The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: ac on May 12, 2015, 01:25:03 PM
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Hi All
I'm thinking of investing in a friend's upcoming brewery.
Potential amount = $5,000. It's less than 1% of my net worth, and I think it'd be fund and potentially lucrative in the long run. It would be my first time with private equity (not publicly traded).
The only way of getting a return on the investment is via annual profit sharing. I'd own 0.5% of the business, so I'd get 0.5% of the true profits (after expenses, servicing loans, etc).
But I still think it could be lucrative in the long run.
I'm a little concerned about tax complications. I've been focusing on simplifying and reducing taxes (15% top bracket). This would yield a K-1 I think and of course dividend income hopefully.
Anyone have some useful advice?
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Where is it? It's hard to imagine in the US (particularly in a city like Chicago) that we aren't near a brewery bubble, and that a major shakeout won't happen at the next downturn.
Investing in a brewery in 2005 sounds like a much better idea than investing in one in 2015, near a "market top", where every goddamn person in the US has a friend who thinks it's a great idea to open a brewery.
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It sounds like the brewery will be set up as an S-Corp, if so you will be responsible for .5% of profits but you will also get to write off .5% of losses during the growth period for the brewery. While not really that complex, yes it will complicate your taxes at tax time.
I won't get into the high risk proposition of any private investment, including the fact as a limited partner you have no control over "profits". There are plenty of ways through salaries and expenses (travel, entertainment, etc) a profitable company can show 0 profit.
However you might want to look into those percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.
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Yeah, $5,000 for 0.5% equity seems like it could be a bad deal unless they're raising a lot of money and plan to get pretty big pretty fast. But if you think it would be fun to own part of a brewery and you're comfortable with losing all of this money, there are worse ways to invest 1% of your net worth.
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Yeah, $5,000 for 0.5% equity seems like it could be a bad deal unless they're raising a lot of money and plan to get pretty big pretty fast. But if you think it would be fun to own part of a brewery and you're comfortable with losing all of this money, there are worse ways to invest 1% of your net worth.
Agreed - if you think of it less of an investment, and more like purchasing a membership at the country club where you get to hang out at the tasting room and drink free beer for a couple of years it could still make sense.
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Yep, breweries are on the "very high risk" list at the moment. I talked to a fellow the other day that is 5 years in and has yet to see a profit. The market is very crowded and shelf/tap space is limited. Only those with truly good distributor connections will be able to grow. I'm sure everyone wanting to open a brewery is sure to think they have a good connection until the rubber meets the road. The best operators seem to be those who are first in a market and use a brewpub model which means making both good food and good beer, but then you are basically running a restaurant, which is a known hazard, in addition to a brewery. While I am sure plenty will survive, the brewery model is ultimately destined for failure because people go into it thinking it will be a fun 2nd career. Especially retired execs with tons of cash to throw at losses (they do this to farming as well). I brought this up 4-5 years ago and no one believed me, but now people already in the business are worried. What you want to invest in is a boring/aggrevating business that no one knows is profitable as hell.
The only thing that may make a difference is if your ownership entitles you to perform regular QC. If so, you might be able to get your $5k out (at the expense of your waistline), but if it doesn't I would move on...
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Key points are:
- How much are the other owners investing, what percentage of the equity are they getting?
- What will the rest of the capital structure look like?
- Is the business plan solid? Do you have a physical copy of it?
- Why does he need $5,000 from you? There are easier ways to raise money than $5,000 at a time and more traditional routes. Accounting costs will be more than 1% of this annually.
If it were me I'd ask for preferred stock with a substantial (10%?) dividend attached to it, convertible to some percentage of the equity at your option. They don't have to pay out your dividend, they just have to before the common gets paid. If these terms sound too good you probably don't have a clear view of the risk involved. It is substantial. Those are the financial considerations.
As other poster's have noticed, donating $5,000 into your friend's brewery is a fun thing to do. I'd be more inclined to just write him the check in exchange for free beer. Saves on accounting for one. You've got a better shot at seeing that beer for two.
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Hi All
I'm thinking of investing in a friend's upcoming brewery.
Potential amount = $5,000. It's less than 1% of my net worth, and I think it'd be fund and potentially lucrative in the long run. It would be my first time with private equity (not publicly traded).
The only way of getting a return on the investment is via annual profit sharing. I'd own 0.5% of the business, so I'd get 0.5% of the true profits (after expenses, servicing loans, etc).
But I still think it could be lucrative in the long run.
I'm a little concerned about tax complications. I've been focusing on simplifying and reducing taxes (15% top bracket). This would yield a K-1 I think and of course dividend income hopefully.
Anyone have some useful advice?
Really??
Your friend is valuing their non-existent business at $1,000,000? I believe this is the only appropriate response:
(http://www.thetraderisk.com/wp-content/uploads/2014/09/youre_dead_to_me-640x300.jpg)
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$1M for a non-existent brewery? It's not like it's an app that sends "Yo!" to people. THAT would be worth way more.
http://www.forbes.com/sites/jaymcgregor/2014/06/19/app-raises-1m-in-funding-for-simply-sending-the-message-yo-back-and-forth/ (http://www.forbes.com/sites/jaymcgregor/2014/06/19/app-raises-1m-in-funding-for-simply-sending-the-message-yo-back-and-forth/)
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Thanks all for the comments
Anyone have a good, clear way to value a startup?
I dont know about the valuation either. To me that means when they get to some stability point, price/book ratio ~2. So they'd have annual revenue of ~$500,000. Or, P/E ~15 so annual profits would be ~$70,000. I think that sounds plausible.
But trying to forecast the bubble - come on now! This site is a bastion of non-forecasting attempts.
i have the business plan and operating agreement. shares cost the same amount for everyone. profit sharing goes by how many shares you own. they're taking out a $180,000 loan.
My thoughts are:
the area is not craft beer saturated. beer festivals here get absolutely packed and sell out
they'll sell an addictive substance
i like their substance
it'd be fun
if i lost all the money i'd be annoyed but not crushed. $5,000 is one month's worth of savings for me
i'd learn more about business
all startups are "nonexistent". so yes it's risky to invest in a startup. but at least for this kind of startup the product is clear. if your opinion is to avoid investing in any startup because its much more risky than vti, then I respect that. I do feel like I'd be violating the investing principles that I've finally gotten comfortable with and executed decently over the past year. but I also get to share the benefits of those principles with very few people. and this brewery investment would be more tangible.
Anyone have a good, clear way to value a startup? Hopefully my price/book and p/e ratio thoughts above are sane.
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As others have pointed out: $5,000 being 0.5% means it's worth $1M. Something aint adding up. That's enormous. How does it take $1M to start a brewery? I brew in my basement for practically free.
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$5,000 for 0.5% sounds like a TERRIBLE idea.
If you are doing this as an investment, this seems like an awful one. Even at a much higher percentage, it is a risky investment, though perhaps not a complete rip-off. (Also- how will you feel when it seems like the business is bringing in money but the "profit" is zero because a major expense is your friend's salary? I worked for a private company that did profit sharing. The amount of "profit" we had to make before they called it such was INSANE because the family that owned the company would first give themselves raises and huge bonuses.)
But if you just want to give your friend $5k to play with and maybe down the road you'll get something from it, but most likely you'll just lose it- well, that's up to you. How much do you like your friend?
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I want to point out that the valuation of this brewery is 0. It doesn't exist. It has annual revenue of 0.
It's not normal to invest $5000 and get 0.5% based on it's future hypothetical valuation, if it's successful. If you were investing $5000 of a 1M established business, then you'd deserve only 0.5%, because you skipped the build-up phase. Late comers don't get rewards for coming late to the risk party.
But you aren't skipping the riskiest phase. You have all the risk (proportional to your investment). You should get all the reward (proportional to your investment).
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I dont know about the valuation either. To me that means when they get to some stability point, price/book ratio ~2. So they'd have annual revenue of ~$500,000. Or, P/E ~15 so annual profits would be ~$70,000. I think that sounds plausible.
A P/E of 15 is a good price for a large multi-national corporation (OK that would be a great price in today's market). You're talking about a brewery that doesn't yet produce beer. This isn't even remotely comparable to a small-cap stock.
If you were feeling generous, and this were an established small business, you might pay something like 5X earnings + book. That would be a very generous offer.
Businesses of this size fail very often before ever even making a profit of any kind. The upside here would have to be quite large to justify a $1M valuation - think if things go well, annual profits of 200K or more. I get that this is small potatoes in your overall picture, but unless you think this thing has the potential to be a big-time money making machine, you're basically just giving your friend money, even if things work out.
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You haven't mentioned it, but I would also be worried about your friends experience in brewing. If he is currently a good home brewer with a business plan and a gleam in his eye....I would be worried. There is a biiiiig difference going from 5-20 gallon batches in your basement to a 2+bbl system. Where you are constantly producing beer and have many many more variables that need to be taken into consideration to produce a repeatable product. Not to mention he will probably have to quit whatever job he currently has and start working 100+ hours a week to have any shot.
Does your area allow for taprooms and growler sales?
Is he hiring an experienced brewer or does he have experience through a school or previous jobs?
All in all it appears you want to invest in this just to be a part of it. That's cool. Just be aware you may never see your money again.
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Anyone have a good, clear way to value a startup?
I dont know about the valuation either. To me that means when they get to some stability point, price/book ratio ~2. So they'd have annual revenue of ~$500,000. Or, P/E ~15 so annual profits would be ~$70,000. I think that sounds plausible.
You need to consider the probability of the business actually growing that large. If getting to $500k annual revenue is a sure thing, then maybe valuing it this way makes sense. If you think it has a 50/50 shot of getting to this point, then maybe you should be paying half as much for your share of the company, and if you think it has a 10% chance then you should be paying perhaps 10% as much. It's essential to price risk into the equation if you actually care about this as an investment and not just as a way to buy bulk quantities of beer from a friend.
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However you might want to look into those percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.
The founders have 50% of the shares and draw $35,000/yr salary. They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment. So there are $500,000 of real dollars being invested. And $500,000 worth of founders "sweat equity" I think you'd call it.
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All in all it appears you want to invest in this just to be a part of it. That's cool. Just be aware you may never see your money again.
+1 to this. Several years ago, a "craft brew bar" in town here sold shares for small fractions of the business to their regulars / home-brew enthusiasts. The idea was these people would brew small batches for the business. They paid a small amount for this, and in return are entitled to some pitifully small portion of the profits, and a discount on beer.
