a point to ask business owners who have gone through the process how accurate they believe that it is. I've never once met an owner who said, "I knew exacty how much this would cost going in, and I was right" and I've met many, many owners who say that the 2x figure is more or less a good estimate.

I wish I could give you a complete list of why this is the case, but I can't. You put forward many reasons, and mannonjd mentioned some good examples. There are many more reasons out there, but I'm not even going to attempt to start a list, because it would inevitably be very incomplete.

The business owners that I've spoken with run businesses doing from $50K/year to $2M/year in sales and run the gamut from the hobbiests that you mention to experienced business owners. Sorry I can't be of more help. All I can do is pass on the warning that a business like a distillery usually costs 2x what you think it will. I'd be happy to hear from anyone with experience to the contrary.

Nick

#9 bluestar

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Posted 24 December 2012 - 02:13 PM

Can you characterize the size of these investments/businesses and the reasons they got to 2X Nick ?
Saying "it happens" isn't much help.


I'll affirm Nick's 2x, but try to give a rationale: at the point where you have a reasonable business plan, you should not only have a cost and schedule estimate, but you should also have some sort of contingency estimate for cost and schedule that should be risked based, and is for dealing with at least the known unknowns. So, that 2x number is another way of saying the correct contingency going into a business like this is 100%. I think that is true for BOTH cost and schedule in this case. OK, why is that reasonable? Because there are so many known unknowns that CAN'T necessarily be resolved before you start to execute. That is because they are items that are out of your control: time for response from federal, state, county, and local entities; permit approval requirements; specifics of some of the equipment requirements once your process has been optimized, etc. Maybe, if you were starting a distillery that were a clone of one you had previously been operating, you could reduce that down to 50%. Or 30%. But mostly we are talking about first time start ups, and in that case, the 100% contingency seems completely reasonable, IF YOU HAVE A GOOD ESTIMATE to begin with!

JMHO

#10 Beauport Bob

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Posted 26 December 2012 - 10:41 AM

Where are the accounting majors? Please do not confuse your business plan with your capital expense budget accompanied with your operating budget. Budget is a tool for your plan. 2x as a blanket may seem incredable, but can be correct. In a past life, charged to analyze fin stats, I would often ask and assist to rewrite plans and projection documents to help raise awareness. In this industry, I would look at each line item and qualify an unexpectied increase. EX: Your cost for a still is not going to "Double", you should know what that will be, so why treat that expense as such. But, your expense to install will increase (with drama). Line by line I would assess and extend an acceptable increase. Itemize your lab equipment expense, calibrated hydrometers etc, then add 50%. Office set-up and supplies, you get tempted to purchase volume for discount. A big warning when applying this process, Freight and Shipping! That is an example of the cost which raises your overall budget by such a large expense. On & On.

#11 bluestar

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Posted 26 December 2012 - 11:07 AM

Thanks, Bob. I think your comments apply generally to cost estimating. But I look at the initial start-up capital costs from a project management perspective, and for PM, the contingency amounts are a requisite part of determining the project budget (which is nominally an initial capital outlay, although can include operating start-up, if start-up is the project). As I said before, contingency should be risk based. Some of that risk can be associated with the quality and known accuracy of the estimate: the degree to which lack of knowledge or early stage planning means not all costs may be accounted for, would increase contingency; the degree to which cost escalations or inflation are potential factors would also increase contingency needs. I think the 2x is reasonable even once these factors are minimized when good information is available for an accurate estimate, because of the other risk factors in starting our business as I described above. I know for me, my estimates of what I needed and what they would cost were pretty good (within 10%), but the unexpected elements and delays cost me enough to bring me close to that 2x number by start-up. Which means, gasp, that if a newby does an initial naive estimate, I would tell them to use 300% (4x) contingency on their budgeting, and then after another year in planning, and their estimates have grown, the contingency can be reduced.

