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Pros and Cons of Finance

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Hi all,

Some of you may recognize me. Hell, I've been on here asking questions since Jan. 2008. Well, as my dad says, "Its time to %#@t or get off the pot." I seem to be at the point of spending money and have gotten ok with that. I do know that I don't have enough for the entire venture. I hope to have a space before the end of the year. I know that all of you that are actually distilling have gotten there many different ways, so I thought some of you might lend your wisdom. Just so you know, I am talking with banks, potential partners, etc., I'm not expecting to get all the answers here, just sound advice.

Some of you have financed yourselves, gone through banks, had investors, or sold stock. I am considering the investor option as well as the banking. Here are my questions and dilemmas:

If I finance with a bank, I will generally need to start repaying right away. So in effect, I am paying back before I am even setup. I have a problem with that.

If you went the bank route, how has it worked for you? Did you do SBA or some other type? Any suggestions?

For those of you with outside investors, what options/incentives did you consider offering in the contract? I could just offer a % of profit. Could offer repayment plan + interest based on prime. Could offer product. What were some ideas that came across your plate?

I'm not looking here for investors, just advice.

Thanks for all your help over the years. Hope to run into more of you eventually.

Todd Weiss

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Any suggestions?


We are in pretty much the same boat -- searching for options other than reaching into my wallet. I suggest you look for state-level and county-level economic development agencies and the like. We have one local group and another state-level group that have been very helpful in helping us put together a workable financing package for our building, and have also said they want to be involved in our distillery build-out when we kick that off this fall. They are particularly interested in jobs creation, I have found....


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We setup an S-corp, authorized shares, figured out a per share value, and then hit the road selling them. If you go this route, you must involve the lawyers. SEC regulations (both fed and for each individual state) are very clear on what you can and can't do and say when raising money in this fashion. They (the lawyers) will review your prospectus, draft your subscription agreement, and most importantly assemble your disclosures. The disclosures are most important part because it's where you try to think of everything that could go wrong and list it in writing, so that potential investors become "sophisticated" and can't back out of the investment down the road. If it ever came down to it where your docs are being picked apart, it'll be by another lawyer, so you need a lawyer to draft them in the first place, unfortunately. Looking back, we spent many 10's of thousands on lawyers when raising money...just a heads up, but I wouldn't change a thing with how we did it (except raise more...but who wouldn't have?)

With the money we did raise, we reached out to a local development commission for a loan on our equipment. Yes, we were fortunate that one existed in our area (Very Northern Maine, you can guess the population density isn't too great up here), and it was paramount to our getting off the ground. Every location is different, there could be one near you? In the end, we brought $4 to the table for every $1 we borrowed...no 20% down, and that was in 2008. The "economic climate" has shifted a little since, and I have no clue what the requirements are now.

Before settling on a path however, we did consider the SBA in cooperation with a bank, and began to fill out the mountains of paperwork they require. In the end, we were fortunate enough to get funding without having to include the SBA, I will never forget the look of relief on the faces of our lenders when we broke this news. Apparently the amount of paperwork they need to fill out is just as cumbersome.

Because we are an S-Corp, the pay out of "profits" is dictated by the % owned by each shareholder. If you setup an LLC, you can attach a distribution agreement that dictates what they get in return, regardless of their % ownership. However, each member of the LLC will be on the DSP, including a background check and submission of financials to prove their investment $ came from a legit source. With the S-Corp, only shareholders with a % ownership over 10% had to be included on the license, a major convenience since we have 17 total shareholders across 3 states.

If you don't want to start paying back $ right away, then you need to eliminate the bank or other commercial lender from the equation. It's a reality of lending, and another motivation to generate some cash flow.

Best of luck,


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We did all three. Because I had a nice chunk of change (we're talking personal savings, not family money or anything like that) to bring to the table and we could offer some collateral, the bank was willing to talk for an SBA loan. Once they looked at things they ran a "stress test" to see how things would fly and were impressed with our numbers and setup (we did have a location established prior to going to the bank). If your business plan is solid and you have a good location that you can act on, that's key. Once they approved the loan and dished the cash, they gave us six months "like a construction loan" in order to get going before we had to start payments. We also went with some family/close friends for minority investment. However, echoing Scott, I priced setting things up with lawyers to go after big money folks that could throw in real money at around 25K, and that's probably a low-end estimate. We ended up sticking with what we had and didn't go with a lot of big money and the trade-off was a lot of sweat equity and it'll be still a while before I get anything I could call a paycheck after doing this for over two years. However, as long as I can pay my bills you'll never hear me complain, I can keep moving things along until we start making enough cash for me to get paid (plus after not getting a paycheck for this long it'll be like Christmas times 10 when I do!). I'll also put my two cents in that IF you don't have serious money backing you and you do need to start paying the bills within a few months, you better damnwell be able to sell to the public in some way, shape or form from your location because it will take a bit for distributors to get a decent pipeline established, at least that's my experience and I'm currently working within seven states. High marks if you're in an area where you can drum up traffic from locals or tourists (I'm a mile from the interstate, that does help).