So most who took them up, did it for the discount on the beer and to be a part of what was at the time a very unique place here. They've stopped any pretense of brewing beer at this place by now, but I think these folks do still get a discount on the beers, but as far as return-on-investment, not a great deal, and this was an established business.
So this bar is an interesting place. All of the beer is good beer, even to the beer-snob types. No Miller-Lite here. This was unique - you could get some decent beers at restaurants around town, but with pretty limited selection. When it first opened, you'd think the place was a perfect business. Busy all the time, and they had something nobody else was offering. Today, within walking distance of this place, there are 2 full-on breweries (one of which just got its license to brew just yesterday - the other makes pretty damn good beer), and a more-corporate version of the same business model as this bar. Corporate-bar even has a separate location that's not walkable from beer-central but definitely more convenient for a large swath of town. I think the original bar may have staying power - they've drifted even more towards unique beers, and they do have a loyal following being first to market and all, and they go out of their way to have events and such. But it definitely won't be the money-making machine you might have thought walking in the door 4-5 years ago.
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The founders have 50% of the shares and draw $35,000/yr salary. They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment. So there are $500,000 of real dollars being invested. And $500,000 worth of founders "sweat equity" I think you'd call it.
Except that this makes no sense. They haven't sweated! When they do sweat, they're being paid $35,000 salary for that sweat! You don't build sweat equity AND get a salary.
You may as well say $500k of real dollars and $500k for being awesome! If you think your friends are worth $500k due to their pure awesomeness, then go for it and make this "investment." But you're not exactly getting a good deal here. But at $5000 for 0.5% vs 1% of equity - maybe you don't care and just want to help them out.
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Also, in case it bears saying: Absolutely, do not guarantee that $180,000 loan. Don't sign anything indicating you are responsible for any part of it.
What happens in these situations, is people will sometimes assume that they'd be responsible for only 0.05% of the debt. Or that the larger shareholders would be responsible first. A couple of bankruptcies later and your $5000 investment lands you a $180,000 debt. Make sure that debt is their debt, secured by their assets and has nothing to do with you.
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Hmmmm. It sounds like fun, but not like a strong investment.
About 5 years ago we were shopping for a new home. A quirky property came up for cheap on MLS. It was a 1.5 ac country lot with an old milling setup on it. A 3-storey drive-through barn with conveyors that went to grain cleaning etc.
I set to work and figured out how we could set the whole thing up for a microbrew. It looked awesome. And we could build the whole thing into our mortgage so that we could do it without partners.
Then I started following Beau's Brewery blog - a similar sized operation out of Ottawa. http://beausbeer.blogspot.ca/ And while the blog was very upbeat and very fun sounding, I quickly realized that this was metric crapload of work, and not just a full time gig for one guy, but for a whole family - with NO RETURNS for years. Granted Beau's is in the Ontario market where government rules and foreign monopolies make things harder, but still, Metric Crapload. The beer is pretty good, but it still isn't in The Beer Store in Ontario - and its been close to 10 years since they started.
I don't have what it takes to put in that much effort to a brewery in the hopes that it catches in a field as crowded as the local microbrew scene is, and your friend needs to be a very unique sort of person to have the right mix of zymurgy, marketing, distribution, and persona to pull this sort of thing off. Do you have confidence that he can go from partying until 3 AM on the other side of the state to negotiating water-taking with the township to the health department to get inspections to a graphic designer to create a seasonal beer box... and then go put together beer recipes once all the 'business side' is done without a break between? And can he communicate in a way that makes all these different players feel excited and valued?
Unless this guy was proven in ways I have never seen someone proven, I would back away quietly while offering as much support as you can. Heck, I might offer to buy the first keg once the place opened, but without so much as a taste of product or a bottle to hold, its not for me.
BTW - you can set up a complete brewery for well under $50K now that so many are going out of business and selling off equipment at fire sale prices. Also, there is at least one brewery in Ontario whose business model is to own nothing but the recipes - they use excess capacity in their competitors' outfits to produce and bottle. Basically an ingredients only startup cost. Still too expensive for me.
Here's a 2-year old article worth reading on the direction of the industry - http://www.thestar.com/business/2013/08/30/craft_beer_wave_could_lose_its_fizz_olive.html.
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Thanks all for the comments
Anyone have a good, clear way to value a startup?
Well the most straightforward way to value it is the same as the most straightforward way to value anything. Expected value. Look at the business plan. What is the estimation for long run annual earnings? Multiply that number by 5 or 6. That's what the "successful" valuation is. An established private company that has rock solid earnings going back a hundred years is probably only worth a multiple of 10. You have no liquidity, that's a substantial cost. It may be a cost you don't care about, but that shouldn't effect your valuation. There are plenty of illiquid investment opportunities at P/E's less than 15, some substantially so. Got your number? Multiply that by the probability that this will happen. If you use a number greater than 15% it better be a very conservative business plan. Here's a good way to tell if you are dealing with a conservative or dreaming business plan. What is the allowance for equipment failure? Is it 10% of the equipment cost? Is it 50% of the equipment cost? Has it not even been mentioned? We'll assume that the business plan is quite conservative and that the probability of it actually happening is 15%. We'll further assume that this scenario is $70,000 in profits per year and a final valuation of $350,000. Scenario 2 is the business muddles along ekeing out a small profit after salaries etc are accounted for, we'll say $10,000 (though you need to be calculating this yourself). In this case your investment is worth $50,000. We'll assign this a probability of 35%. Half of craft breweries fail. You'll be quite tempted to think that your friend is special. He's not. In your valuation this is the one number you aren't allowed to change. Total loss at least 50% of the time. You get to write that off though so, you've got that going for you.
So our valuation is:
$5,000*Your cap gains tax rate(15%)*probability of failure(50%) + muddle probability (35%) * $50,000 * your share (0.5%) + success probability (15%) * $350,000 *your share (0.5%)
$375 + $87.5 + $262.5 = $725
Your expected value is $725, if we assume that this takes 3 years to play out we should discount it, I'm choosing a discount rate of 4% because I'd hate for you to accuse me of being too conservative. The net present expected value is $645. Spend $5000 on the lottery instead, its better for your financial health.
There is another worse scenario here. You get sucked in for more than $5,000. The question here is what does your friend's balance sheet look like? Is his house paid off? Does his wife work? What will you do when the business is sucking wind, he stops making mortgage payments, his wife leaves him, and he gets foreclosed on. The business is still going, he's working 80 hours a week, and he comes around asking for another $5,000 or $10,000. Do you invest more? That's not an impossible scenario. It literally happened to a person I know who went into the business. His/her brewery didn't even fail (yet?). Do you understand me. That isn't even the worst case scenario, he/she is still in!
Your best case scenario might be a quick bankruptcy, the tax writeoff is probably worth more than what you'll actually profit from this. If you want to do this and you want it to make financial sense you need waaaay better terms. If this is the way you like to spend your money I have no judgement, I don't think its likely to be as much fun as you're hoping, because its a coinflip your friend loses everything he has.
Some of the criticism here seems to be misdirected though. You are absolutely right when you say that our guesses on the craft brewing industry are worthless. They're probably less than worthless because they give the impression that you're thinking this through carefully. While many people point out that there is a lot of competition in the industry its got a lot of tailwind as well. It seems more likely than not that the regulatory environment will improve, and there is a lot of beer market share to take from the big guys yet. You could principally build a moat around a strong brand that you build, its not a terrible business to be in. But the terms you're getting are. I challenge you to post and justify a valuation that makes $5,000 for half a percent. If you can't, i'd just give him $4,000 and say good luck, you'll come out ahead and maybe you'll get a few free beers out of it.
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Thanks all for the comments
Anyone have a good, clear way to value a startup?
I challenge you to post and justify a valuation that makes $5,000 for half a percent. If you can't, i'd just give him $4,000 and say good luck, you'll come out ahead and maybe you'll get a few free beers out of it.
Year 3 projected revenue = $2.9M
Year 3 projected profit = $332k
Year 3 dividends at 0.5% ownership = $1.66k. 33% of initial $5,000 investment. Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.
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However you might want to look into those percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.
The founders have 50% of the shares and draw $35,000/yr salary. They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment. So there are $500,000 of real dollars being invested. And $500,000 worth of founders "sweat equity" I think you'd call it.
How is there $500k of sweat equity? It sounds like nothing has been done at this point. They don't have the $300k in investments (which sounds pretty vague), or the $180k loan. So i'm guessing they have no capital at this point. So what have they sweated into so far? Also how is it sweat equity if they are being compensated $35,000/yr?
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Thanks all for the comments
Anyone have a good, clear way to value a startup?
I challenge you to post and justify a valuation that makes $5,000 for half a percent. If you can't, i'd just give him $4,000 and say good luck, you'll come out ahead and maybe you'll get a few free beers out of it.
Year 3 projected revenue = $2.9M
Year 3 projected profit = $332k
Year 3 dividends at 0.5% ownership = $1.66k. 33% of initial $5,000 investment. Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.
So less than the average stock market returns, for a ridiculous amount of risk that you'd lose everything...
Honest question, are you new to investing? I can't see how anyone experienced with investing could call this a "fantastic investment".
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Thanks all for the comments
Anyone have a good, clear way to value a startup?
I challenge you to post and justify a valuation that makes $5,000 for half a percent. If you can't, i'd just give him $4,000 and say good luck, you'll come out ahead and maybe you'll get a few free beers out of it.
Year 3 projected revenue = $2.9M
Year 3 projected profit = $332k
Year 3 dividends at 0.5% ownership = $1.66k. 33% of initial $5,000 investment. Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.
So less than the average stock market returns, for a ridiculous amount of risk that you'd lose everything...
Honest question, are you new to investing? I can't see how anyone experienced with investing could call this a "fantastic investment".
Annual returns of 33% would be a fantastic investment. CAGR since 1870's of the s&p has been 9%. So 33% is higher than 9%.
It's risky yes. I get it. And the annual dividend is uncertain. But my response to the challenge of justifying the $1M valuation is the projected 33% dividend by year 3, repeated annually.
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The founders have 50% of the shares and draw $35,000/yr salary. They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment. So there are $500,000 of real dollars being invested. And $500,000 worth of founders "sweat equity" I think you'd call it.
Except that this makes no sense. They haven't sweated! When they do sweat, they're being paid $35,000 salary for that sweat! You don't build sweat equity AND get a salary.
You may as well say $500k of real dollars and $500k for being awesome!
Classic!
