Minimum cost of distillery (if buying distillery from somebody)?

[Winnie the Pooh]

Hello all,

I was offered to buy a distillery here in WA, and that is what comes with it

(a) certain equipment, such as
- tools to distill (it is an independent discussion if that tool set is ideal or not)
- aging, bottling supply, such as bottles, corks, barrels, oak in various forms, cardboard boxes, etc
- fermenting supply, such as malt and other similar supplies, yeasts and nutrients, different infusions, etc
- various distilled (but not aged) spirits, such as rum, brandy, Grain Neutral Spirits, etc
- various wash for distilling, such as fermented wine (for brandy), corn wash, etc

(b) already bottled spirits
(c) certain brands
(d) poor marketing contracts (unfortunately, they are not very successful in contracts, so there are not many constant sources of sale)
(e) about 4 months of the current lease of the building with about 5500 sq. fts
(f) tasting room in front of the distillery (its square is included into 5500 sq. fts above)
(g) something else, that I missed
(h) all legal distillery documents, including permits from federal permits and licenses till city approvals, etc

Majority of the letters above can be estimated regarding cost or remaining; marketing/contacts can be estimated as 2-3x of annual sale (for example). One of MAIN questions is cost of "legal distillery" such as all documents, permits, licenses, etc. Any ideas of how to estimate it?

The idea that I have in mind, is a cost of rental during the time, waiting for all permits and licenses PLUS cost of getting all required documents from federal to local city (if you start it from scratch) including legal help cost.

Thanks

 

[HedgeBird]

11 hours ago, Winnie the Pooh said:

One of MAIN questions is cost of "legal distillery" such as all documents, permits, licenses, etc. Any ideas of how to estimate it?

$1

[Foreshot]

So you're asking one of the hardest question in business. What is it worth? There aren't going to be any simple answers. It sounds like the business isn't that successful. If that's true then I would go in with more of a equipment replacement cost estimate (FFE - Furniture, Fixtures, and Equipment). The IP (name, licenses, etc) aren't worth much of anything as they are a small business. You could ask for an asset sale (FFE only) and ignore the rest. It's fairly common with small businesses. 

11 hours ago, Winnie the Pooh said:

estimated as 2-3x of annual sale (for example)

Revenue, not sales. HUGE difference.  If the person has lost money then the true value of the business is basically 0. A lot of people selling say "look at the potential". That potential, in all honesty, is what you're going to be putting into it. So they are getting you to pay for the work YOU are going to be doing. 

Aside from the cost of the business, do you understand if it's the right business for you? If the business isn't that successful do you understand why? If so do you have the skillset(s) to fix it?  or the money to hire person/people with the right skillset(s)? Starting from scratch sucks, but it beats buying a bad company and riding it down. Do you think if you started a new company from scratch would you be in a better position in 3-5 years? 

The best person to speak to is a local accountant or lawyer that is well versed in small business sales or a sales broker. There's way too many items that would affect the value of the business. 

Think about it this way:

The MORE work/money YOU are going to have to put into it the LESS money it's worth.

The LESS work/money YOU are going to have to put into it the MORE money it's worth.

[dhdunbar]

If you purchase the assets, the federal permit (and I'll wager dollars to donuts the state licenses and permits too) cannot be transferred legally.  If the federal permit is transferred , itd is terminated by terminated by operation of law, which means without TTB having to take any action, the permit is invalid immediately upon the transfer (or your starting to operate the business) . 

So, the sellers permits have no value, because you cannot use them  (See §1.44).  You first must qualify on your own to distill before you can start using the assets you purchased to do so.,

Further, the seller cannot sell or deliver, to you, the bulk spirits (spirits in  containers of more than one gallon) because you are not eligible to receive them (see §1.80 and following).

Additionally, if you purchase the packaged spirits in containers of one gallon or less, for the purpose of reselling them, and you do not have a basic permit as a distiller, you will first have to have a basic permit as a wholesaler.  See §1.22.  

If you purchase a majority interest in a limited liability entity (corporation or LLC), which then continues to operate the DSP,  you have a change in control and the permit terminates, but if you apply for a permit within 39 days of the date of the change, the LLC can continue to operate on the existing permit until TTB takes action on the new application  (see §1.42 and 1.44). 

Remember, if you buy an interest in an existing entity, then you also inherit the entities liabilities.  I would not make such a purchase without contacting an attorney and seeing what precautions you might be able to take to ensure that the seller has disclosed all existing obligations.  See, for example, https://dor.wa.gov/get-form-or-publication/publications-subject/tax-topics/buying-assets-business.  Get competent legal advice.  I can point out questions you should ask; I cannot provide answers to those question.