#12 Beauport Bob

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Posted 26 December 2012 - 12:46 PM

Agreed! And, though not intentionally inflate, doesn't it look good to achieve target goals with an acceptable 10%-15% reserve due to proper expense diligence!

#13 stevea

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Posted 31 December 2012 - 06:26 AM

This is a great forum. Sincere thanks to everyone who' attempted to address my question on "why 2X", but I'm left a little unsatisfied by the answers.

We are in the process right now. May options and issues. 1. Time: [....] 2. Equipment: [...] 3. Volume of product to turn a profit?


Obviously no one can predict the timing for licensing & regulatories, but even a 1yr delay is nowhere close to a a factor of 2x unless you've quit your 'day job' or are paying employees to wait. The equipment and volume needed should be pretty well honed in the biz plan P&L, materials costs and waste disposal too.

Need to have a still big enough so that you can run it a couple days a week and spend the rest of the time marketing and other business. Small still can be a big mistake and the bigger ones don't cost that much more and have much more capacity to produce your money, spirits.


Yes, I completely agree that "size matters", but I'd you should estimate labor hours calculations, including marketing and travel, in the biz plan. It's part of the P&L estimates - right ?

What is also helpful I think is a tasting room and store to sell product. Can be pretty profitable.

I certainly don't know - but I am extremely skeptical. You get a much higher margin, but the cost of operating a tasting room are non-trivial. It's not like wine where every 4th taster will purchase a case on the spot. I'd rather focus on getting a good score from the Whisky Advocate and let someone else manage the retail 'boutique'. It's very local, small scale PR, but diverts from the main goals.

[...]specifics of some of the equipment requirements once your process has been optimized, etc.


Process optimization is the first point so far that makes a mark. Are you saying ppl are starting distilleries, then finding that they need say 50-100% more capital equipment ?

Maybe, if you were starting a distillery that were a clone of one you had previously been operating, you could reduce that down to 50%. Or 30%.


I agree there are a lot of process unknowns. Back at the start of the microbrewing era in the 1980s/90s there were a number of brewery consulting firms that would design/review your plans and equipment layout and make suggestion. Does anything like that exist for small distilleries ? It could be a serious risk reduction technique.

Later you said your capital expenses were accurate to w/in 10%, but other factors drove it to nearly 2X - what other factors ? You mentioned time, but that sounds like a <20% number for an unexpected 1yr delay. Freight ? Installation costs ? Infrastructure costs ? It almost has to be a major revision of capital equipment to get to 2X, but you say otherwise.

#14 bluestar

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Posted 31 December 2012 - 11:32 AM

...
I certainly don't know - but I am extremely skeptical. You get a much higher margin, but the cost of operating a tasting room are non-trivial. It's not like wine where every 4th taster will purchase a case on the spot. I'd rather focus on getting a good score from the Whisky Advocate and let someone else manage the retail 'boutique'. It's very local, small scale PR, but diverts from the main goals.
...
Process optimization is the first point so far that makes a mark. Are you saying ppl are starting distilleries, then finding that they need say 50-100% more capital equipment ?
...
I agree there are a lot of process unknowns. Back at the start of the microbrewing era in the 1980s/90s there were a number of brewery consulting firms that would design/review your plans and equipment layout and make suggestion. Does anything like that exist for small distilleries ? It could be a serious risk reduction technique.
...
Later you said your capital expenses were accurate to w/in 10%, but other factors drove it to nearly 2X - what other factors ? You mentioned time, but that sounds like a <20% number for an unexpected 1yr delay. Freight ? Installation costs ? Infrastructure costs ? It almost has to be a major revision of capital equipment to get to 2X, but you say otherwise.


Look, many of us have been there done that. We are telling you what we have experienced. But I will give you one more go, then wish you luck with your low contingency plan...