Generally you don't get half the shares in a startup (that doesn't exist) and get paid a decent salary on top of it (with no revenues). Unless you can put one over on some investors. Generally you get the business going on your own with your own resources (in your basement, nights and weekends, with a loan, etc) and then if you need a bunch of cash to kick it to the next level because you're doing too much business to handle it yourself, and are growing too fast, but don't quite have the cash yet to hire the needed workforce, but you expect to have that cash flow just as soon as you can meet the huge demand for your product--then you get investors. For something cheap to make like beer anyway. If you're talking software where you have to put in thousands of hours of time before it's even possible to make a penny, but the product can scale insanely, then the model is a little different (but still garage, people not getting a salary, etc).
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Thanks all for the comments
Anyone have a good, clear way to value a startup?
I challenge you to post and justify a valuation that makes $5,000 for half a percent. If you can't, i'd just give him $4,000 and say good luck, you'll come out ahead and maybe you'll get a few free beers out of it.
Year 3 projected revenue = $2.9M
Year 3 projected profit = $332k
Year 3 dividends at 0.5% ownership = $1.66k. 33% of initial $5,000 investment. Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.
So less than the average stock market returns, for a ridiculous amount of risk that you'd lose everything...
Honest question, are you new to investing? I can't see how anyone experienced with investing could call this a "fantastic investment".
Annual returns of 33% would be a fantastic investment. CAGR since 1870's of the s&p has been 9%. So 33% is higher than 9%.
It's risky yes. I get it. And the annual dividend is uncertain. But my response to the challenge of justifying the $1M valuation is the projected 33% dividend by year 3, repeated annually.
My apologies, I thought you meant 33% total, not in year 3. Still a ridiculous projection though...
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However you might want to look into those percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.
The founders have 50% of the shares and draw $35,000/yr salary. They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment. So there are $500,000 of real dollars being invested. And $500,000 worth of founders "sweat equity" I think you'd call it.
How is there $500k of sweat equity? It sounds like nothing has been done at this point. They don't have the $300k in investments (which sounds pretty vague), or the $180k loan. So i'm guessing they have no capital at this point. So what have they sweated into so far? Also how is it sweat equity if they are being compensated $35,000/yr?
I think the $300k in investments is coming from the OP and other friends.
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500k for a micro-brewery? That might be getting too big too fast? What type of brewing experience does your friend have? You should be able to get everything you need to make and keg large quantities of beer used for less than 100k. The shift from brewing 5-15 gallons at a time in your home to brewing several hundred gallons at a time is huge. Most people that start breweries have home brewing experience as well as commercial brewing experience.
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It's not really an investment, more of a fun thing to do.
I would definitely do this if a friend asked me but I also would write the cheque and just ask for free beer.
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Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.
"IF" - How's that for Laconic.
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However you might want to look into those percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.
The founders have 50% of the shares and draw $35,000/yr salary. They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment. So there are $500,000 of real dollars being invested. And $500,000 worth of founders "sweat equity" I think you'd call it.
How is there $500k of sweat equity? It sounds like nothing has been done at this point. They don't have the $300k in investments (which sounds pretty vague), or the $180k loan. So i'm guessing they have no capital at this point. So what have they sweated into so far? Also how is it sweat equity if they are being compensated $35,000/yr?
I think the $300k in investments is coming from the OP and other friends.
Allegedly. If they already secured a portion of the investment I would have expected that to have been worded differently.
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What you want to invest in is a boring/aggrevating business that no one knows is profitable as hell.
Not to derail the thread, but does anyone have any ideas for this?
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However you might want to look into those percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.
The founders have 50% of the shares and draw $35,000/yr salary. They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment. So there are $500,000 of real dollars being invested. And $500,000 worth of founders "sweat equity" I think you'd call it.
How is there $500k of sweat equity? It sounds like nothing has been done at this point. They don't have the $300k in investments (which sounds pretty vague), or the $180k loan. So i'm guessing they have no capital at this point. So what have they sweated into so far? Also how is it sweat equity if they are being compensated $35,000/yr?
I think the $300k in investments is coming from the OP and other friends.
Allegedly. If they already secured a portion of the investment I would have expected that to have been worded differently.
yes, $300k raised from family and friends
If I'm reading the tone of many of these posts, you guys are more animated about this than I am :)
What's the deal? Is this based on horrible experiences?
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What you want to invest in is a boring/aggrevating business that no one knows is profitable as hell.
Not to derail the thread, but does anyone have any ideas for this?
I hear self storage businesses make a bunch of money, but who knows?
I just go for almost exclusively vti, vxus, and bnd. How's that for boring?
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Something that would be helpful is a business reason you think the micro-brewery would be successful? Are they already a nanobrewery that is doing well looking to expand?
I'm not sure if anyone else feels the same way, but it sounds like a group of guys that just got together and decided they were going to open a brewery.
Who has experience brewing? Where? Those are things I would want to know before giving money. Also, for me at least owning .5% of a startup doesn't seem worth while. What's the point? Just go hang out at their brewery when it opens.
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Thanks all for the comments
Anyone have a good, clear way to value a startup?
I challenge you to post and justify a valuation that makes $5,000 for half a percent. If you can't, i'd just give him $4,000 and say good luck, you'll come out ahead and maybe you'll get a few free beers out of it.
Year 3 projected revenue = $2.9M
Year 3 projected profit = $332k
Year 3 dividends at 0.5% ownership = $1.66k. 33% of initial $5,000 investment. Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.
So they're expecting to start with nothing and get up to selling ~8,000 bottles of beer per day? That's a lot of customers. I think most successful bars probably sell <5% of that (there are more Tuesdays and Wednesdays than Fridays). Kegs are similarly priced per ounce.
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However you might want to look into those percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.
The founders have 50% of the shares and draw $35,000/yr salary. They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment. So there are $500,000 of real dollars being invested. And $500,000 worth of founders "sweat equity" I think you'd call it.
How is there $500k of sweat equity? It sounds like nothing has been done at this point. They don't have the $300k in investments (which sounds pretty vague), or the $180k loan. So i'm guessing they have no capital at this point. So what have they sweated into so far? Also how is it sweat equity if they are being compensated $35,000/yr?
I think the $300k in investments is coming from the OP and other friends.
Allegedly. If they already secured a portion of the investment I would have expected that to have been worded differently.
yes, $300k raised from family and friends
If I'm reading the tone of many of these posts, you guys are more animated about this than I am :)
What's the deal? Is this based on horrible experiences?
Then they aren't trying to raise $300k, they already did raise it.
I think the tone is just a reflection of the type of deal most here think it is. It's just not adding up to me, so I am expressing my doubt and skepticism that this is a good deal.
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What you want to invest in is a boring/aggrevating business that no one knows is profitable as hell.
Not to derail the thread, but does anyone have any ideas for this?
If I did do you honestly think I would be telling you about it?
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However you might want to look into those percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.
The founders have 50% of the shares and draw $35,000/yr salary. They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment. So there are $500,000 of real dollars being invested. And $500,000 worth of founders "sweat equity" I think you'd call it.
How is there $500k of sweat equity? It sounds like nothing has been done at this point. They don't have the $300k in investments (which sounds pretty vague), or the $180k loan. So i'm guessing they have no capital at this point. So what have they sweated into so far? Also how is it sweat equity if they are being compensated $35,000/yr?
I think the $300k in investments is coming from the OP and other friends.
Allegedly. If they already secured a portion of the investment I would have expected that to have been worded differently.
yes, $300k raised from family and friends
If I'm reading the tone of many of these posts, you guys are more animated about this than I am :)
What's the deal? Is this based on horrible experiences?
The numbers simply don't work out. It seems they just pulled $1 million out of the air as a big number, and are going around to their friends and family asking for money. The whole thing just screams ignorance at best, malice at worst. I'd run far away from this, even if it's only a small % of your net worth, in my opinion it's not worth the chance of ruining the friendship.
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However you might want to look into those percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.
The founders have 50% of the shares and draw $35,000/yr salary. They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment. So there are $500,000 of real dollars being invested. And $500,000 worth of founders "sweat equity" I think you'd call it.
How is there $500k of sweat equity? It sounds like nothing has been done at this point. They don't have the $300k in investments (which sounds pretty vague), or the $180k loan. So i'm guessing they have no capital at this point. So what have they sweated into so far? Also how is it sweat equity if they are being compensated $35,000/yr?
I think the $300k in investments is coming from the OP and other friends.
Allegedly. If they already secured a portion of the investment I would have expected that to have been worded differently.
yes, $300k raised from family and friends
If I'm reading the tone of many of these posts, you guys are more animated about this than I am :)
What's the deal? Is this based on horrible experiences?
Then they aren't trying to raise $300k, they already did raise it.
I think the tone is just a reflection of the type of deal most here think it is. It's just not adding up to me, so I am expressing my doubt and skepticism that this is a good deal.
they've raised some but not all which is why there's still at least $5,000 worth for sale.
there's more to the story than a bunch of guys trying to brew some beer and make millions, but i'd rather not spill all the details since it's not publicly available info.
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However you might want to look into those percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.
The founders have 50% of the shares and draw $35,000/yr salary. They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment. So there are $500,000 of real dollars being invested. And $500,000 worth of founders "sweat equity" I think you'd call it.
How is there $500k of sweat equity? It sounds like nothing has been done at this point. They don't have the $300k in investments (which sounds pretty vague), or the $180k loan. So i'm guessing they have no capital at this point. So what have they sweated into so far? Also how is it sweat equity if they are being compensated $35,000/yr?
I think the $300k in investments is coming from the OP and other friends.
Allegedly. If they already secured a portion of the investment I would have expected that to have been worded differently.
yes, $300k raised from family and friends
If I'm reading the tone of many of these posts, you guys are more animated about this than I am :)
What's the deal? Is this based on horrible experiences?
The numbers simply don't work out. It seems they just pulled $1 million out of the air as a big number, and are going around to their friends and family asking for money. The whole thing just screams ignorance at best, malice at worst. I'd run far away from this, even if it's only a small % of your net worth, in my opinion it's not worth the chance of ruining the friendship.
what valuation would work out?
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Thanks all for the comments
Anyone have a good, clear way to value a startup?
Well the most straightforward way to value it is the same as the most straightforward way to value anything. Expected value.
<lots of math>
I would also add in that you have to demand higher returns for higher risk. So expected value is far above what you should be paying at this point because the risk is very high. And you have to compare that to your alternative investments. Super stable companies like Johnson & Johnson yield 10% total return (7% real) over the long run.
