Whiskey Startup investment - Equity given and retained

[pogriallais]

Hi Guys,

Hopefully someone with experience getting finance for their distillery or an investment specialist could offer some insight and or experience. If the details are too vague just let me know.

Using the figures below as an example:

Total Capital expenditure and working capital to start up and to operate distillery for first 5 years- $5,000,000

Personal funds-$400,000- $500,000

What sort of equity should I be retaining?

First whiskey to be released at 3 years. We hope to produce Vodka/Gin/ White whiskey initially for cash flow as well as having distillery tours.

Thank you in advance.

[Mash]

All of it. But don't quit your day job.

[Roger]

How did you come up with the $1,000,000- per year outflow for 5 years ? It would be very difficult to burn that much cash, given that you expect inflow from un-aged spirits. Don't give up a bunch of equity based on an errant front loaded cash burn calculation.

Best of luck.

[Roger]

Sorry, misread it to say your capital buildout was the initial $400-500g. But even if it is $1-1.5mil, the question remains essentially the same.

[Jedd Haas]

The question is lacking in so much detail that it can't really be taken seriously. The serious answer is to take the time and do the hard work to write an actual business plan. Then the numbers will come into focus.

[paul@mbroland.com]

Please understand that I am being completely professional and do not want to offend you. However, I wouldn't bank anything as far as actual industry numbers/decisions on this matter on what you learn on an online forum. You're talking to owner/operators and distillers that are in different parts of the country (& world in some cases), making different products that may or may not have anything whatsoever to do with your target market, with different goals and experiences. I would recommend that you find an accountant/industry professional that you can discuss this with along with other information that you put together based on a realistic industry analysis, also including taking into account other similar businesses in your local area (may not necessarily be a distillery). Case in point, I started up my distillery for a fraction of what you're figuring, and I spent over 2 years visiting places, talking to people, and crunching a LOT of numbers. Maybe you want to treat it as a normal business and get investment (pretend the aging product doesn't exist for the first year or two), and base any outside funding off of reality once you've gotten things going. Plus, everyone wants to take the pretty girl out to the prom (not the hypothetical pretty girl), so attracting outside investment may be a bit easier once you've gotten going. But, with that being said, don't let more than 49% of your business go unless you're starting the business in order to just flip it. And, if you're doing that, I'll stop here.

[JohninWV]

Good advice Paul.

[Scott @ Twenty2Vodka]

the answer to the question of how much equity should you retain, in this economy, with no cashflow todate, and with the expenses touching 1million/yr is: "As much as someone who is will to put up the $$ will let you keep". You have no leverage here, and 10% down is still 90% away from what you think you need at this stage of the game. On top of that, one lesson I have most certainly learned starting up a biz by raising funds in exchange for equity is this: Figure out how much $ you will need, then go out and get 3x as much before you spend a penny. Same goes for cocktail ice and firewood.

Best of luck,

-Scott

[Scott @ Twenty2Vodka]

How did you come up with the $1,000,000- per year outflow for 5 years ? It would be very difficult to burn that much cash

Methinks you have not yet experienced the true cost of doing business in this industry. I could spend $1million in only a couple transactions at the moment. And i'm not talking about on equipment either...

-Scott

[pogriallais]

Thanks everyone for responsding. Some great info in your posts.

I'm doing my research at the moment to construct a business plan.

I was hoping to start with a 500 gallon pot still with coulmn rectification distillery.

So to put the figures into context, everyone I have spoken to in Ireland and Scotland(industry experts) who have started/ are starting a micro whiskey distillery said that it's not possible to do it with less than €5,000,000. The €5,000,000 is to cover equipment, and working capital for the first 5 years. They feel anything less is not viable. I see plenty of US distileries started with a fraction of that figure.

The capex and working capital business models are based on whiskey only and would release whiskey at 4 years.

I would much rather retain most equity in the business and I have no intention of flipping the business.

Is there a real demand/appetite in the US market for white whiskey or is it a small niche?

[Scott @ Twenty2Vodka]

Is there a real demand/appetite in the US market for white whiskey or is it a small niche?

Are you aware who exactly you are posing this question to? This is a forum comprised of people trying to make a living by creating and selling products like white whiskey. Of course the folks in this forum think there is a real demand/appetite for what they toil with everyday. Honestly.