You want the tasting room if you can add it for low cost, if you are in a region that can get any traffic whatsoever. Everyone I know has it has found it a profit center, and more importantly a critical interface to the drinking customer that you don't get ANYWHERE else. Don't have it, and you move one step away from your customer. Unless your customer is your distributor, in which case you aren't thinking about craft, your just thinking about small...

Unless you have already done all the process development elsewhere, or did it as an experienced distiller elsewhere, etc., you will substantially change your process over time in the start up period (first year or more), and that will cause you to make additional capital and small equipment purchases. We needed more small storage vessels, we doubled the number of fermenters because time in fermentation was longer than anticipated, we needed to make some still modifications because it did not work as well as we hoped out of the box.

Moreover, when we did the construction for waste lines, we found unexpected problems in the system and we found the inspector had new "code" requirements, same for fire, same for HVAC, etc. These are "known unknowns", areas we can anticipate that we don't have all of the information. Of course, you can overestimate, that is, estimate based on worst case scenarios (assume that there actually are no waste lines underneath this building just rented and was told had them), but that is cooking the books, you are just burying the contingency in the estimate.

Delays COST, because you have to already have rented, started construction and ordered a still BEFORE your TTB application is submitted (technically you should be ready for operation, but they are forgiving). That means the costs for these mount up while you are waiting for those delays. Again, unless you budgeted and scheduled on a worst case scenario (say, 1 year for the TTB to award a permit), and buried contingency in your estimated. Delays added tens of thousands of expense for us in the end.


There are consultants out there. I brought one on board for my start up. But they will give you the same feedback. Oh, my consultant costs turned out to be more than double what I estimated, but in that case because the value of the consultant convinced me I was overall doing better using him more.

By the way, for this stuff, SWOT is squat without a good budget and contingency for your project, which are inputs to SWOT (although your SWOT analysis can generate risk factors to be used in your contingency analysis).

JMHO, YMMV

#15 stevea

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Posted 02 January 2013 - 12:25 PM

Sincere thanks for the discussion Bluestar.

Look, many of us have been there done that. We are telling you what we have experienced. But I will give you one more go, then wish you luck with your low contingency plan...


I NEVER suggested a "low contingency plan", so let's not lampoon or mischaracterize other's statements. Unless your business is playing dice, a 2X increase over estimates is a serious failure in any plan. It means something in the original plan was missing or very greatly underestimated. We should all strive to improve on that foundation of failure. Yes, sure - SOME item in the list of 50 will certainly double, but that shouldn't be the average.

Several people here, who are in a position to know, have suggested a 2X cost of start-up vs estimated start-up costs. Like any rational person, I want to understand the SPECIFIC REASONS why this major over-run happened, not the hand-wavy "IT HAPPENS" description. One is useful, actionable information, the other is a pointless scare story.

You want the tasting room if you can add it for low cost, if you are in a region that can get any traffic whatsoever. Everyone I know has it has found it a profit center, and more importantly a critical interface to the drinking customer that you don't get ANYWHERE else. Don't have it, and you move one step away from your customer. Unless your customer is your distributor, in which case you aren't thinking about craft, your just thinking about small...


I completely agree about the motivation for a tasting room, but I have serious doubts about the costs, the market reach, and business model required. If you primarily seek to serve local customers - then it's reasonable, but I still suspect there are better venues that don't create a separate cost/profit center with added licenses, liability, insurance, labor, public restrooms, handicap access, and dealing with the local MADD contingent, and doubling or tripling your $/SF cost for customer accessible location.

Unless you have already done all the process development elsewhere, or did it as an experienced distiller elsewhere, etc., you will substantially change your process over time in the start up period (first year or more), and that will cause you to make additional capital and small equipment purchases. We needed more small storage vessels, we doubled the number of fermenters because time in fermentation was longer than anticipated, we needed to make some still modifications because it did not work as well as we hoped out of the box.