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If I'm reading the tone of many of these posts, you guys are more animated about this than I am :)
What's the deal? Is this based on horrible experiences?
I think most are guessing that you didn't come here in order for us to talk you into the deal, so we're trying to fill the role of devil's advocates to encourage you to do your due diligence. Particularly since, as you say, this would be a dramatic departure from your relatively-recently acquired skill as a "boring" investor.
In regards to predicting a bubble, in general the bubbles we talk about here involve stock markets, which have thousands of individual opinions "voting" on the same question in order to determine a valuation. So yes, in those cases, it's very difficult to say one's own opinion is wiser than that of the market. In this case, it appears that there is no market of opinions voting on what the value of a 0.5% ownership stake is, so it's a lot more valid to have someone come along and say that maybe $5000 is the wrong price.
With perfect timing, the morning after my initial post, The Chicago Tribune posted an article "The state of Chicago craft beer" (http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CCAQqQIwAA&url=http%3A%2F%2Fwww.chicagotribune.com%2Fentertainment%2Fdining%2Fct-craft-beer-week-roundtable-goose-island-5-rabbit-half-acre-20150513-story.html&ei=H6xTVbvAGs6YyASppYGYDQ&usg=AFQjCNFKFMczW2j3jT0fqDY3DSK6Ywbt6A&sig2=J7Y3Flu1hdvW6FPf3-7efA&bvm=bv.93112503,d.aWw), in which brewing insiders discuss whether or not Chicago is in a "craft beer bubble". One bit of data is that it's grown from 3 breweries to 60 breweries in just 10 years (with more coming). Maybe that's still a sustainable growth rate, but it at least makes it hard to argue that investing in a brewery today will have a better return that if you'd invested in one 5 years ago. Anyway, your scene may be in a more nascent state than Chicago's or your guys may have a completely different value proposition. But either way it's a pretty interesting article for anyone interested in the still-growing craft brewing scene.
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what valuation would work out?
There are lots of ways to determine valuation. As an investor you should do your research and determine the one you are most comfortable with.
It seems a lot of people just pick $1 million because they think they have a million dollar idea. But very few start ups are actually worth a million dollars. What have they presented to you to justify the current valuation. Is it reasonable?
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Year 3 projected revenue = $2.9M
Year 3 projected profit = $332k
Year 3 dividends at 0.5% ownership = $1.66k. 33% of initial $5,000 investment. Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.
As a small investor in a successful(IMHO) craft brewery, I will tell you that those numbers are rather optimistic.
6-7 years in, around 7-8k bbl/year, and not at 2 million in revenue (no food).
Also, the J-curve is pretty heavy. I would say it took ~4-5 years before there was actual net-net profits that were paid out. Depreciation, investments in new equipment, accounting... it adds up. But now that we are passed that, we can reap the benefit of high margins on a product that doesn't really cost that much to make (per/pint).
Anyway, I would say they are asking for a lot with a million dollar valuation already. What are they bringing to the table (other than projections) that justifies it? I would want extensive background on their experience and a whole lot of trust in the founders (if they have more than 50%, guess who can give themselves a nice raise from the 35k/yr). Not just on their brewing ability, but also on follow-through and previous careers. Even then, it's a coin flip that they catch on in a beer market that has a lot of good choices.
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if they have more than 50%, guess who can give themselves a nice raise from the 35k/yr
This is a great point. If they could miraculously increase business to a few million bucks per year, wouldn't they have a good argument that they *deserve* six figure salaries? Oops, looks like there aren't any dividends yet.
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Thanks all for the comments
Anyone have a good, clear way to value a startup?
I challenge you to post and justify a valuation that makes $5,000 for half a percent. If you can't, i'd just give him $4,000 and say good luck, you'll come out ahead and maybe you'll get a few free beers out of it.
Year 3 projected revenue = $2.9M
Year 3 projected profit = $332k
Year 3 dividends at 0.5% ownership = $1.66k. 33% of initial $5,000 investment. Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.
Alright lets put that into the model. $332K * Valuation Multiple (5) = 1.66 M.
15% * 1.66 M * 0.5% = $1,245
Well at least with this scenario you aren't hoping for bankruptcy due to tax considerations! The expected value is still way too low. Even if we throw out the chance of breakeven entirely (which is totally unrealistic) we end up with
$375 + $4150 = $4525
This is still less than your investment, and its before we discount it to present value! After we do that (at 4%) we get about $4000. This is a bet with a 20% house edge. Still not worth it. We've even made a completely untenable assumption! It really just comes down to that you need better terms. Just out of curiosity did the business plan pass the conservatism test? (Are they insuring their equipment? What are they reserving against broken equipment?) A lottery ticket is also a fantastic investment if you win. I don't know whether the numbers from the business plan are reasonable, but I do know that they aren't good enough to justify an investment! If you were getting 2-4% for $5000 it'd be more interesting. If you had more downside protection it'd be more interesting.
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However you might want to look into those percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.
The founders have 50% of the shares and draw $35,000/yr salary. They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment. So there are $500,000 of real dollars being invested. And $500,000 worth of founders "sweat equity" I think you'd call it.
How is there $500k of sweat equity? It sounds like nothing has been done at this point. They don't have the $300k in investments (which sounds pretty vague), or the $180k loan. So i'm guessing they have no capital at this point. So what have they sweated into so far? Also how is it sweat equity if they are being compensated $35,000/yr?
I think the $300k in investments is coming from the OP and other friends.
Allegedly. If they already secured a portion of the investment I would have expected that to have been worded differently.
yes, $300k raised from family and friends
If I'm reading the tone of many of these posts, you guys are more animated about this than I am :)
What's the deal? Is this based on horrible experiences?
Watched a horrible experiences here :-) Can't speak for anyone else. I'm also naturally animated about valuation discussions. No hard feelings. Its your money. For what its worth, I think its probably a fair assumption that your friend is acting honestly, but I do think that he's probably thinking, "this would be a fun thing to do, and maybe we'll all get rich! Wouldn't that be great."
I don't see any evidence that your friend is acting in bad faith, or that the craft brewing market is due for a crash, I just think its not a good deal.
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they've raised some but not all which is why there's still at least $5,000 worth for sale.
there's more to the story than a bunch of guys trying to brew some beer and make millions, but i'd rather not spill all the details since it's not publicly available info.
Well, alright here's another way we can determine a fair valuation. What is the interest rate on the loan they are getting and what is it secured by?
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When trying to value a business, one of the best things to consider is: "What would a potential buyer pay for this business in an arm's length transaction?"
Would a potential buyer walk in a buy your friends' brewery for $1,000,000? Well no. That buyer would look around and say, "What brewery?"
Imagine there -was- a brewery. The value would then be in the recipes and name (both of which would be valued, for the most part, by the number of current customers times a multiplier, with maybe a premium if it has really good recipes and a really cool name - due to potential); the equipment; the building; the cash in the bank.
The value of this business is the cash it has on hand, because it has nothing else. It's very debatable whether any recipes or name have value in the planning stages of a business - but maybe a very marginal value if the recipes are super fantastic.
So imagine I'm the investor with $1,000,000 and what I want to do is buy a brewery. Right now my choices are: Your friends' brewery, or start my own (we will suppose that there are no other breweries to buy). What would you do with $1,000,000? Chances are, you could start your own for less than that... What is it about your friends' brewery that's making it worth money?
I also want to add that I don't think the friends are being malicious and intentionally trying to rip people off. They are probably like a lot of people who start a business - they're excited about this idea. They think it's going to be ultra successful. They don't really want to cut people in. They don't want to take $5,000 now and five years down the road, be paying $10,000 a year to you. They're just failing to examine the other side of that coin - there's an 80% chance or higher that 5 years down the road, they will have failed and they will be paying you nothing. They're not wanting to compensate you for your risk, because they're only looking at reward.
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Thanks all for the comments
Anyone have a good, clear way to value a startup?
I challenge you to post and justify a valuation that makes $5,000 for half a percent. If you can't, i'd just give him $4,000 and say good luck, you'll come out ahead and maybe you'll get a few free beers out of it.
Year 3 projected revenue = $2.9M
Year 3 projected profit = $332k
Year 3 dividends at 0.5% ownership = $1.66k. 33% of initial $5,000 investment. Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.
Alright lets put that into the model. $332K * Valuation Multiple (5) = 1.66 M.
15% * 1.66 M * 0.5% = $1,245
Well at least with this scenario you aren't hoping for bankruptcy due to tax considerations! The expected value is still way too low. Even if we throw out the chance of breakeven entirely (which is totally unrealistic) we end up with
$375 + $4150 = $4525
This is still less than your investment, and its before we discount it to present value! After we do that (at 4%) we get about $4000. This is a bet with a 20% house edge. Still not worth it. We've even made a completely untenable assumption! It really just comes down to that you need better terms. Just out of curiosity did the business plan pass the conservatism test? (Are they insuring their equipment? What are they reserving against broken equipment?) A lottery ticket is also a fantastic investment if you win. I don't know whether the numbers from the business plan are reasonable, but I do know that they aren't good enough to justify an investment! If you were getting 2-4% for $5000 it'd be more interesting. If you had more downside protection it'd be more interesting.
adamwoods - I finally understood your valuation explanation! Hooray for me.
I also left out a key piece of info: the operating agreement includes this amazing promise that I could voluntarily disassociate and get my money back.
So using your valuation logic I'm going to split total failure into 2 categories: I see it coming and pull my money out or I don't see it coming
Failure I see coming: probability = 25% * $5000
Failure I don't see : probability = 25% * $5000*(15% + 7%) 7% is for state tax. I assume I could write that off state tax too.
Moderate dividend : probability = 40% * $170/yr*10yrs + $5000 Assume after things go fine for 10 years I get my $5,000 back
Full success dividend probability = 10% * $1700/yr*10yrs + $5000
Total = $6405 before going to net present value...but some of that is in the present day dividend assumptions. some is not. its messy.
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Go ahead and do it! Consider it a future write off and a fun thing to do. See if you can talk them into a free under the table 12 pack each week and call it good.
Me thinks your likelihood of making money are very slim and the likelihood of losing your entire 5K is very high. Most bars that don't even have the expense of brewing their own beer go under within 3 or 4 years typically.
That and I don't really think a private brewer can brew beer cheaper than large scale brewers.
IMHO it would be better to just go with a 91 beers on tap concept. That concept could be done for under 100K.
The breweries around here have horrendous tasting beer and I'm guessing that it is food sales that keep them afloat. That or daddy's money.