-Scott

[tl5612]

I'm guessing you're from Ireland, and not the US?

If you are, it would be worth looking at St George's Distillery in the UK http://www.englishwhisky.co.uk/ , I think they are using an 18 hectolitre still. Rather than White Dog etc. they sold their under-age whisky as some sort of aged 'Eau De Vie'. I would say it is certainly a niche market.

Maybe read about Kingsbarns Distillery in Scotland and their (very long) journey to funding.

London Distillery Company is starting up on roughly £350k: £250k outside investment for 30/40% I think (it was on a crowdfunding site, so this info is freely available) and £100k asset finance.

That said, I do find your original question fairly bizarre. If you really have $500k to invest, surely you already have an understanding of investments/valuations and don't need to ask a forum?

[pogriallais]

Thank you all again for your thoughts and the information. I am based in Ireland. Scott, I appreciate completely what you're saying, hopefully I didn't cause any offence.

Great info from Paul, Scott.

Thanks tI5612 for the info on UK distilleries. The London Distillery Company have some good info quoted in their outline business plan on Crowdcube.com.

[bioviper]

have you ever thought maybe instead of spending 500,000 on a distillery and products that you have know idea yet if there going to become popular . just spend 100,000 grand . buy a smaller still do most of the build out yourself . keep your distillery under 2,000 SF. spend very little on your tasting room. people dont buy spirits because you spent 50,000 bucks on your tasting room . the booze has to speak for its self. tinker with your brand and recipies for 3 to 6 months and see if there is even a demand for whatever your selling before you go all in with your money and other peoples. be smart. i have a feeling there is going to be a lot of shiny big stills and built out distillerys for sale in the next 5 years

[pogriallais]

Bioviper. I completely agree with you that not everyone will be successful. That's why I think it's important to do all the hard work of researching everything that comes to the business and meeting people. It was my initial thought to start relatively small and if all goes well to expand.

At the moment I'm in discussions with industry experts who would be willing to help in an advisory/board member role as I don't have experience within the industry. I do have lots of experience technically- my family have been distilling for generations.

[tl5612]

Am I right in assuming these industry experts told you to get an 18 hectolitre still (~500 US gallon)?

Not sure if you're aware, but stills smaller than this are now getting licences in the UK (this is if you're N. Ireland).

[pogriallais]

They didn't specify still size but they did suggest output. Fortunately it is possible to get a licence with a smaller still but you must be deemed to have exceptional circumstances and there's also a few more regulatory hoops to jump through(Republic of Ireland). Some of the experts that I have spoken to have quoted that I should aim for 50,000+ cases per year, others said I should aim for 100,000 litres per year. Of course the business is not just about volume it's also about the margin after sales. Regardless of the advice I don't want to end up in a situation where the distillery is too small for me to make a living from it. I'm crunching the numbers at the moment to see what will actually work but also getting expert financial input.

[tl5612]

You would make more than a living selling either 50,000 cases or 100,000 litres!

Check out EU grants, there are plenty about... if you create jobs (which you will). Could help dramatically with CAPEX.

If I were you, I would investigate hiring an Australian / US craft whisky consultant. They might have more experience in of size you're looking at than the Irish/Scots, and bring some new (forward-thinking) ideas with them!

Sounds like an exciting journey. Good luck.

[pogriallais]

Thank you. I completely agree with you re the forward thinking of people within the craft distilling world particularly in the US. Not to use a broad sweeping statement but I think people who are used to big industry may find it harder to think outside the box. I have spoken to a number of US consultants already- looks like they will be taking a trip across the pond! Cheers

[TetonDistillery]

pogriallais,

Some of the advice those experts in the UK have given you is not appropriate for a startup.

1) $5 million would be nice, but it is not even remotely necessary to get a new distillery off the ground.

Planning for production of 50,000 cases per year from the start is crazy. You don't need to buy stills/fermenters on that scale in year one.

It is easy to buy additional stills, fermenters and boilers as your demand increases.

2) Once you have a product that is in demand, even on a small scale, then it is easy to find additional capital from investors.

If you start small and have a great product, then when you do need to sell equity to investors you will end up retaining a larger percentage of the company.

Right now all you have is a paper business plan. Selling equity now will result in you losing the largest percentage of the company.

You wrote that you have $400,000 to $500,000 in personal funds for this business. That is more than enough for a startup distillery.