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I'm going to chime in here, because my day job actually pertains to finance (I'm a banker). And no, ironically enough, our SBA loan didn't come from the bank I work at (conflict of interest as I'm an officer). And yes, drinking and banking go hand in hand..never say bankers can't party! ;)

If you choose to go to a bank, make sure you have realistic estimates. Bankers like to be at least 75% confident that they'll get reimbursed. And this type of business, especially in a market that has yet to be established in your area, is a risk. Involve your banker in your plans, your expectations, your excitement and obviously, your ability to repay.

You can ask specifically for repayment at a later date. This was key to Paul's & my ability to finance. We asked to get a waiver for the first year or so, until cash started coming in, especially since the majority of our product wouldn't get sold for a bit. While we do sell out of our gift shop, we had to make sure there was enough time between production and people actually walking through the door. Just because you open the doors and say "hey, we're here" doesn't mean people are going to flock in and buy everything you have. You've also got a TON of other overhead you've got to worry about. If you explain to your banker how you expect to have cash flow, they will have a better understanding of how the business works. Just because you plop a business plan in front of them doesn't mean they will still get the entire picture. Walk them through it. Paul & I live in Kentucky, yet our banker still didn't "get it" until we went through the whole deal (though I admit Paul is verrrry persuasive). :D

Contractors do this all the time. They will set up a loan to pull advances from and generally don't start repaying until 6-12 months down the road if the house doesn't sell. It's not something that's unheard of. It's a commercial loan, and while your banker would probably you rather start payments immediately, obviously it's not going to be something that makes your pocketbook happy. It never hurts to ask for other terms.

Bankers are in it to make money, just like you. No one wants to take a hit, period. If you can make your banker comfortable, then you'll be able to get some help.

One last thought, and one I'm sure you've already thought of. The less people (investors) you can have involved in your business, the more control (and less headache) you will have. Try to keep as much in house as possible.

Good luck! And if we can be of any assistance, don't hesitate to contact us. As far as our situation, it's been one hell of a wild ride, but it's worth it.

(Decided to add an edit as an afterthought). Not sure who you bank with, but I would suggest choosing a community bank that is preapproved to do SBA loans. If you go with a community bank, they have the ability to approve on the spot (with a little bit of decision time) vs. it having to go through a corporate, non-personal channel. National banks are great for some things, but on something like this, you need a personal touch. And just because one bank says no, doesn't mean the other one will. Oh yeah, and expect to sign a personal guarantee. The banker views it in two ways. Number one, if you aren't willing to sign a guarantee, that means you think it won't work. Number two, if you're willing to sign a guarantee, that means you're willing to pay it back in whatever means necessary, and that will hit your credit if you default.

Notice I said I'm STILL a banker. Ideally, one day, I will be here everyday at the distillery with Paul. Until then, I'm still paying the bills on the homefront. Keep the faith!

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If you setup an LLC, you can attach a distribution agreement that dictates what they get in return, regardless of their % ownership. However, each member of the LLC will be on the DSP, including a background check and submission of financials to prove their investment $ came from a legit source. With the S-Corp, only shareholders with a % ownership over 10% had to be included on the license, a major convenience since we have 17 total shareholders across 3 states.

Actually, this is incorrect regarding LLC ownership in relation to the DSP application.

Here is the response I received from the TTB:

The application only needs to identify members who own a 10% or more interest in the LLC and any managing members (such as persons who make up the board of managers or persons who hold officer positions).

A "member" (owner) of an LLC may be either "active" or "passive". "Active" members are owners who are involved in the day-tto-day running of the venture. It is these who would generally be classified as "managing members" and thus would need to be included on the DSP application. Otherwise, investors would generally be classified as "passive" non-managing members and would only need to be included if their unit share of the venture meets or exceeds 10%.

An LLC has many advantages over the Corporation, but if you needed to, it is easy to switch from LLC to Corporation. It is NOT easy to switch from Corporation to LLC unless you're willing to accept some serious pain from the IRS.