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Thanks all for the comments
Anyone have a good, clear way to value a startup?
I challenge you to post and justify a valuation that makes $5,000 for half a percent. If you can't, i'd just give him $4,000 and say good luck, you'll come out ahead and maybe you'll get a few free beers out of it.
Year 3 projected revenue = $2.9M
Year 3 projected profit = $332k
Year 3 dividends at 0.5% ownership = $1.66k. 33% of initial $5,000 investment. Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.
Alright lets put that into the model. $332K * Valuation Multiple (5) = 1.66 M.
15% * 1.66 M * 0.5% = $1,245
Well at least with this scenario you aren't hoping for bankruptcy due to tax considerations! The expected value is still way too low. Even if we throw out the chance of breakeven entirely (which is totally unrealistic) we end up with
$375 + $4150 = $4525
This is still less than your investment, and its before we discount it to present value! After we do that (at 4%) we get about $4000. This is a bet with a 20% house edge. Still not worth it. We've even made a completely untenable assumption! It really just comes down to that you need better terms. Just out of curiosity did the business plan pass the conservatism test? (Are they insuring their equipment? What are they reserving against broken equipment?) A lottery ticket is also a fantastic investment if you win. I don't know whether the numbers from the business plan are reasonable, but I do know that they aren't good enough to justify an investment! If you were getting 2-4% for $5000 it'd be more interesting. If you had more downside protection it'd be more interesting.
adamwoods - I finally understood your valuation explanation! Hooray for me.
I also left out a key piece of info: the operating agreement includes this amazing promise that I could voluntarily disassociate and get my money back.
So using your valuation logic I'm going to split total failure into 2 categories: I see it coming and pull my money out or I don't see it coming
Failure I see coming: probability = 25% * $5000
Failure I don't see : probability = 25% * $5000*(15% + 7%) 7% is for state tax. I assume I could write that off state tax too.
Moderate dividend : probability = 40% * $170/yr*10yrs + $5000 Assume after things go fine for 10 years I get my $5,000 back
Full success dividend probability = 10% * $1700/yr*10yrs + $5000
Total = $6405 before going to net present value...but some of that is in the present day dividend assumptions. some is not. its messy.
This math is crazy optimistic. Something like 80% of small businesses fail in the first year. And of those that don't fail quickly, only some portion are actually profitable. 50% failure over 10 years is rose-colored glasses.
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Thanks all for the comments
Anyone have a good, clear way to value a startup?
I challenge you to post and justify a valuation that makes $5,000 for half a percent. If you can't, i'd just give him $4,000 and say good luck, you'll come out ahead and maybe you'll get a few free beers out of it.
Year 3 projected revenue = $2.9M
Year 3 projected profit = $332k
Year 3 dividends at 0.5% ownership = $1.66k. 33% of initial $5,000 investment. Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.
Alright lets put that into the model. $332K * Valuation Multiple (5) = 1.66 M.
15% * 1.66 M * 0.5% = $1,245
Well at least with this scenario you aren't hoping for bankruptcy due to tax considerations! The expected value is still way too low. Even if we throw out the chance of breakeven entirely (which is totally unrealistic) we end up with
$375 + $4150 = $4525
This is still less than your investment, and its before we discount it to present value! After we do that (at 4%) we get about $4000. This is a bet with a 20% house edge. Still not worth it. We've even made a completely untenable assumption! It really just comes down to that you need better terms. Just out of curiosity did the business plan pass the conservatism test? (Are they insuring their equipment? What are they reserving against broken equipment?) A lottery ticket is also a fantastic investment if you win. I don't know whether the numbers from the business plan are reasonable, but I do know that they aren't good enough to justify an investment! If you were getting 2-4% for $5000 it'd be more interesting. If you had more downside protection it'd be more interesting.
adamwoods - I finally understood your valuation explanation! Hooray for me.
I also left out a key piece of info: the operating agreement includes this amazing promise that I could voluntarily disassociate and get my money back.
So using your valuation logic I'm going to split total failure into 2 categories: I see it coming and pull my money out or I don't see it coming
Failure I see coming: probability = 25% * $5000
Failure I don't see : probability = 25% * $5000*(15% + 7%) 7% is for state tax. I assume I could write that off state tax too.
Moderate dividend : probability = 40% * $170/yr*10yrs + $5000 Assume after things go fine for 10 years I get my $5,000 back
Full success dividend probability = 10% * $1700/yr*10yrs + $5000
Total = $6405 before going to net present value...but some of that is in the present day dividend assumptions. some is not. its messy.
This math is crazy optimistic. Something like 80% of small businesses fail in the first year. And of those that don't fail quickly, only some portion are actually profitable. 50% failure over 10 years is rose-colored glasses.
Don't you know that if there are four options and you're not capable of making an informed choice then the probability of each of them happening is 25%?
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good point dsmexpat. that makes my messy calc = $8590.
bobw, thanks for the reasonable response
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they've raised some but not all which is why there's still at least $5,000 worth for sale.
there's more to the story than a bunch of guys trying to brew some beer and make millions, but i'd rather not spill all the details since it's not publicly available info.
There's more that's needed to really give you an answer.
Year 3 projected revenue = $2.9M
Year 3 projected profit = $332k
Year 3 dividends at 0.5% ownership = $1.66k. 33% of initial $5,000 investment. Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.
Are they already in operation?
Otherwise, thats mostly useless.
I can project anything on a business that doesn't exist. All too often with breweries the above isn't the case.
The founders have 50% of the shares and draw $35,000/yr salary. They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment. So there are $500,000 of real dollars being invested. And $500,000 worth of founders "sweat equity" I think you'd call it.
Their "sweat equity" isn't worth $500,000 if they're drawing a salary. It's worth $35,000.
Hows the business structured? What's your risk with being responsible for debt if it goes under?
How is the $180,000 loan secured? If they're securing it, then they deserve some equity for the risk. If they're not, they don't.
adamwoods - I finally understood your valuation explanation! Hooray for me.
I also left out a key piece of info: the operating agreement includes this amazing promise that I could voluntarily disassociate and get my money back.
So using your valuation logic I'm going to split total failure into 2 categories: I see it coming and pull my money out or I don't see it coming
Failure I see coming: probability = 25% * $5000
Failure I don't see : probability = 25% * $5000*(15% + 7%) 7% is for state tax. I assume I could write that off state tax too.
Moderate dividend : probability = 40% * $170/yr*10yrs + $5000 Assume after things go fine for 10 years I get my $5,000 back
Full success dividend probability = 10% * $1700/yr*10yrs + $5000
Total = $6405 before going to net present value...but some of that is in the present day dividend assumptions. some is not. its messy.
You won't be pulling anything out if there isn't anything to pull out. Which is the most likely outcome by the time you realize it's failing.
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I also left out a key piece of info: the operating agreement includes this amazing promise that I could voluntarily disassociate and get my money back.
How does this work? Things start looking like they are going south so you can get your money back? Wouldn't everyone do the same thing and then the business immediately goes under, and there isn't enough money to pay it back?
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Hows the business structured? What's your risk with being responsible for debt if it goes under?
This is the most important question in the thread. Very much looking forward to hearing the answer.
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adamwoods - I finally understood your valuation explanation! Hooray for me.
I also left out a key piece of info: the operating agreement includes this amazing promise that I could voluntarily disassociate and get my money back.
So using your valuation logic I'm going to split total failure into 2 categories: I see it coming and pull my money out or I don't see it coming
Failure I see coming: probability = 25% * $5000
Failure I don't see : probability = 25% * $5000*(15% + 7%) 7% is for state tax. I assume I could write that off state tax too.
Moderate dividend : probability = 40% * $170/yr*10yrs + $5000 Assume after things go fine for 10 years I get my $5,000 back
Full success dividend probability = 10% * $1700/yr*10yrs + $5000
Total = $6405 before going to net present value...but some of that is in the present day dividend assumptions. some is not. its messy.
That is a key piece of info, however I'm pretty skeptical that if business is going poorly the operator will be able to pay out $500K. I say $500K because I don't see why you'd be the only one pulling out if bankruptcy looked imminent. Does this clause apply to everyone? If they start with $500K and lose money, how will they pay everyone back $500K? If they're making money why are you pulling the money back out?
Regarding the getting your money back in 10 years, where are they going to get the money to pay out a half million dollar dividend in year ten if they've been paying out *all* of the profits?
Also I get:
$5000 * .25 + $5000 * .25 *.22 + $170 * (Reasonable P/E multiple of 5) * 0.4 + $1700 * (Reasonable P/E multiple of 5) * 0.1 =
$1250 + $275 + $340 + $850 = $2715 of value in year 3
We then add in that dividend to be paid in year 10:
$5000 * .5 = $2500.
Discount the year 10 dividend back to present at 4%:
$1700
Discount the year 3 value back to present at 4%:
$2413
That totals to $4113, this is still less than $5000. Perhaps you could argue that a P/E of 5 is too harsh. Maybe it is. The real question here is what does your friends balance sheet look like? Who is backing up this guarantee? Are you the only one that gets the guarantee? Are you getting bought out at $5000 in year ten? Where is that money coming from?
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The OP stated that there's more to it than what he's told us. Therefore:
From what you've told us, it's obviously a bad investment. Very obviously so. I'd say the odds of a success, based on what you've told us, are around 5-10%. Based on that, I wouldn't invest at more than 1x earnings in year 3 in their "successful" scenario.
Do you have any reason to believe that they have a decent shot at success that you have not mentioned here? If so, how material is it? How much of it depends on you trusting your friend's word?
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They're planning on getting a sba 7(a) loan.
https://www.sba.gov/7a-loan-program
Yes, a "run on the bank" is a big potential problem
The main reason I'm considering investing is I think they have a good idea that will do well in our region, and they are good people to pull the idea off. Even the worst breweries around us with beer that's not tasty seem to do well. So I really don't think this would fail outright. I think most probable scenario is there's much smaller profit than they want.
I think of the $1M valuation from the founders perspective as:
We the founders need $500k to start the brewery for upfitting, equipment, licensing and marketing, and operational loss before break even. After break even and there are some profits, the 2 founders get 1/2 the profit, and the rest of the profit is distributed to shareholders. Yes we could build a dinky brewery with a dinky taproom for less than $500k, but we don't want to make a dinky one. We want a nice one because this area would support it. So since we want 1/2 the profit, that means $500k/(1/2) = $1M.