We did our distillery for roughly that amount and it included construction of a 2,400 sq ft building that could have a tower for our 32 ft column.

My advice would be to start the company with only your personal funds and retain 100% of the equity for now.

Once you have production and a good product, put it out there for competitions and try to get some recognition that it is high quality and in demand.

If you really have something, then investors will be easy to find to fund expansion. And since you are already a proven product at that point, you will end up retaining a far larger percentage of the company.

Just my opinion.

[Two Bit]

$1 million per year is easy to spend, and it will get you close to your 50,000 case goal. Good job on setting your sights high. I'd spend $5 million tomorrow if I had it.

My advice is to keep as much equity as your new partners will let you keep. If you have lofty goals you'll need money and lots of it. What you need to ask yourself is whether you'd like to own 35% of Bacardi (for example) or 100% of your smaller brand. Are you in the business to create a small craft product or make gobs of money straight out of the gate? It's entirely up to you, and nobody on this forum board can really advise you on it.

That said, if you have 400-500k of your own money, keep every penny for capital and get some long term loans for the rest. You should be able to show it as 15% of your overall spending package, and put the startup price at $3.3 million. Easy to spend, especially when you don't have an income for 4 years. Can you afford that loan payment? Maybe. Will it be less expensive than an equity partner? Probably. It sounds like your industry/advisory board is made up big corporate type people, so I'll just go ahead and assume that you're leaning in that direction. Nothing wrong with it, but if you aren't leaning toward big corporate, you should maybe get folks more familiar with shoestring budget businesses. We have both on our advisory board, and both give invaluable advice.

Don't let anyone make you feel guilty or misguided about you wanting to start larger than they did. Your 500 gallon still isn't going to get you there though. If you have a goal of 50,000 cases in one year you should probably get a new calculator because your goal is either too high for that size still, or your still is too small for your size goal. It's all in how you look at it. I think you should go for the 50,000 cases. It's still pretty small compared with the 'big guys.' I would love nothing more than to see you back here in 4 years declaring you met your 50,000 cases first year goal straight out of the gate. Good luck to you, and keep tight hold of control of your business - because it's YOUR business.

[pogriallais]

I really appreciate all the responses from everyone- I'm listening to all opinions and following my gut and the metrics to make my decision on scale.

The plan at the moment is to sell 10,000 cases in year one and to build that up to 50,000 cases. I would have no problem starting smaller and getting further investment when there is demand for the product. My concern however is the time involved in that strategy. To produce Whiskey in Ireland legally it must be aged for 3 years. Scalling up with whiskey is a slow process and to me it's too late scaling up when demand has already surpassed supply. Of course with Vodka/white whiskey/gin production there is no aging required so it's easier to scale up as demand increases.

[TetonDistillery]

Do you plan to only do aged products? No revenue for the first few years?

If that is the situation, then I would say you definitely do need deeper pockets with investors. Your personal funds are not enough.

If you are planning to do unaged products in year one, while using spare capacity to barrel your whiskey on the side, then your personal funds that you started are enough to get rolling and retain 100% equity to start.

The key to your ability to quickly scale up is the space you have available. If you lease an area that is limited and cannot be expanded, then you are in for a costly move later. If the area next door is available and you can easily double your space, then much grief can be avoided later. So pick a space with room to expand so you are not limited near term.

Investors can always be found later. You are far more likely to get a higher price per share from investors (you keep more equity) if your distillery is operating with a product to show. If you are just a paper business plan, then you are an extremely high risk and it will cost you a lot more equity.

[pogriallais]

I do plan on making unaged spirits from day one to get cash-flow going in addition to distillery tours. I completely agree on the valuation of the company, of course it is higher risk to an investor and I stand to keep much less equity from a business plan than an operational business. With regard to space I'm considering building on my family's land but I'm not ruling out purchasing a building or a long term lease.

[pressure9pa]

I realize there are probably no fewer than 50 variables involved, but in the opinion of those who have gone through it, does the below pass a sniff test?

A business in startup with $100k invested from the founders trying to raise an additional $700k by offering 40% of the equity.

We would essentially be trying to fund 87.5% of the costs with 40% of the ownership being offered to a series of outside investors. I'm being told this is a "typical" range, but I'm wondering if anyone has any evidence to support or refute this. It seems a little optimistic to me.