It may be easier for you to raise startup money as an LLC because you can grant different rights to each member (owner). For example, one thing you could do as an incentive to invest is to grant the investors a 30% share of the venture's profits, losses and liabilities, but a 70% share of the venture's assets. That way, they could have the added advantage of greater equipment depreciation write-offs, while also holding a greater claim to the assets should you ever close your doors and need to sell everything off (thus reducing their investment risk). This would also reduce the amount of immediate dilution to the value of their investment they would have to accept, since they would have a greater share of the book value of the company. Then, once you have returned their investment amount out of the future profits, you could agree with investors that their share of the assets is reduced back to 30% -- in line with their share of the profits, losses and liabilities. Just a thought.

I think you could only do some of this with a C-Corporation, and it would involve issuing different classes of Preferred shares, dealing with conversion rights, anti-dilution provisions, liquidation preferences, etc. Ugh. Of course, you would have to deal with being double-taxed (corporation gets taxed, and then owners get taxed individually on their dividends). While an S-Corporation doesn't get double-taxed (profits "pass-through" to the owners), you can't issue more than one class of shares, so you couldn't do any of this neatly.

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  • 2 weeks later...

Hey Chris,

Thanks for this bit! That was some of the type stuff that I was looking for. What incentives can I give to investors to make it a bit sweeter? This would help ease some of the edginess. Is this a topic that I would talk to lawyers or accountants about (initially)?



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@ Scott: Thank you for all your contributions. Believe me, I wish I could *give* as good as I *get* from this forum! :D

@ Todd: Well, regardless of the business structure you choose, there are lots of ways to doll-up your deal. As a start-up, mostly it will involve mitigating risk for investors.

Speaking with an accountant is a good start, but don't forget who you're speaking with... in my experience, most accountants are NOT deal-makers and they're a pretty risk-averse lot. But they can help advise you on some of the tax incentive options you can put into the deal for investors. Ultimatly a lawyer may need to get involved to draft your agreements with investors. Scott makes a good point that if an investor gets a wild hair at some point, it will be *their* lawyer who will try to pick apart your deal.

At the end of the day, much of it depends on how savvy and wealthy your investor is, and what turns them on.

Not to give you legal advice here, but generally you have less to worry about with an investor who is wealthy enough to afford the total loss of their investment ("accredited investors") and one who has invested in private equity deals in the past, since it is assumed they are fully capable of evaluating the merits of your deal on their own.

Another incentive example -- if you go with a C- or S-Corp structure (NOT an LLC) and you're raising $1 million or less, you could sweeten the deal by offering IRS Section 1244 stock to the investor(s). Basically, you declare your stock to be offered to investors as 1244 stock in your corporate minutes, and reflected as such on stock certificates (if any).

Typically, if an investor buys stock in a company but the company folds at some point, that's that... they've lost their money and there is nothing more they can get out of it. Or, if they sell their stock at some point for a loss, they just have to eat the loss.

But if that stock is 1244 stock, they can declare up to $50,000 of it (or, if the investment is a joint investment, $100,000) as a *loss*, which means they can write it off on their taxes. It's like "tax insurance" for the investor.

There are lots of possibilities... you might just consider offering a deal as a starting point to investors and then expect to negotiate from there.

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Robot says "Warning Will Robinson"... States laws first on formation. Self propriatorship, Partnership, Straight Corp, C-Corp, S-Corp, Limited Liability Corp, etc, these are all "allowable" setups through IRS code. That does not mean all states regard them the same. Always, Always, Always look at your own States laws on formation first along with the Federal IRS CODE. (Normally) you do your business formation in your State. Some advantages of each formation tool at the federal level can be a disadvantage at the state level. This also plays to each individual investor as stated earlier. Regards, (also former commercial lender) Bob

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Very true. Always a good idea to check with an accountant first. For example, while all 50 states allow the formation of LLC's (specifically, single member LLC's, which is how you may need to start-up), there are differences. Of course, you can set-up your LLC in a state other than your own.

FYI, all states allow the formation of C-Corp and S-Corp, and the standard rules apply. Generally speaking, Delaware has the most legal "precedent" behind the corporation structure, which is the reason why it is a rather common choice for formation of venture capital-funded entities.

You will also find other serious limitations on who or what types of entities can hold stock/member interests in a corporation or LLC formed in a particular state, or even at the Federal level. For example, S-Corps cannot have foreigners or self-directed IRA's as stockholders (among other limitations).

The IRS 1244 corporate stock election is something you can do that applies on the Federal level, regardless of the State. This means that the investor can write off his/her loss on the Federal tax return, but not on his/her State taxes.

So, yeah, always listen to the Robot and you won't get Lost In Space. :D

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