Offerings for Investors

[Grossmiller]

Hello, I was wondering if you guys had any thoughts as far as what is a fair share to give investors i.e. Equity stake, Stock options etc.. Thanks

[paul@mbroland.com]

That depends on a lot of things, but here goes (based on my experience). If you can sell from your distillery, you can offer them a special "investor's rate" when they buy. You can get their mouths watering about how you'll have scheduled "by invitation only" tastings for experimental batches and the like. You can offer them barrels "at cost" (meaning they'll pay for the raw materials, production costs, taxes, bottling, etc), probably most would want smaller barrels or something of that nature. If you plan on having scheduled events at the distillery (music events, wedding receptions, etc), you can allow them to have an event there at cost once a year. All of this, of course, is dependant on how much they invest. As far as equity goes, Bill always says do the 80/20 split as an LLP and when things break even, it flops to 20/80 (ask him about it if I just confused you). If you have a corporation, I wouldn't advise selling more than 49%, just don't give yourself a very big salary, ha ha. Clear as mud?

Hello, I was wondering if you guys had any thoughts as far as what is a fair share to give investors i.e. Equity stake, Stock options etc.. Thanks

[Alexander Kaspar]

A lot depends on what they are investing in. Land, buildings, equipment etc. would be far different than an investment in an up and running distillery, especially one that has a proven track record and needs to expand.

I am looking for a start-up investor for my farm distillery and have found that if I had an existing set-up there are many willing investors from a few thousand to over a million. The more you have going the less you need to give away.

[Grossmiller]

Thank you guys for your response. You have been a lot of help.

[Guest Liberty Bar - Seattle]

Thank you guys for your response. You have been a lot of help.

Well, not yet.

What you're asking is a very, very very involved issue. For less than a quarter of a million dollars, the agreements and decisions that have to be made is relatively simple. For instance, if there's only one investor and a dearth of other interested parties, that investor will be able to really push on the % and terms. If there are a number of investors that don't know each other, that'll make the negotiations easier on a case to case basis. More than that amount means that you will have either more investors or someone with deeper pockets and thus...well, better lawyers...

There really are a lot of options. Are you going to give a % as in effect co-owner? Or, will you give the investor a % return on the capital over a specified period PLUS a % of the net? And, for how long?

I know people that basically sold 80% or more of their companies because they REALLY needed the money, and ended up working for his investors - but...he was able to start 'his' business.

I wish you luck.

My last advice will be to not be too 'nice'. If you have a good offer and you are able to operate on your promises, you don't owe anyone anything beyond what is reasonable. You are doing THEM a favor too, you know.

[TetonDistillery]

Bumping an old topic...

We are in this situation now and trying to figure out how to value our current distillery as we raise money to fund our expansion.

When we were just a paper business plan in late 2011, that was quite easy to value. All speculative, but it was easy to value the business plan and it was mostly family funding it back then.

It seems far more complex to value our business now that we are producing, we have distribution in a few states, etc. but we don't have enough history yet to value the business based on tradition measures like EBITDA, etc.

Are there any suggestions out there for valuing an operating distillery?

We are not concerned about finding investors. There are people contacting us often about that. Our issue is how to value this relatively young enterprise at a reasonable number so we can establish a price per share to do the offering at. We are considering offering about 10% of stock dilution to fund the next round of expansion.

The only distillery valuation example I can find online was for a startup in England called the London Distillery Company. The problem with using that as an example is that when they raised the money, it was a pure startup with only a paper business plan, no product, no distribution, etc. So it is not really relevant for comparison purposes to determine valuation in a second offering later in the life of an young distillery.

That having been said, in 2012 London Distillery Co raised about $400,000 for a 45% equity stake when it was a paper business plan.

So they were valuing the total company at about $900,000 at the start before they did anything.

http://www.crowdcube.com/pg/case-study-london-distillery-company-56

[Roger]

You could work this backwards. Estimate your 3rd year realistic EBITDA, and assume that your biz is then worth 1x of that number. Then calculate how much you want to give up, based on that parameter, while keeping in mind that your investor will more than likely dilute that number by the amount of years it will take you to generate a real return to them, I.e. 7-10% interest on their money, while waiting.

This "pure number" would be more easily sold if you were already in operation, vs if you were paper, in which case you could expect savvy investors to dilute this number by as much as 50% due to the unknown

Very rough example: expected 3rd year EBITDA - $1,000,000 . Willing to give up 25% = gross expected investment -$250000, less 3 years 7% return on dead money - $52,000 = $200,000 investment less dilution due to risk factors such as "unknown" = $100,000 for 25%.

Rough boilerplate biz sales / values.

This unless of course you can "charm" some clueless locals to invest a disproportionate amount because they like the idea of investing in the industry, regardless of the actual or potential outcome

[tl5612]

So they were valuing the total company at about $900,000 at the start before they did anything.

http://www.crowdcube...lery-company-56

That said... it might be easier to raise money for a glossy paper plan with optimistic (maybe unrealistic) forecasts without a product, than for a business with a product making a loss (hoping to breakeven).

Regarding LDC, you should remember that there had/has not been a London Whisky for 100 years. This was the first micro (and still is) setting out to make it. A city of 6 million, with many more tourists. A HUGE market with massive potential. That alone sounds good to me. Not to mention that it was part Crowdfunded... so there is certainly that emotional appeal.

[Michaelangelo]

Don't discount the value of your IP (intellectual properties) in all of this. Your multiple goes up if you can demonstrate that your "Brand" has legs.

[Roger]

You could work this backwards. Estimate your 3rd year realistic EBITDA, and assume that your biz is then worth 1x of that number. Then calculate how much you want to give up, based on that parameter, while keeping in mind that your investor will more than likely dilute that number by the amount of years it will take you to generate a real return to them, I.e. 7-10% interest on their money, while waiting.

This "pure number" would be more easily sold if you were already in operation, vs if you were paper, in which case you could expect savvy investors to dilute this number by as much as 50% due to the unknown

Very rough example: expected 3rd year EBITDA - $1,000,000 . Willing to give up 25% = gross expected investment -$250000, less 3 years 7% return on dead money - $52,000 = $200,000 investment less dilution due to risk factors such as "unknown" = $100,000 for 25%.

Rough boilerplate biz sales / values.

This unless of course you can "charm" some clueless locals to invest a disproportionate amount because they like the idea of investing in the industry, regardless of the actual or potential outcome

Sorry, I misspoke on the Ebitda. I meant to say 1x - Gross, or 5x Ebitda

And for a startup in this industry, there is no value in IP or Branding. Those items only have value after they have been proven and quantified.