Now that is a very useful on-point comment. Obviously it's a highly regulated business where one cannot even experiment on product development w/o substantial regulatory and equipment costs. For example, I have a good bit of experience wrt brewing, even with *some* unmalted grains, but a mash that consists of 80-90% raw rye is a frightening prospect. Hard to believe it can be lautered at all w/o enzyme additions or rice hulls or ... Handing flour in the mash &amp; fermenter is similarly unfamiliar, and daunting. Yes getting process experience has to be a major cost/delay, but not unforeseeable.

Given that - would you advise others to start with very small production or even test-batches only for that "infancy" period and only step-up to the production after some product &amp; process development ? Obviously this means extra cost for some smaller scale hardware and then a more extended period in the red.

Hard to imagine a 2x error in fermentation rates, therefore capacities, but ... I haven't been in your shoes.

Moreover, when we did the construction for waste lines, we found unexpected problems in the system and we found the inspector had new "code" requirements, same for fire, same for HVAC, etc. These are "known unknowns", areas we can anticipate that we don't have all of the information. Of course, you can overestimate, that is, estimate based on worst case scenarios (assume that there actually are no waste lines underneath this building just rented and was told had them), but that is cooking the books, you are just burying the contingency in the estimate.


Well first, no ! You don't want either a high or low estimate, you want either a simple average or else a probability distribution of costs.

Yes, regulators suddenly choose to interpret code in a different way - there is little recourse and the cost above estimates are true unknowns. I did bump into this before, tho' smaller scale. A great point.

Delays COST, because [...] Again, unless you budgeted and scheduled on a worst case scenario (say, 1 year for the TTB to award a permit), and buried contingency in your estimated. [..].


No one doubts that delays cost real money. But there are better approaches than fully budgeting for the worst case. Not close to 2X overrun in any case.

There are consultants out there. I brought one on board for my start up. But they will give you the same feedback. Oh, my consultant costs turned out to be more than double what I estimated, but in that case because the value of the consultant convinced me I was overall doing better using him more.


That sounds like a good problem. You had to believe your consultant was ultimately saving you money..
Would you mind saying who was the consultant ? I completely understand if not.

By the way, for this stuff, SWOT is squat without a good budget and contingency for your project, which are inputs to SWOT (although your SWOT analysis can generate risk factors to be used in your contingency analysis).


Your thinking about SWOT all wrong. It's an analysis technique that is useful and valid even early on, with ballpark-y budget and unknown capitalization. You just have to recognize those as serious 'W'eaknesses. SWOT should lead you to recognize the weaknesses, detail them and address (or accept) these in subsequent analyses. It's just a way to organize ideas - valid at any stage.

==========================

To summarize - aside from the obvious variables, the 2X factor is accounted for by ....

1/ Initial process development, revision, 'learning', optimization (may include additional capital expenses).
2/ Unforeseen regulatory reqs - unpredictable water, sewer, power, ventilation, fire code compliance costs.
3/ Extreme licensing delays (beyond some reasonable expectation)

Anyone have others ? For example I'm having a hard time getting a handle on total water usage, labor time for various production tasks. Of course the market acceptance of the product is a huge variable.

#16 John McKee

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Posted 02 January 2013 - 01:27 PM

Steve,

I agree with most of your points.....2X overruns are not normal in good planning. We brought our project in under 5% of budget, but we planned for the better part of 2 years. I think that got us around the knee-jerk "get the doors open!" philosophy of planning and execution. It hurt to put out money for 2 years, without a return, but ultimately the planning led to a well executed project, within budget.

One note, don't discount a Tasting Room. The value greatly exceeds anything you currently have modeled....especially with regard to product outreach. If you have the chance to open a tasting room, do so.

Cheers.

#17 JohninWV

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Posted 02 January 2013 - 01:48 PM

Steve,

I agree with most of your points.....2X overruns are not normal in good planning. We brought our project in under 5% of budget, but we planned for the better part of 2 years. I think that got us around the knee-jerk "get the doors open!" philosophy of planning and execution. It hurt to put out money for 2 years, without a return, but ultimately the planning led to a well executed project, within budget.