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That is the worst rationalization I've ever seen for valuation. I would be very scared to do business with people with that kind of business acumen. "We need a million dollars, so the business is worth that."
If they need that kind of money for a business and can't offer it themselves or secure a loan they need to offer a higher percentage of the business to investors.
I'm still of the opinion that if you want to give your friends $5,000 to have fun with, go for it.
But if you were looking at this from an investment prospective, it is a terrible deal.
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Since it's pretty clear to me you want to go forward and "invest" despite all of the reasons enumerated on here for why not, then I'd suggest that you at least take all of this advice to help the founders come up with a better business plan (and hopefully in the process, more realistic targets and valuation).
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The main reason I'm considering investing is I think they have a good idea that will do well in our region, and they are good people to pull the idea off. Even the worst breweries around us with beer that's not tasty seem to do well. So I really don't think this would fail outright.
Survivorship Bias - the single greatest fallacy in investing (http://forum.mrmoneymustache.com/investor-alley/survivorship-bias-the-single-greatest-fallacy-in-investing-35417/):
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You must remind yourself that when you start to pick apart winners and losers, successes and failures, the living and dead, that by paying attention to one side of that equation you are always neglecting the other. If you are thinking about opening a restaurant because there are so many successful restaurants in your hometown, you are ignoring the fact that only successful restaurants survive to become examples. Maybe on average 90 percent of restaurants in your city fail in the first year. You can’t see all those failures because when they fail they also disappear from view.
As Nassim Taleb writes in his book The Black Swan, “The cemetery of failed restaurants is very silent.” Of course the few that don’t fail in that deadly of an environment are wildly successful because only the very best and the very lucky can survive. All you are left with are super successes, and looking at them day after day you might think it’s a great business to get into when you are actually seeing evidence that you should avoid it.
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I think of the $1M valuation from the founders perspective as:
We the founders need $500k to start the brewery for upfitting, equipment, licensing and marketing, and operational loss before break even. After break even and there are some profits, the 2 founders get 1/2 the profit, and the rest of the profit is distributed to shareholders. Yes we could build a dinky brewery with a dinky taproom for less than $500k, but we don't want to make a dinky one. We want a nice one because this area would support it. So since we want 1/2 the profit, that means $500k/(1/2) = $1M.
Ignorance confirmed. They have $500,000 in debt, and want half the profits, so therefore the company is worth 1 million? So I guess if they took on $5 million in debt, their company would be worth $10 million? You don't see anything wrong with that?
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I think of the $1M valuation from the founders perspective as:
We the founders need $500k to start the brewery for upfitting, equipment, licensing and marketing, and operational loss before break even. After break even and there are some profits, the 2 founders get 1/2 the profit, and the rest of the profit is distributed to shareholders. Yes we could build a dinky brewery with a dinky taproom for less than $500k, but we don't want to make a dinky one. We want a nice one because this area would support it.
This sounds like a justification for a $500k valuation.
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OP, you clearly are not on this forum looking for advice. You have already decided to give these people your money (note that I didn't use the term "invest"). That's fine. It's your money and you can do what you want with it. But you are making an emotional decision and not a financial one. That is your right to do. I think literally every poster has advised you of the lack of sound financial basis for making this decision. That seems to be pretty clear. You are welcome to do things with your money that don't make financial sense. Just be aware of why you are doing this. Go into this knowing that you are giving (not investing) your money to these people. And depending on how the liability is designed, you may be giving more than your original gift. And they may ask you for another gift in the future. And they may ask you to gift more of your time to bring in business. Just be prepared for all of this. If you want to do something emotionally pleasing with your money, this is one option. If you want to make an investment with your money, find another business with a more favorable financial picture, or buy VTSAX. For your own sake, and for the sake of whatever relationship you have with the potential business partners, know the real reason why you are doing this if you are going to do it. It will save you angst and damaged relationships going forward.
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Ignorance confirmed. They have $500,000 in debt, and want half the profits, so therefore the company is worth 1 million? So I guess if they took on $5 million in debt, their company would be worth $10 million? You don't see anything wrong with that?
Man, you've just given me the BEST business idea. Would anyone like to buy shares?
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So since we want 1/2 the profit, that means $500k/(1/2) = $1M.
I find this math bewildering.
If they want 1/2 the profit and they only need $500k... then why don't they bring $250k to the table and give the other $250k its fair share?
In fact, they are bringing $200,000 to the table, and they want others to bring $300k to the table. That entitles them to 40% of profits. In addition, they are getting paid $35,000 each per year for their labor. I have the sneaking suspicion that the business will also be paying their loan payments. So no need for any premium for "sweat equity" or guaranteeing the note.
They want that extra $300k of investment capital to only entitle people to half shares. On a percentage basis, then, their 200k bought them 57% + salary + loan payments, while other people bought 43% with their 300k. Their only justification for this set up is that they want to have more profits, so that's the way it is.
A reasonable set up would be that their $200k buys 40% ownership, they get a salary for their labor. If you're feeling generous, you could argue that the business pays the interest (but not the principal) on their note for a certain number of years (5, maybe, which is enough time for it to get successful and start paying dividends).
Ultimately - $5000 isn't a lot of money. Just please, please, please carefully examine the business structure and the loan terms and ensure - for your own protection - that your responsibilities regarding that note are nil.
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Microbreweries are near and dear to my heart, and if I were at $500K NW and $5K/mo savings, I'd totally go in for $5k on a friend's brewery - assuming they were competent and experienced, and I could drink for free in perpetuity. I wouldn't even do it for the return, but if they offered a return, I'd still want it to make sense. The $1M is just too arbitrary. Let's go ahead and assume that whatever your friends have invested (money, or time before they became salaried workers) is worth half a mil, which is... your call, really. You have the trade secrets we don't. I'll keep things simple, and assume that part is legit. Your $5k still shouldn't be pegged at .5% unless and until there's a million invested.
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Just read that there are 3400 breweries in the US and 2000 more in the planning stages...
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My recommendation is to give him the money with an agreement for free or discounted beer in the future and a handshake agreement that he'll give you your money back when he becomes a millionaire (not likely to happen, but it will make everyone feel good).
Many others have commented legitimate valuation and business concerns. They're all correct.
An equally important aspect to you is your friendship. You've stated that you'd be fine if he lost all your money. That's all well and good. But stop and consider how your friend would feel towards you if he lost your entire investment and he felt responsible for it. Even if you're okay with it, he shouldn't be. That will impact your friendship.
Trying to pretend it's an investment when it's really a gift is a recipe for misunderstanding and resentment.
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Hi ac -
I'm going to be positive and assume the brewery is a good idea executed by competent people that have an edge or something. The valuation and structure is a bit concerning but I'll assume at least one of them has experience in this regard.
For comparison, in the countryside we often get investment banks from the city put together deals and then let private investors locally invest. These deals are often (but not always) real-estate, and the structure similar to a convertible bond, such that your money is effectively tied up for the term, you are drawing a dividend from year one, and at the end of the term there is often some kind of option to receive back your principal or convert it into shares in the company. The dividend is usually between 8-15%, depending on the length of the term, risk, etc.
I haven't seen a microbrewery come up but I have seen term sheets for similar businesses (eg cheese factory - moderate initial capital requirements, high markup product, mildly seasonal, etc). Invariably they are structured similarly, whereby they pay a dividend that would almost cover the entire cost of your investment over the term (in nominal amounts), and give you the option to receive your principal back or retain a share in the company.
I know it's too late now but this would seem a fair option for future investments, or at least to give you a framework with which you could start thinking about any given investment.
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In the UK companies like this can apply for tax relief which means investors can claim 30 - 50% tax relief on their investment and also tax relief against the remained if the company goes bust. So if investing 10k and the company busts then the most I would lose would be 3k after tax reliefs. Do you have any similar incentives for investing in startups in the US?
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Thanks all for the helpful thoughts.
Dungoofed: I think your cheese example sounds similar to my friends' upcoming brewery EXCEPT: my friends are offering shareholders a share of the profits. The cheese guys are offering a specific dollar amount dividend/share whether or not there is a profit. Correct?
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Just read that there are 3400 breweries in the US and 2000 more in the planning stages...
How cool is that! Should be good for Springfield MO where they weld a lot of brewing tanks.
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Yes we could build a dinky brewery with a dinky taproom for less than $500k, but we don't want to make a dinky one.
This imho is the scariest thing you've said so far. Only because it's exactly what the folks from the story I told a little earlier (lost house, wife, working 80hr weeks to continue losing money) were saying. Successful businesses start small with low capital requirements. They went in big early. The manager had ~10 years of experience brewing and 20+ years running a profitable business. Is this your friends first real business?
Have a dinky taproom and reinvest profits to scale up. Once you have proven that your friend can make beer at scale then worry about getting bigger. This whole thing is crazy, for $820,000 of equity and a loan of $180,000 you could just buy a profitable brewery and your friend could run that. Why in the world would you want to build a new one from scratch when its a coinflip for them to lose everything?
If you or they are just going to do this come hell or high water, I'd be happy to give their business plan a free consultation. Have them shoot me an email with some sort of non-disclosure agreement. My email is my username and I'm at gmail. Have them put something specific in the subject line so I don't lose it.
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My recommendation is to give him the money with an agreement for free or discounted beer in the future and a handshake agreement that he'll give you your money back when he becomes a millionaire (not likely to happen, but it will make everyone feel good).
This seems like the best way to go, and probably what I would do if I were in the situation. If (IFF!) I thought they had a great plan and the skills to even have a remote chance of pulling it off (>20% would be good in the brewery business) I'd gladly hand a friend $5k (or similar small part of my NW) with the promise of free beers and maybe a an agreement to give me $10k if/when he's a multi-millionaire, or something like that. Might not happen, but could be fun to pay attention to and see how it goes. I'd like to be able to stop by "my brewery":)
But it does not sound like this operation has much chance of success at all, so in that case it'd skip it, even with promise of 10% or 20% of the profits!
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Yes we could build a dinky brewery with a dinky taproom for less than $500k, but we don't want to make a dinky one.
This imho is the scariest thing you've said so far. Only because it's exactly what the folks from the story I told a little earlier (lost house, wife, working 80hr weeks to continue losing money) were saying. Successful businesses start small with low capital requirements. They went in big early. The manager had ~10 years of experience brewing and 20+ years running a profitable business. Is this your friends first real business?
Have a dinky taproom and reinvest profits to scale up. Once you have proven that your friend can make beer at scale then worry about getting bigger. This whole thing is crazy, for $820,000 of equity and a loan of $180,000 you could just buy a profitable brewery and your friend could run that. Why in the world would you want to build a new one from scratch when its a coinflip for them to lose everything?