Where your proposed transaction falls under the provisions of parts 1 and 19 is going to be case specific.  I've just described the general rules.

I do not know the WSLCB rules.  If you elect to operate in the same space,. you should have some assurance that the local authorities do not object to the location and construction and that you meet fire codes, etc., but nothing is ever assured just because it was approved once.  

Listen to what those who are in the business say; they know more about those issues than I ever will or want to.  Then do your own due diligence.  Don't buy blue sky that is overcast and grey :-).  And keeping with that metaphor, don't drive in a fog so thick that you can't see where you are going.

 

 

[Patio29Dadio]

Go find yourself a CVA (certified valuation accountant/analyst) and have them value the business before you consider any offers.  Generally a business is worth less than what the seller thinks it is worth, so you are generally going to pay for the CVA costs in the saving in the sales price for the business.   A good CVA helps the seller understand how his business is valued and how it is not valued and saves you from that conflict of not agreeing on price. 

[Winnie the Pooh]

15 hours ago, Foreshot said:

Revenue, not sales. HUGE difference.  If the person has lost money then the true value of the business is basically 0. A lot of people selling say "look at the potential". That potential, in all honesty, is what you're going to be putting into it. So they are getting you to pay for the work YOU are going to be doing.

Obviously, I was thinking too much about sale, that is why word revenue was replaced :(. Of course, I am talking about 2-3x of annual revenues.

[Winnie the Pooh]

15 hours ago, Foreshot said:

So you're asking one of the hardest question in business. What is it worth? There aren't going to be any simple answers. It sounds like the business isn't that successful. If that's true then I would go in with more of a equipment replacement cost estimate (FFE - Furniture, Fixtures, and Equipment). The IP (name, licenses, etc) aren't worth much of anything as they are a small business. You could ask for an asset sale (FFE only) and ignore the rest. It's fairly common with small businesses.

Starting this discussion, I was trying to split the business on assets and potentials. i do not believe much in speech of the seller in potentials. So, I wanted to buy equipment (including, possibly some distilled stuff)  and legal face. My question was more about cost of legal side, since distillery is not a simple LLC, where you pay legal fees of a couple hundreds and get all paperwork in two weeks. What I read, people spent from 9 - 18 months in order to start to make a first run. So, asking this question, I was thinking, that buying already registered distillery, can allow me to dramatically shrink the time, I would wait to get fully legalized on my own. Pay for fees, lawyers, to be complaint with regulations, etc. That is what I was asked as a part of the question of how much it would cost.
I guess, I supposed to be more specific asking this.

[Winnie the Pooh]

15 hours ago, Foreshot said:

Aside from the cost of the business, do you understand if it's the right business for you? If the business isn't that successful do you understand why? If so do you have the skillset(s) to fix it?  or the money to hire person/people with the right skillset(s)? Starting from scratch sucks, but it beats buying a bad company and riding it down. Do you think if you started a new company from scratch would you be in a better position in 3-5 years?

I have some ideas of how to make it works.

[Winnie the Pooh]

9 hours ago, dhdunbar said:

If you purchase a majority interest in a limited liability entity (corporation or LLC), which then continues to operate the DSP,  you have a change in control and the permit terminates, but if you apply for a permit within 39 days of the date of the change, the LLC can continue to operate on the existing permit until TTB takes action on the new application  (see §1.42 and 1.44).

I think, that option is what is suppose to happen, when people discuss to sell legal face of the distillery. Part of my question was if this legal face is asset (in addition to equipment, supplies and already distilled spirits), what would be a right price of this asset

p.s. I guess, you meant 30 days and 39 is just a type, because:

27 CFR § 1.44 - Automatic termination of permits.
§ 1.44 Automatic termination of permits.

No basic permit shall be leased, sold, or otherwise voluntarily transferred, and, in the event of such lease, sale, or other voluntary transfer, such basic permit shall automatically terminate thereupon. If any basic permit is transferred by operation of law or if actual or legal control of the permittee is acquired, directly or indirectly whether by stock ownership or in any other manner, by any person, then such permit shall be automatically terminated at the expiration of 30 days thereafter: Provided, That if within such 30-day period application for a new basic permit is made by the transferee or permittee, respectively, then the outstanding basic permit shall continue in effect until such time as the application is finally acted upon.