One note, don't discount a Tasting Room. The value greatly exceeds anything you currently have modeled....especially with regard to product outreach. If you have the chance to open a tasting room, do so.

Cheers.


I couldn't agree more with the comments about a tasting room. It's huge for us and we are in a very small town, albeit with decent tourist traffic certain times of the year.

As far as budget, plans are great and very useful, but all sorts of issues can haunt even the best plans.Each individual market and product has it's own challenges. We opened and expected to have more success selling vodka and gin than we actually had. A number of factors contributed to this, including local market size, market saturation, etc. It took much more money to market our products than planned due to these factors. It also meant that our operating capital was underfunded due to the lack of sales. Fortunately, we have some good investors and we've managed to overcome those initial mistakes.....I think. :)

#18 Roger

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Posted 02 January 2013 - 10:38 PM

This thread almost seems to have spun out of control :). The original question was, and I paraphrase , " I want to hear how and why people have failed".

Unless I am mistaken, I have not yet heard of a single micro-distillery failure. Perhaps then the better question would be: what have operating distilleries unexpectedly encountered in significant startup capital and/or operational expenses for which they had not planned, if any ?

There have been some great responses to that so far, and I myself would love to hear some more. For example the issue with actual fermentation time as related to products would be very helpful for real planning. Likewise issues encountered and resolved relating to fire codes, waste water, etc...

As for the 2x figure, thats pretty boiler plate in any "unknown" startup, but as the industry develops and if people continue to openly share information in a manner that does not cause them competitive harm, then numbers with or without outside consultation should become clearer, provided the startup has reasonable expectations of what they expect to produce and sell. Further the "x" factor is usually related to scale. I could see a $250,000- plan turning Into a $500,000- reality pretty easily. However a $2,000,000- plan would not scale the same to $4,000,000-. so shoestrings beware.


#19 grehorst

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Posted 03 January 2013 - 06:12 AM

The problem with asking about failures on an industry forum is that those who have failed are not hanging around here, and those who are in the process of failing aren't likely to be wanting to talk about it. There's only one answer anyway (at least simplistically)- inadequate sales.

Fortunately most distilleries recognize shortcomings and adjust their plans and manage to survive, but it's a lot easier if you have contingencies to begin with. I think that's where the 2x advice plays a strong role. I completely agree with it for the low dollar startup as Roger points out above.

As for tasting rooms- I completely dismissed the idea when we started because we couldn't legally do it anyway. That changed and every cent we've invested in it since has been the best investment we could have made. From marketing value to cash flow it's been huge- and it came out of nowhere... this is an example of where that 2x really helped out.

#20 bluestar

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Posted 03 January 2013 - 08:55 AM

We will have to agree to disagree, Stevea. I don't consider a 2x final cost where a 100% contingency is budgeted as a failure of a project plan, where the risk based on known unknowns warrant it. It is GOOD project management. Of course, if you KNOW all the things I could NOT know when I started, and if you have no costs associated with delays, then agreed, that 2x figure is probably way too high. I would be very interested in hearing in the end where you come in after start up compared to your budget.

I think the topic shifted precisely because for those of us that have not "failed" (yet?), we instead provided advice on what we didn't anticipate. And that devolved into the discussion of "failing" to meet original budget sans contingency (most here seemed not to be surprised when their final costs exceeded their budgets due to unplanned issues and delays).

Part of this is a semantical issue, and in my world (project management) your baseline plan is an optimal one that is achievable, if all goes well, and your contingency is an estimate of the increase in baseline costs based on risks and their possible costs to mitigate or overcome. For a SMALL distillery (to which I was speaking) for someone NEW to the industry, I stand by my 100% contingency for a new start up, if the baseline cost estimate is not "padded" with imbedded contingency.





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