If you or they are just going to do this come hell or high water, I'd be happy to give their business plan a free consultation. Have them shoot me an email with some sort of non-disclosure agreement. My email is my username and I'm at gmail. Have them put something specific in the subject line so I don't lose it.
I said something very similar about 50 posts ago. Startups start in a garage or a basement, working nights and weekends, continually improve their product, foster a following, increase demand, building positive cash flow, and then scale up, step by step, making sure to not outgrow their market. Otherwise you do stupid stuff that doesn't work and you lose a million bucks of your friend's money because you thought something would be cool instead of knew it would be profitable.
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Yes we could build a dinky brewery with a dinky taproom for less than $500k, but we don't want to make a dinky one.
This imho is the scariest thing you've said so far. Only because it's exactly what the folks from the story I told a little earlier (lost house, wife, working 80hr weeks to continue losing money) were saying. Successful businesses start small with low capital requirements. They went in big early. The manager had ~10 years of experience brewing and 20+ years running a profitable business. Is this your friends first real business?
Have a dinky taproom and reinvest profits to scale up. Once you have proven that your friend can make beer at scale then worry about getting bigger. This whole thing is crazy, for $820,000 of equity and a loan of $180,000 you could just buy a profitable brewery and your friend could run that. Why in the world would you want to build a new one from scratch when its a coinflip for them to lose everything?
If you or they are just going to do this come hell or high water, I'd be happy to give their business plan a free consultation. Have them shoot me an email with some sort of non-disclosure agreement. My email is my username and I'm at gmail. Have them put something specific in the subject line so I don't lose it.
I said something very similar about 50 posts ago. Startups start in a garage or a basement, working nights and weekends, continually improve their product, foster a following, increase demand, building positive cash flow, and then scale up, step by step, making sure to not outgrow their market. Otherwise you do stupid stuff that doesn't work and you lose a million bucks of your friend's money because you thought something would be cool instead of knew it would be profitable.
I was thinking the same thing. I'd recommend they read The Lean Startup (http://www.amazon.com/The-Lean-Startup-Entrepreneurs-Continuous/dp/0307887898), and make an MVP (Minimum Viable Product) before throwing their money away.
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Year 3 projected revenue = $2.9M
Year 3 projected profit = $332k
Year 3 dividends at 0.5% ownership = $1.66k. 33% of initial $5,000 investment. Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.
As a small investor in a successful(IMHO) craft brewery, I will tell you that those numbers are rather optimistic.
6-7 years in, around 7-8k bbl/year, and not at 2 million in revenue (no food).
Also, the J-curve is pretty heavy. I would say it took ~4-5 years before there was actual net-net profits that were paid out. Depreciation, investments in new equipment, accounting... it adds up. But now that we are passed that, we can reap the benefit of high margins on a product that doesn't really cost that much to make (per/pint).
Anyway, I would say they are asking for a lot with a million dollar valuation already. What are they bringing to the table (other than projections) that justifies it? I would want extensive background on their experience and a whole lot of trust in the founders (if they have more than 50%, guess who can give themselves a nice raise from the 35k/yr). Not just on their brewing ability, but also on follow-through and previous careers. Even then, it's a coin flip that they catch on in a beer market that has a lot of good choices.
+1 My husband just started working at a brewery, he's the 4th employee. There's the owner, owner's friend who does marketing and things (who is still working at his regular job), and a full time brewer with previous commercial brewing experience in the Midwest. The owner is planning on making money through distribution at the moment; there is a small tasting room with a bit of food (thank state law for that) but all the production is based on getting put on tap elsewhere and being sold through beer distributors. They are focusing on distributing one beer right now, and selling four at their location. I know the owner made VERY conservative estimates about growth in determining how much in loans he could afford, how long to expect to go either without a salary or a super tiny one, etc. Right now he's doing a lot of networking. $2,000,000 in revenue in 3 years is insane. There aren't any outside investors but now that they have cash flow going they're buying more equipment to meet big demand (yay!). So profits aren't going to happen for several years.
I would pay the $5,000, ask for 1% ownership, and consider it a bit of fun and supporting your friend. This is in no way an investment.
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I invested in a start-up distillery, so know where you’re coming from.
Some questions I’d ask about the founders
1) Would you consider them highly ethical, conscientious and detail oriented?
2) Are they extremely hard workers?
3) Do they have a good nose for how to run a business?
4) Do they have experience in the particulars of this industry?
If the answer is no to any of those questions, then this investment is an easy pass.
Why are the founders only investing $20k? That’s peanuts into a $1mm business. I’d like to see more skin in the game, especially if they’re drawing a salary from day 1. As is, they’re just getting friends and family to fund their dream. That’s an amazingly sweet deal for them, but not for you.
Do you know other potential investors? If so, you can act as in investor syndicate and negotiate better terms. Never take the initial terms as the first and last word.
Consider being a second funding round investor. These businesses need additional capital with high regularity either in the form of more equity capital or more loans. You can sit on the sidelines and see if this gets traction before committing a dime. The chance that this thing is a run-away success is much lower than you think.
The business structure sucks. I’d read a few other offering memorandums from start-up businesses like this to get a feel for how they’re commonly structured. At the very least, I’d insist that the 50% investor shares needs to be paid back in full before management shares draw profits. You may also insist on a cumulative preferred dividend as well.
Others have joked about it, but I’d seriously insist on a contractually defined “beer dividend”. You’ll most likely never see a dime from this investment, so I’d be damn sure I at least see some beer. ~$500 retail value per year strikes me as a good number.
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I actually have some experience with this...my friends and I from college started an LLC in 2008 with the intention of starting a brewery, with one of the members of the LLC being the head brewer. 10 of us total kicked in $300 a month into a brokerage account, which we invested until we had a large enough nut to start a brewery. Long story short, life happened (kids, houses, etc) so we modified our plan and invested in 2 startup breweries instead. In both cases we did combo debt/equity investments, with 5-year promissory notes with coupons of 8 and 10% secured (in writing) against several conditioning tanks. In both cases the breweries dramatically underestimated the permitting requirements, start-up time, cash flow, etc, and have had to raise additionally equity. While both subsequent equity raises didn't dilute minority shareholders and the stock priced above our buy-in price, I consider it a long shot about ever getting our equity back unless the breweries are purchased by a big brewing concern. As a minority shareholder, you have little in the way of access to company profit because you lack decision making ability. Moreover, in one case, the majority owner has racked up a ton of construction debt for tenant improvements not related to brewing, but more just trying to make the brewery appear as catnip for bearded hipsters, and there's not much the minority shareholders can do. Luckily, both breweries have been able to meet their debt obligations to our LLC, albeit one is several months behind on payments.
If we had to do it again, my group would go 100% debt, rather than any equity. Let me know if you want anything more in depth, and I can email you the specifics of the breweries, their capacity, time to positive cash flow, etc.
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This looks like the early stages of one of the disasters on a show like The Profit.
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I actually have some experience with this...my friends and I from college started an LLC in 2008 with the intention of starting a brewery, with one of the members of the LLC being the head brewer. 10 of us total kicked in $300 a month into a brokerage account, which we invested until we had a large enough nut to start a brewery. Long story short, life happened (kids, houses, etc) so we modified our plan and invested in 2 startup breweries instead. In both cases we did combo debt/equity investments, with 5-year promissory notes with coupons of 8 and 10% secured (in writing) against several conditioning tanks. In both cases the breweries dramatically underestimated the permitting requirements, start-up time, cash flow, etc, and have had to raise additionally equity. While both subsequent equity raises didn't dilute minority shareholders and the stock priced above our buy-in price, I consider it a long shot about ever getting our equity back unless the breweries are purchased by a big brewing concern. As a minority shareholder, you have little in the way of access to company profit because you lack decision making ability. Moreover, in one case, the majority owner has racked up a ton of construction debt for tenant improvements not related to brewing, but more just trying to make the brewery appear as catnip for bearded hipsters, and there's not much the minority shareholders can do. Luckily, both breweries have been able to meet their debt obligations to our LLC, albeit one is several months behind on payments.
If we had to do it again, my group would go 100% debt, rather than any equity. Let me know if you want anything more in depth, and I can email you the specifics of the breweries, their capacity, time to positive cash flow, etc.
Bingo. This describes my experience almost to a T, and I think is very typical of this type of startup.
If anyone thinks the equity is going to take any distributions in the first 5-10 years, they probably need to re-calibrate expectations dramatically. It's the nature of the beast that a growing business always has a list of 100 things it would love to spend money on, so writing checks to investors is low priority. It's far more likely that you're going to be hit up for more money than receive a distribution in the early to mid stages. The equity is really more of a very long term option that will eventually pay out 10x+ on a sale or 0 (most likely).
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I actually have some experience with this...my friends and I from college started an LLC in 2008 with the intention of starting a brewery, with one of the members of the LLC being the head brewer. 10 of us total kicked in $300 a month into a brokerage account, which we invested until we had a large enough nut to start a brewery. Long story short, life happened (kids, houses, etc) so we modified our plan and invested in 2 startup breweries instead. In both cases we did combo debt/equity investments, with 5-year promissory notes with coupons of 8 and 10% secured (in writing) against several conditioning tanks. In both cases the breweries dramatically underestimated the permitting requirements, start-up time, cash flow, etc, and have had to raise additionally equity. While both subsequent equity raises didn't dilute minority shareholders and the stock priced above our buy-in price, I consider it a long shot about ever getting our equity back unless the breweries are purchased by a big brewing concern. As a minority shareholder, you have little in the way of access to company profit because you lack decision making ability. Moreover, in one case, the majority owner has racked up a ton of construction debt for tenant improvements not related to brewing, but more just trying to make the brewery appear as catnip for bearded hipsters, and there's not much the minority shareholders can do. Luckily, both breweries have been able to meet their debt obligations to our LLC, albeit one is several months behind on payments.
If we had to do it again, my group would go 100% debt, rather than any equity. Let me know if you want anything more in depth, and I can email you the specifics of the breweries, their capacity, time to positive cash flow, etc.
Bingo. This describes my experience almost to a T, and I think is very typical of this type of startup.
If anyone thinks the equity is going to take any distributions in the first 5-10 years, they probably need to re-calibrate expectations dramatically. It's the nature of the beast that a growing business always has a list of 100 things it would love to spend money on, so writing checks to investors is low priority. It's far more likely that you're going to be hit up for more money than receive a distribution in the early to mid stages. The equity is really more of a very long term option that will eventually pay out 10x+ on a sale or 0 (most likely).