 

[Winnie the Pooh]

9 hours ago, dhdunbar said:

Remember, if you buy an interest in an existing entity, then you also inherit the entities liabilities.  I would not make such a purchase without contacting an attorney and seeing what precautions you might be able to take to ensure that the seller has disclosed all existing obligations.  See, for example, https://dor.wa.gov/get-form-or-publication/publications-subject/tax-topics/buying-assets-business.  Get competent legal advice.

I discussed about liabilities , mostly any unpaid lawns, liens, unpaid taxes, etc. I was told, that everything is clear. It obviously, should be checked carefully and with accountants/lawyers. Thanks

[Winnie the Pooh]

10 hours ago, dhdunbar said:

Remember, if you buy an interest in an existing entity, then you also inherit the entities liabilities.  I would not make such a purchase without contacting an attorney and seeing what precautions you might be able to take to ensure that the seller has disclosed all existing obligations.  See, for example, https://dor.wa.gov/get-form-or-publication/publications-subject/tax-topics/buying-assets-business.  Get competent legal advice.  I can point out questions you should ask; I cannot provide answers to those question.

Can you list these questions? I guess, it would be helpful for other people as well. Thanks

[Eud]

I'm a novice and just in the process of doing homework before possibly taking the leap, but it sure looks to me like you're thinking about buying someone else's problems.

[dhdunbar]

3 hours ago, Winnie the Pooh said:

Can you list these questions? I guess, it would be helpful for other people as well. Thanks

Please remember that I am neither a tax attorney or someone who specializes in the rudiments of business acquisition, etc...  I'm just someone whose been around for awhile and seen a few things.  That does not make me immune form being blind to a lot of others.  

1.  The company may have existing, undisclosed liabilities.  These may be either to other businesses,e.g., unpaid bills, or to a government, e.g. unpaid taxes, or to employees, e.g. unpaid taxes; or might be involved in litigation or potential litigation. 

2.  An attorney should be able to advise you how to protect yourself, and whether you can protect yourself against such contingencies. 

3.  In fact, you should look to the attorney for guidance on what contingencies you need to anticipate.  When I conduct interviews, I would often end it with, "Is there anything I should have asked you that I have not?"  With your attorney, the primary question should be, "What should I ask you?"  

4.  Speaking about things of which I do have knowledge:

• A  business which is being sold is being sold for a reason.  One of the reasons can be that it is that it is not profitable.  even if you think you can turn it around, one of the result of loses or not much profit,  etc, can be a "delay" in paying excise taxes.  Have they been paid; were all taxable events reported, etc...
• Eight year old bourbon has one value, three year old another, and a one year old generic whiskey still another.  Can the seller demonstrate, by the records it has kept, that the eight year old bourbon is entitled to that designation and does not need to be labeled as whiskey not more than three days old.  You want to pay only for what you get and you get only what  the seller can prove by its records.
• Does the seller have records that support the entries on the operating reports, i.e, do the records reflect all of the changes in proof gallons that appear on the operating reports, which give rise to the book inventory shown on the operating reports. 
• Next, does the book  inventory exist?  You need to make an inventory prior to sale.  You should do this, with the proprietor, and if bulk spirits are involved, with someone, other than the proprietor, who can use a hydrometer and knows how to determine volume.  Does that agree with what the last TTB operating reports show, reconciled for transactions that have occurred since that report was prepared? 
• You should also take another inventory at the time of sale to make sure there have not been any last minute, unreported removals :-).  Remember, the LLC is responsible for the taxes for any spirits for which it cannot account, and the LLC is going to be you and any other investors. 
• Does the seller have label approvals for all of the labels it is using and has used?

I'm sure that that list is not exhaustive, but it should give you and others who might be considering a purchase, a place to start.

If you decide to buy the assets and so not assume the liabilities, ask your attorney about sales taxes in Washington.  I sent you a link on that, I think.

Finally, don't rely on what I'm saying being accurate.  Get more than one opinion.  

That is general advise I offer to everyone here for free.  For more specific advice about TTB matters, contact me by PM and we can discuss how I might be able to help you.  

 

 

 

 

[Dehner Distillery]

Start your own Distillery.

Buy what you want. Not some ones problems. Because when you buy some one else problems then they become your problems.

[Winnie the Pooh]

I guess, topic is very well covered. I would thank you everyone, who spend your time and provided valuable feedback and shared a lot of useful information.

I will not consider to buy this distillery and will try to start  on my own.

Thanks to everyone.