RICK COX, B.B.A., BREWER Fall ‘18 Business Basics RICK COX, B.B.A., BREWER Fall ‘18

Objectives (Part 1) What you will learn Today’s Craft Alcoholic Beverage Industry Getting Prepared Different forms of ownership Business Planning

Question What is business?

Today’s Craft Alcoholic Beverage Industry What eco-friendly generation is driving the market? Craft sectors emphasize innovation and local identity. Since 2007, every craft segment has grown by double digits. Growth in spirits and Cider.

Four types of ownership Advantages and disadvantages of different forms of small business ownership Four types of ownership

Advantages and disadvantages of different forms of small business ownership Sole-proprietorship You are the sole business owner You assume all responsibility Financial Legal

(Cont) LLC (Limited Liability Corporation) Membership, not ownership Members assume all responsibility, not one individual No stock offerings, percentage based on membership

(Cont) S-Corp 100 share holders All U.S. citizens Board of Directors By-laws SEC regulated

(Cont) C- Corp 1,000 share-holders Any nationality can be a share-holder Board of Directors By-Laws SEC regulated

Time to Jump in? Craft Beverage Business Failure rates hover near 5 percent Failure rate so low due to traditional craft producers are passion driven who refuse to fail Survival depends on a demonstrable mastery of the craft Changing laws

Products, Challenges, Markets (cont.) Breweries Independently owned producing no more than 6 million bbls/year 2018 excise tax from $7 to $3.50 Culture Future

Products, Challenges, Markets Distillers Independently licensed producing fewer than 750,000 proof gallons/year Culture Future

Products, Challenges, Markets Hard Cider Production under what license? History Culture Future?

Tell me “Why” Start with Why

Make Your Mark “Craft rewards revolutionaries, those remarkable individuals who are never satisfied with the world as it is an fearlessly seek a better way.” page 19

Make Your Mark Ken Grossman Jim Koch

Start Prepared Do you and your partners have: Understanding of the business Knowledge of alcoholic beverage production Marketing savvy legal skills physical strength $250k, $2.5 M, apple orchard

Know yourself Can you be: Fearless Steadfast Honest and transparent Devoted

Stand Tall Do you have: Generosity Forbearance Curiosity Appreciation Wisdom

Set Goals Aim for: Specificity Optimism Realism Short and long term

Advice Ken Grossman Think fast and move quickly. Have a decent marketing plan. Jim Koch Make friends. Don’t forget about the beer.

The Student Who is brewing beer? Who is opening breweries? You have graduated. What do you need to start your craft business?

What is the Mission? Answer these questions: Why are you in the craft alcoholic beverage business? Who are your customers? What image of your craft business do you want to convey? What is the nature of your products and services? What level of service do you provide? What roles do you and your employees play? What kind of relationships will you maintain with suppliers and distributors? How do you differ from your competitors? How will you use technology, capital, processes, products, and services to reach your goals? What underlying philosophies or values guided your responses to the previous questions?

Talk to Me Describe this

Business Plan There is no greater work of fiction than that of a business plan. Sam Calagione Dogfish Head Craft Brewery

Parts of a Business Plan Major components: Executive summary Business description Market strategies Competitive analysis Design and development plan Operations and management plan Financial factors

Parts of a Business Plan Executive Summary Describe the business Legal form of operation Amount and purpose of the loan requested Repayment schedule Borrower’s equity share Debt-to-equity ratio after the loan Security or collateral Market value/estimated value Price quotes for any equipment

Parts of a Business Plan Business Description Expands on the executive summary Start with a description of the overall craft beer, spirits, or cider industry Explain target market, distribution, advertising, promotions, customer service strategies Describe product or service Emphasize unique features or variations that set you apart Explain why the money you seek will make your business more profitable

Parts of a Business Plan Market Strategies Define your market -- size, structure, growth prospects, trends, sales potential Based on research, interviews, and sales analysis Focus on your customers and your competition Document where your information came from Who, what, when, where, why of your customers Emphasize your unique selling position (USP) Once market is defined and established sales goals, present the strategies of: Price Distribution Sales

Parts of a Business Plan Competitive (S.W.O.T.) Analysis: Strengths -- What sets you apart from the competition Weaknesses -- What do you not have the best skills at Opportunities -- What lies ahead of you that you can make into an advantage in the market Threats -- What is a threat to you and your company

Parts of a Business Plan Design and Development Plan Describes a product’s design and charts its development within the context of production, marketing, and the company itself. If offering a service only, focus solely on development. Development plan covers: product development market development organizational development Create a schedule that shows how these will develop over time.

Parts of a Business Plan Operations and Management Plan Management team and qualifications Management compensation Board of directors Executive officers Employees Professional support Operating expenses (capital and expense requirements)

Parts of a Business Plan Financial Factors Income statement details the business’s cash-generating ability Cash flow statement details the amount of money coming into and going out of the business. (Pro Forma/Profit and Loss statement) Show seasonality Balance sheet paints a picture of the the financial strength in terms of assets, liabilities, and equity over a set period.

