Category Archives: Financial

Damn Exchange rate!

Well what a bad surprise we received today about purchasing our equipment.  Instead of our equipment costing us about $550,000, we just got a 10% surcharge!  I blame myself, and I would recommend to anyone else who plans on starting a brewery to take note.  Watch the exchange rates and know the forecasts!  When a business needs to order equipment, fluctuations in the exchange rate can have a massive impact on costs.

Let me give you an example, from the time that we wrote our business plan about 4 years ago to today, the Canadian dollar has gone from about $0.95 Canadian for $1 American to what it is today $1.09 Canadian for $1 American.  As you can imagine this is crushing, and seeing the Canadian dollar lose $0.03 in one week, has become too much for us to handle.  We are purchasing some US dollars.

Unfortunately, this means that the cost of every dollar in equipment we buy, will now cost us about $0.10 more.  Just so you know, here are the costs for our equipment, at least what we have budgeted in our plan:

  • Brewhouse $250,000
  • Bottler $100,000
  • Fermenters and Conditioning Tanks $150,000
  • Misc Equipment $50,000

So all the costs of this equipment just went from $550,000 to about $605,000, as the suppliers we are working with accept American money only.  That sucks so hard I can’t even begin to tell you.  I feel so stupid for not thinking ahead to this possibility and changing some money over months ago.  If we had done this even just 2 months ago we would have saved about $25,000 in  costs.

So this leads us to a point that we must now consider.  Do we raise more money to pay for this cost overrun?  Do we look to purchase our equipment locally?  Or do we reduce the size of our equipment and shave some costs off that way?  Maybe there is a combination of a couple of these to make it work.

At the end of the day, there isn’t much that we can do about this.  All we can do is manage our actions from here on out.  It is a tough lesson for us to learn, and while there isn’t a lot that I can do about this, I can at least help someone else out to save some money.

General Update on Things

I have received some feedback lately around wanting a general update on our progress.  There seems to be genuine interest in how the overall project is going versus what we are encountering on a daily basis.  As such, this post is a little more of a general update on our progress rather than a general rant about this process, or a specific detail of things.

So as you likely know, we have submitted a development permit to the City of Vancouver for a space in East Vancouver.  On Thursday of last week, we were told we’ll be given an answer on this permit in the next couple weeks.  We are waiting for this permit, as we can’t lease the space we are interested in without first getting approval to brew there by the City.  In Vancouver, the only buildings that you can outright lease and know with certainty you can brew is M2.  The trick is that there isn’t a lot of M2 zones, and the buildings we were looking at in M2 just weren’t right for us.  So we ended up in an I2 zone, which is one where brewing beer is conditional upon submitting a development permit.  Any potential for us to use this space hinges on getting this permit, so we are waiting with fingers crossed to get good news.  As of Nov 18th, no news!

Another big process is collecting and securing money from investors.  Luckily, an investment in our brewery is eligible for the eBC tax credit, which basically means that 30% of each investors money is returned to them in the form of a credit from the government of BC.  It looks like we need to raise over $1,100,000 so everything we can do to help secure “financial partners” is welcomed with open arms.  We are going to be collecting money in the next 2 weeks from our investors, so I hope that what people have committed is what they are going to offer us.  If not, I am sure I will post something around my frustration with this.

Financing is another part of the business that is really important.  We will need both an operating loan and a line of credit in order to make the business float during the crucial first couple years.  Opening a brewery can be a recipe for financial hardship, as the line between profit and loss on a monthly basis is razor thin.  If sales fall behind a little bit, and costs are a little higher than expected, money can go out the window very quickly.  Luckily for us we were approved for a loan and line of credit to make our finances come together.  These will total about $450,000, and when added to the money we are raising we feel like we should be in a good position to make things work.

The layout of our space and submission for building permits is something we have been working very hard towards.  In fact, this has taken the majority of our time of late.  With the arrival of our Development permit by the end of November <fingers crossed>, we would like to have our building permit submission ready to go.  This means that we need to have the layout of the space virtually complete, have the work needed by engineers complete, have all the drawings and work from our architect complete, and to have all other inputs ready to go.  It seems really easy when I sit here and type this, but the reality is that there are so many moving parts to this, that it is incredibly complicated and difficult to carry out.  Finalizing the layout of our space has taken us over 8 weeks, as there are SO MANY variables to consider.  For example: Needs now versus in the future when we grow, tasting room connection to brewing space, retail area, production flow and functionality, the location of existing services, proximity of different spaces that need to be connected, etc, etc.

