Investing in New Distillery - What sort of return?

[bold]

Hi Guys & Girls !

Looking to invest in a new distillery. What type of return should the owner offer or I should expect to get?

[jwymore]

Depends on a lot of things but if this is a startup don't have big expectations for the first couple years. After that it depends on efficiency and sales volumes. Make sure the business plan makes sense before you invest.

[kkoch]

There is no one single answer except "it depends". The appropriate return depends upon too many factors - the amount, percentage of equity, time table, risk, etc. Assuming you can afford to lose all of your investment (high probability with any "new" business), you will want a better return than you would receive from a safe (or safer) investment such as bonds, stock market (yes, odd, but it is still safer than investing in a new business), or CD's.

Only you will be able to determine if the risk/reward matches your personal financial comfort zone.

Ever watch Shark Tank? As goofy as that show is, they still provide a good primer on investment decision making.

[stevea]

A start-up MUST have a detailed multi-year P&L plan, and it should show the gross margins & capital involved. Then a longer-term 'vision' plan should indicate if they intend to plough that margin back into expansion. What is their goal and what happens when they get there ?

http://en.wikipedia....i/Exit_strategy

So you'll need to assess several things - Is the P&L valid & complete; HOW are they organized ? Is it a partnership, LLC, S-Corp, C-Corp ? Do they have access to enough capital to avoid hitting bottom ? Then assuming they meet those basics you need to assess if the margins are sufficient to warrant an investment, given the obvious risks.

I think a lot of small distillers have some obvious issues .... they may not correctly assess the labor (time&costs) involved; the founders labor isn't free either. Fermenting 900 gal and passing it thru 4x passes on a 300gal pot still to produce 100gal of output describes a lot of labor (and power & materials) for a little product. Pot stills don't scale with demand. Then there are market acceptance issues - the stores are awash in vodka/gin products and the "locally made" tag will sell bottle#1 within the region, but selling the bottle#2 requires something special in the bottle and frankly there are a lot of good products out there. For brown liquor you need to consider years long delay & losses and barrel costs involved and then the flavor risks, and when you are done you are competing with the big guns.

Ever watch Shark Tank? As goofy as that show is, they still provide a good primer on investment decision making.

NO way. Shark-tank is a cartoon version of how venture capital works. [i've been in 5 start-ups now, in various roles for employee #1 to Principal/CEO]. They do ask good marketing questions, they rarely ask anything abt the production side, and then the deals they offer some of the 'chum' are absolutely pathetic - should be criminal.

But the bottom line is that you need to be thinking in terms of big risks and therefore big rewards must appear in the plan, to make investment sense. It's risk capital only - not the nestegg. And yes you have to be thinking abt a 100% profit in 3 years, but your investment will likely be very illiquid. You need to think abt WHO ill buy you out when you want to sell. You'd prefer shares of an S-Corp or C-Corp and if you have enough equity in the company you want to be on the board.

You'll have to use your judgment to tell IF these guys have a good product, IF they have a good P&L sheet, IF they have a marketting & sales plan that makes sense, IF they have the talent to pull it all off. Also IF the market will support a new product. IMO one more really good vodka/gin won't get much traction except by a massive & expensive marketing campaign. And tho' there is more room for good whiskies, it will likely take 4+ years in a barrel before you'll have anything to sell. White-dog is dead IMO; an interesting excursion for the aficionado but they are universally awful. I think brandies are harder to make, but have market potential.

Can they make someting good ? Can they sell what they make for a profit (w/ a dcent gross margin) ?

[Michaelangelo]

Wow stevea, brutally honest but spot on. Investors are looking for multiples of return on their investment, not just a few extra dollars better than what they can get from a savings account. They get in to the investment with an entry strategy, and have already formulated their exit strategy before they hand you the check. In and out in 3 to 5 years.

[TetonDistillery]

Most distilleries don't have a well defined exit plan for investors. Friends and family might help you with a hobby business, but real investors will want to see a valid way to convert their ownership shares back into cash within 3-5 years. Without a solid business plan, most distilleries will be limited to friends and family as investors.

Investors in a startup need to have the potential for huge gains to justify the risk. 5X return on their money or higher would be reasonable. Because most new businesses fail, including distilleries, each small investment needs to have the potential to be a home run to make up for the other failed investments. If you are just trying to create a small hobby distillery, that is not of any interest to an investor.

Is the plan to sell to a major in a few years? There are a lot of craft distilleries springing up. They won't all survive and thrive. I think this will be like just about any other industry. Many will fail within the first 3 years. I think we will see a lot of used CARL stills on the market in a few years at heavily discounted prices.

In fact, I am waiting to buy one from a distillery that decides to shut down. They are pretty.

We bought all our equipment cheap from China. It doesn't look nearly that pretty.

[kkoch]

Stevea,

You provided tons of great information regarding the process to evaluate and determine if/when to invest in a business, but the OPs original question (and the one I was referencing with my post) was regarding ROI's which I do not see in your post.

Totally agree with you that if the business has an unrealistic plan that accounts for the items in your post then they will probably fail and/or be a cash drain.

Bottom line: If an investor doesn't do proper due diligence and are comfortable with the level of risk/reward, then they shouldn't be investing.