Parts of a Business Plan Building and construction plans Leased facilities Building improvements Subcontracting The lease agreement

Parts of a Business Plan Additional information Anything not included elsewhere, but will significantly affect the business. i.e., ROI, break-even point, return on assets Gain help from your accountant to help organize raw data for financial section. including monthly and yearly sales projections

QUESTIONS?

What you will learn (Part 2) Regulation and Taxation (Ch 4) The Craft Customer (Ch 6) Financing Craft Beverage Companies (Ch 7) Branding (Ch 8) The Side Hustle (Ch 9)

Regulation and Taxation Federal Government controlled alcoholic beverages until 1920 Chief source of revenue Ended in 1920 with Prohibition Work of the devil 21st amendment repealed Prohibition in 1933 Gave states power to impose restrictions production sales distribution

Federal Alcoholic Beverage Laws U.S. TTB (Tax and Trade Bureau) Operation permits Label approvals (COLA) Formula approvals Distribution (Three-tier system) Taxes

Federal Alcoholic Beverage Laws (cont.) Operation permits Currently less than 60 days Background checks Field investigations Equipment and premises examinations

Federal Alcoholic Beverage Laws (cont.) Label approvals Currently less than 30 days Certificate of Label Approval (COLA) Must have approval for all labels for outside sales

Federal Alcoholic Beverage Laws (cont.) Formula approvals Brewery, Cidery, Meadery Must have list of ingredients Distillery Must have list of ingredients in detail along with “style” being manufactured.

Federal Alcoholic Beverage Laws (cont.) Distribution Three-tier system Federally mandated Separates alcoholic beverage producers from alcoholic beverage distributors from retailers. Outdated system Places undue burden on small craft alcoholic beverage producers.

Federal Alcoholic Beverage Laws (cont.) Taxes Separate federal tax rates for each of the craft categories Beer; $3.50/bbl on first 60,000 bbls, $18/bbl after Distilled spirits; $13.50 per proof gallon Cider; $1.07/gallon if less than 14% alcohol, $3.40/gallon if “sparkling”

Do you need an accountant? Accountants Start-up Big picture Lifetime partnership? Business advisory services Accounting and record-keeping Tax advice Auditing

Just like having Microsoft Word does not make you a writer, having accounting software does not make you an accountant. page 55

Choosing an Accountant Services Personality Fees

State Alcoholic Beverage Laws Each state and DC has its own distinct set of rules for each alcoholic beverage State guilds resource for laws

State Alcoholic Beverage Laws Tennessee has highest state excise tax at $1.17 per gallon

State Alcoholic Beverage Laws https://www.tn.gov/revenue/taxes/beer-taxes/due-dates-and-tax-rates.html

Craft Customer T-shirt-and-jeans crowd What’s new? What’s different?

Agree or Disagree?? Craft Customer The bottom line takes care of itself if you make good beer. Agree or Disagree??

Craft Customer Who is the fastest growing audience of craft? Millennials (born between early 1980’s and early 2000’s)

Craft Identity Craft drinkers Experimenters jump from one new beer, spirit, cider to another Tracks styles rather than brands Wants to feel a “connection” to what they buy Authenticity matters

Financing Self-financing Equipment leasing Investors Private equity Institutions State support Crowdfunding Crowdfunding equity Craft buying craft Big beer buying craft

Branding Company’s foundation Creates value Clarifies your message Reason for being Your “why” Creates value Creates buyer trust Clarifies your message Makes your advertising work harder A promise

Branding Building a Branding Strategy Set yourself apart Know your target customer Develop a personality

Branding Getting started branding Tell the story and explain the product Build a website Social media Make the product center stage

Selling Shovels It may not be about beer, spirits or cider Equipment Services Other businesses

Questions?

Location, Location, Location What determines your location? Style of operation Demographics Foot traffic Accessibility and parking Competition Proximity to other businesses and services Image and history of the site Ordinances Infrastructure of building Utilities and other costs Taxes

Cost of Brewing Supplies and Equipment System Size FV & BT/SV sizes Glycol system COG Grain Hops Yeast Nutrients Water

Cost of Wastage in the Brewery Every penny adds up Wastage includes Dumped beer Water Under-modified malts Old hops Spent grains Man hours Electricity Gas Spilled beer

Purchasing and Economic Order Quantity Analysis Budgeting Timeframes Economies of scale Savings vs. Storage

Inventory control systems and JIT Inventory First in / First out “Par” levels Re-ordering

Questions?

What you will learn (Part 3) Total Quality Management and its Impact Small Business Insurance

Total Quality Management and its Impact Management philosophy, a paradigm, a continuous improvement approach to doing business through a new management model Focus on meeting owners’/customers’ needs by providing quality services at a reasonable cost Focuses on continuous improvement Recognizes role of everyone in the organization Views organization as an internal system with a common aim Focuses on the way tasks are accomplished Emphasizes teamwork

Insurance DRAM SHOP liability Health Workers compensation Liability Serving of alcohol to an intoxicated customer Health Optional dependent upon size of company Workers compensation Liability Structural and equipment loss Product loss Future retail value

Government Regulations TTB (Brewers Notice) OSHA Department of Agriculture City Inspections Building Fire Health Department

QUESTIONS?