Equipment is something that we need to have ready to go, so that we can be sure it is ready in time for production.  We have looked to China, Europe, Canada and the USA for our brewhouse and tanks.  To be honest, I can see why this step can be either really easy, or one of the most difficult steps.  No two quotes seem to be alike, and the unknown factors of quality, timeliness of delivery, and follow-up support make these intangibles even harder to gauge in terms of importance.  A big hurdle to buying Canadian is the price.  Companies like Newlands and Specific Mechanical are local and have a good reputation in the business, but their prices are among the highest.  Moreover, it sounds as though some of the other start-up breweries have experienced some trouble with them.  Then there are the systems from Europe, where the quality is top notch, and the price matches.  Moving East to China, the land of cheap equipment, but one where the after sale service is poor, and other local breweries have experienced trouble with having to repair brand new equipment.  All of these things make choosing one company to work with very difficult.  At the end of the day, it is a balance between all these things, and hopefully one company stands out as the best.  At this point, we have no idea which one it will be.

Another huge part of this process is our name.  For the time being we are letting this one go for a few weeks.  While we don’t have an official name yet, the focus groups we ran were instrumental in getting us closer to making this choice.  The only problem is that we are putting out other fires that are more important at this time.  Things like financing, layout, legals, accounting, etc.  We anticipate having our name by the end of the year, and that should give us 8 months to create a brand around this.  I hope this is enough time and that we make decisions that are based on sound principles.

The legal side of things is something we kind of let slip and caused us a lot of grief and unnecessary stress.  In order to raise money and run a proper incorporated company you need to have:  A shareholders agreement (aka a partnership agreement), a subscription agreement, a set of articles for your company, and a share ownership agreement.  All of these documents are tedious to create, and require the hard work of a legal team.  Reviewing and revising take a lot of time and mean that you are continually working on getting these documents ready so that you can raise money, and provide a framework to investors on how your company will operate.

There are literally hundreds of other little things to do, some of which are major and some of which are minor pieces of major components.  There seems to be nothing that isn’t important in some way to the overall picture of this brewery.  To be honest, I would love to find the time to blog about all these things, but I just feel too much pressure to write about them, rather than working away at them.

Lease versus Buy Equipment

Well if needing to raise $1.2 million dollars isn’t enough of a mountain to climb in order to open a brewery, don’t forget the line of credit of about $250,000 you will need to keep your operations solvent until you break even on a monthly basis.  For our operations, we are projecting about 16-18 months before we break even.  When you really look at the reality of opening a brewery, you almost think it would be better to head down to the River Rock Casino and see if you couldn’t do better than owning a brewery.

There is one major way to mitigate the risk associated with starting a brewery:  Lease your capital equipment.  It is a novel idea that can amortize the capital cost of equipment over a longer period of time, and help ensure short term liquidity during the crucial first few years of owning a brewery.

My personality is not one that is geared towards leasing anything.  I have never leased a car, as I think it is better to own something outright with a loan, than it is to just pay for use.  In fact, throughout my career as a salesperson, I never leased a car.  So leasing the brewhouse is not something that I ever thought was going to be an option.  But I have been told by more than a few people that there are some benefits, so lets take a look at the Pro’s and Con’s of leasing:

Pro’s of Leasing Equipment:

  • Leases are tax deductible:  The whole lease payment is a straight write-off, which is easy
  • You can afford a nicer/bigger/more reliable system as the cost will be amortized over a 5 year period (in our case it would be)
  • Few upfront costs associated with lease and the details of taxes, etc are handled by someone else
  • Don’t need a down payment, as all the actual payment of the equipment is handled by the leasing company
  • Spread the cost of the equipment from upfront when you have zero revenue, to a time period when (in theory) you have good revenue in order to pay for the equipment.
  • At the end of an equipment lease, you own the items you leased.  There is no payment like with a car, you simply own the stuff you bought.

Con’s of Leasing Equipment:

  • If our business fails, we are still bound to pay for the lease until it is complete, and the equipment is owned by the bank, meaning our biggest asset is in the hands of someone else until we pay it off in full
  • With a lease, you may have additional cash during the first couple years, but it makes cash flow a little harder in years 3-5 as you have an extra charge on your cash flow
  • Once you sign a lease, you are bound to the lease
  • Over the course of a lease, you spend about 5% of the total amount owing per year in payments to someone else, which can add up quickly when you are looking at $500,000 in leasing.

I am sure there are other points for and against leasing equipment.  When I spoke with my accountant, he said something that stuck with me, and I hope to keep in the forefront of my mind when it comes to this kind of thing:  Do whatever makes your cash flow better.  Simple enough right ….. well not so fast.

Like everything in this process, and I sound like a broken record, there is a decision to make.  Sacrifice better cash flow in years 1 and 2 for worse cash flow in years 3 to 5.  Or vice versa!  It seems to be a universally known that a lack of cash sinks businesses.  Cash Is KING!  Well, under that scenario, a lease agreement seems to make logical sense.

So into my cash flow I went, and put in leasing equipment, and voila out popped the results!  Enter dramatic music here …. It didn’t work out as well as I thought it would.  In fact, it saddled operations down the line with those extra payments, when that cash (and lost money on interest) could be better allocated to other facets of the business.  Help!  I have a meeting on Monday with our accountant, and I hope to get his expert advice on what we should do.  I wonder which way he will go?  Do you have an opinion?

In my opinion, I think we will lease some of our equipment, but at this point I don’t believe leasing all of the equipment is worth it.  The $10,000 per month in lease costs help in the short term, but not the long term.  One thing is for sure …. its just another decision to make, and one that is crucial to ST and LT success of the brewery.

Raising Money …. Almost there

This part of starting a brewery involves no glamour, lots of rejection, and takes a thick skin. Most importantly, looking for investors takes patience.  Sometimes, the last thing I want to do is is take time away from the Brand Guide, Business Plan or other more ‘fun’ projects (OK I’ll say it, liquid research) to focus on this.  There seems to be a lot of people interested to know more, but to have ongoing discussions with them, means reducing the number of people who actually want to make an investment.

You see sharing your business plan, and your thoughts on everything from Marketing to Financials is like exposing your inner-most thoughts on business and branding.  Inevitably, we all have different viewpoints on these items, so there are things about my business plan that some people jive with, and other parts that turn people off our business.  Likely, if you are reading this blog you are a fan of craft beer; so explaining the market, how it’s growing and what the future holds is easy …. like selling candy to a kid.

However, about 75% of investors that read my plan don’t know a lot about craft beer.  For instance, they think Granville Island or Sierra Nevada is craft, have never heard of many of the smaller craft brewers, and don’t seek out establishments that cater to craft beer.  Some investors have even approached the business plan from a pure business standpoint.  They ask, “Why wouldn’t you brew more beer, sell it cheaper, market the crap out of it, and have higher sales?”  As you can imagine, this is not what I have in mind for my brewery! #FollowMyDreams

Most of all, you are asking mostly friends and family to invest their money in your dream.  This simple fact means that people start out skeptical in the first place.  We all know someone who is offering some multi-level marketing investment, or someone else who is selling diet pills or a weight loss plan.  Personally, I find this annoying, especially when its very in-your-face.  Also, people work hard for their money, and there is nothing worse that pissing your money away on a bad investment.  All of these things stick in my mind when I ask people to part with their hard earned money.

The net sum has been very positive.  I feel lucky to be based in Vancouver with this dream, as craft beer is bigger here than most any other place in Canada.  From a Canadian perspective, craft beer in BC is very sophisticated and has set the standard for many years now.  The Canadian Brewing Awards is littered with BC breweries winning gold medals over the past 5 years.  I just have to keep reminding myself that this opportunity is not for everyone.  I have also learned to take the feedback that people give me as not a personal attack, but ways to make our business and prospects for success better.  Ok, sometimes people are just jerks, but thankfully they are in the minority here.  Most people just can’t afford to drop $25,000 on something like this …. living in Vancouver is expensive.

As of today, we have raised over $1 million dollars towards starting this dream.  When I really step back and think about that number, it is a LOT of cash.  Depending on the space we lease, and the retrofit cost involved in making the space suitable for brewing, we will likely need another $200,000 to be fully financed.  I hope that we can find this money within the next few months, as the thought of being so close to connecting with all the investors we need is both motivating and exciting.

I am always open to comments, support and help from anyone and everyone in making my dream of a craft brewery become a reality.  If you happen to have any advice, thoughts on anything about the industry, or any other insights on anything to do with starting a business, please feel free to pass them along.

Thanks for reading this post ….

Cash Is King.

Holy crap it takes a lot of money to start a brewery!  I am not sure how else I can say this.  I am dumbstruck by the amount of capital and effort it takes to get to day 1, the day you can start producing beer.  The process of starting any business, especially one like a craft brewery, is a real test of many attributes of your personality.  I would say the biggest is your ability to raise, conserve and allocate your money.

I have spoken to several in the business about how much cash I need to do a production brewery, and the range in numbers I get is astounding.  For smaller breweries, it seems you can do it for about $400,000, and depending on your lease agreement, size of the space, and how quickly you can start making sales, the number can climb really high from there.  Its scary when you hear about how much Red Truck, Red Racer, and others are spending on their new breweries.

For my ambitions and goals, I am hoping that $1.1 million dollars will be sufficient, along with a line of credit to help me out until we get into the black …. likely about 12  months or so (I hope).  I do hope to connect a little more deeply with some of the newer breweries to see if this number is realistic or not.  I would love feedback from anyone.

A big plus to making things more hopeful to succeed is the tasting room that breweries are now allowed to have.  The connection you can make with craft beer enthusiasts, the ability to sample new styles of beer with immediate feedback, and the ability to sell your own beer make gutting it out during the first couple years much more possible.  I am not sure how companies like R and B, Storm and even Coal Harbour were able to succeed without a tasting room.

At the end of the day, I like to think that I am good with money.  But budgeting in my real estate finances, and the finances of my family is a much different beast than managing the budget for the brewery I am starting.

Tags:  Craft Beer, Financing your Start-up, ImStartingACraftBrewery, Vancouver, BC, Starting a Craft Brewery, Cash Is King