Especially since the people running the business are already paying themselves a salary for their labor (so their pockets are filled), and control 50+% of the shares, and can vote themselves any raise they want. There's no need for dividends ever, except as a tax-reduction strategy in the very small chance that this business becomes really profitable.
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Especially since the people running the business are already paying themselves a salary for their labor (so their pockets are filled), and control 50+% of the shares, and can vote themselves any raise they want. There's no need for dividends ever, except as a tax-reduction strategy in the very small chance that this business becomes really profitable.
Right. The only scenarios where you're likely to get paid are if the business is sold, or it's profitable and runs out of growth initiatives. Both scenarios are probably 10+ years out, and unlikely to happen at all.
To the OP: From purely an investment standpoint, this deal is probably a disaster unless there's some angle you're not sharing (like the founder's father-in-law is the state's biggest beer distributor, or something of that nature). If the purpose is primarily the ability to brag to friends that you're part owner of a brewery, then I guess only you can put a value on that. If these guys are truly your friends, you should be able to hang with them and swill the occasional brew regardless of your investor status. In fact, investing might just make things awkward (especially when they hit you up for another $5k for a second round of financing - wait for it, it's coming).
Not trying to rain on the parade, but trying to establish some realistic expectations.
I'll add that if you're hoping that this investment will bring you closer to your brewer buddies, it probably won't. If the business fails, they'll resent you for turning down future investment rounds (and possibly even blame you for their failure) and you'll resent them for pissing away your $5,000. In the unlikely event that the business succeeds, believe it or not, they might resent their investors who own 50% of the company that "they built". It's sort of a lose-lose. Simply being a good customer is your best bet.
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Terrible investment. It sounds like you have too much surplus money lying around and want to throw it at something. Just because you have the money doesn't mean you should start throwing it at bad investments. Be smart with your money.
If brewing beer sounds fun and you want to be a part of it then save your $5000 and when you've hit financial independence you can quit you job and spend all day at the brewery helping them out and tasting samples.
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If I was given the choice of the following two options:
- Investing $5000 in your friend's brewery.
- Investing $2500 in US T-Bills and setting the remaining $2500 on fire.
I would choose option #2.
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If I was given the choice of the following two options:
- Investing $5000 in your friend's brewery.
- Investing $2500 in US T-Bills and setting the remaining $2500 on fire.
I would choose option #2.
Can I watch?
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I had a very similar opportunity last year except they valued it at 1.2million- 1% share cost @ 12k. 3 owners who have 20% ownership each and will not take salaries for first 3 years. The other 40% is owned by investors like myself and we have an anti-dilution clause and some other safegaurds.
I went ahead and bought some shares; however, there were some different justifications:
The location that they have opened in is extremely prime. Tap room has been full every night since opening about 3 months ago (I made the initial investment last year) and it *should* continue to flourish. This was the major cost of the initial investment.
The craft beer market has not been saturated in this area yet and there are only 2 other competitors in the area none with current plans to be medium scale distributors.
Income comes from tap room until wholesale contracts are in place this year currently- at 15barrel system with plans to expand to a 30barrel system if/when sales are steady at 3000bbls/yr
They have the brewing licenses- a huge step for this business.
The brewmaster is well known and has several brewing awards from around the nation
One co-owner has opened and owns a successful similar business in another state (he has some experience)
Agreements had been reached for medium scale distribution in local grocery stores/shops on opening of the 15bbl system.
The business model is "green" something that people love forking money over for nowadays and they advertise this well (and practice it too).
The amount invested fell within my gambling portion of my account- I will not miss it if all is lost - I think this is key because I don't plan on seeing any shareholder dividends for a little while....
Again I think it could have been a foolish "investment" if I didn't just consider it an all or nothing "gamble".
Oh and they provided free kegs for my sister's wedding and the wife and I get free beer when we visit (part of the contract).
Once concern I do have is the area that they are opening in has a typical craft beer cost of $5- seems a little low to me but I guess the lower price brings people in the door...
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I work at a small brewery/large-ish brewpub (3000bbls/year)
Just as a counterpoint to some of the posters suggesting that breweries start smaller.
500k to 1M dollars will get you a small brewery. Sure you can go smaller than that, glorified homebrew equipment, but the economies of scale are working against you and you will never have enough to reinvest into anything to grow the business. A batch of beer takes 6-8 hours to brew whether I make 5 gallons of 5000 gallons.
Depending on the setup they are planning you can usually make 7bbls work with your own retail taproom, or 15bbls work for distrubution. I've seen smaller examples work for both, but they require extremely tight budgets, operating with far less than ideal equipment and nearly 10 years before they are ready to upgrade.
Recently I would say a large percentage, possibly a majority of places opening have been nano/hobby/undersized breweries. I don't exactly fear for a bubble, but these breweries will not last. They are not viable businesses from the start. If people want to run a brewery for a few years because they think it would be fun more power to them, but you're likely to lose less money simply homebrewing and giving it away if you like to put a smile on someone's face with your beer.
The most recent local closure in my area admitted at closing time that no one had drawn any salary from the business. They were running a 3bbl system and their own retail tap room on the weekends.
Now, with all that said, what are your friends level of experience? Being a homebrewer does not mean you can brew on a commercial level. In fact the brewing and recipe development are one of the smallest time portions of the work. What is their mechanical background? Can someone weld? The work is not glamorous, it has its perks of course and with the right mindset can be fun, but when a chiller goes down on a Friday afternoon and you're ready for the weekend you aren't gleaming with pride about being a brewer.
I would land where several others have landed if I had to settle on giving advice. If you'd like to give 5k to a friend in exchange for some beer considerations and maybe some money back later, go for it. Just keep in mind that 5k is a miniscule amount of money in a brewery. That's about a weeks worth of COGs for us. It won't buy you any decent sized fermenter that I know of, and odds and ends parts necessary to operate the brewery will add up into the thousands quickly.
Tell you friends to plan for and expect delays and then when they still get delayed beyond that at least they'll only be 6 months off instead of a year off their targeted opening. Tell them to figure out their numbers and then add 25-50% to their startup costs. Then rerun the numbers and see if it still works.
You may very well be in a prime area for a new brewery, and obviously without more details it is impossible to pass a full judgment. Just be aware that breweries are definitely one of those businesses where the saying "how do you make a small fortune in (insert business), start with a large one" applies.
Cheers!
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If I was given the choice of the following two options:
- Investing $5000 in your friend's brewery.
- Investing $2500 in US T-Bills and setting the remaining $2500 on fire.
I would choose option #2.
Can I watch?
http://en.wikipedia.org/wiki/K_Foundation_Burn_a_Million_Quid
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I had a very similar opportunity last year except they valued it at 1.2million- 1% share cost @ 12k. 3 owners who have 20% ownership each and will not take salaries for first 3 years. The other 40% is owned by investors like myself and we have an anti-dilution clause and some other safegaurds.
I went ahead and bought some shares; however, there were some different justifications:
The location that they have opened in is extremely prime. Tap room has been full every night since opening about 3 months ago (I made the initial investment last year) and it *should* continue to flourish. This was the major cost of the initial investment.
The craft beer market has not been saturated in this area yet and there are only 2 other competitors in the area none with current plans to be medium scale distributors.
Income comes from tap room until wholesale contracts are in place this year currently- at 15barrel system with plans to expand to a 30barrel system if/when sales are steady at 3000bbls/yr
They have the brewing licenses- a huge step for this business.
The brewmaster is well known and has several brewing awards from around the nation
One co-owner has opened and owns a successful similar business in another state (he has some experience)
Agreements had been reached for medium scale distribution in local grocery stores/shops on opening of the 15bbl system.
The business model is "green" something that people love forking money over for nowadays and they advertise this well (and practice it too).
The amount invested fell within my gambling portion of my account- I will not miss it if all is lost - I think this is key because I don't plan on seeing any shareholder dividends for a little while....
Again I think it could have been a foolish "investment" if I didn't just consider it an all or nothing "gamble".
Oh and they provided free kegs for my sister's wedding and the wife and I get free beer when we visit (part of the contract).
Once concern I do have is the area that they are opening in has a typical craft beer cost of $5- seems a little low to me but I guess the lower price brings people in the door...
Thanks for sharing this. This seems like a well thought through approach to investing. It's still risky and speculative, but there seems to be a lot there that makes it a better investment.
Is the business profitable yet? How long did/is it expected to take for that to happen?
Once profitable, how are profits being dealt with? Invested back into the business, dividends, both?
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Thanks for sharing this. This seems like a well thought through approach to investing. It's still risky and speculative, but there seems to be a lot there that makes it a better investment.
Is the business profitable yet? How long did/is it expected to take for that to happen?
Once profitable, how are profits being dealt with? Invested back into the business, dividends, both?
The business plan showed a small profit for this year with nice looking profits on years 2-3; however, the business plan is just a glorified estimate and I won't really know anything until the reports come out- will update once I see something. The plan was to not make any real profit (from the brewing) until 4Q15 but from what I understand the retail sales are going great- I havn't seen any real numbers though :-/
The owners plan on using some of the profits to prepare for the 30bbl system upgrade. The plan is to pay out an annual steady dividend of some value- though with startups these plans always change. They are also not opposed to going for another round of funding for phase 2 which is why the anti-dilution was important- we will be issued additional new shares to be compensated for our diluted shares if that does happen.
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The owners plan on using some of the profits to prepare for the 30bbl system upgrade. The plan is to pay out an annual steady dividend of some value- though with startups these plans always change. They are also not opposed to going for another round of funding for phase 2 which is why the anti-dilution was important- we will be issued additional new shares to be compensated for our diluted shares if that does happen.
This is unusually strong. How does this work practically speaking? If no current owners can be diluted, then how does a new equity investor gain a stake? I suppose management could sell their own shares, but that would be a horrible deal for them if they're getting diluted while other investors retain their full stake.
Generally, a second round will comes as a "rights offering" whereby initial investors have the first opportunity to invest more in the business. In this way, they can retain the same percentage stake, but will have to invest on the same terms as everyone else to do so.
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Have you tasted any beer he has made?
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AC, I'm guessing you already cut your friends (?) a check.
If not, consider that there are more options than "No...crap, I'll be left out if I don't donate" and "Yes, here's my money to fulfill your desire." Examples:
1. "I'm not in now, but keep me posted. If you ever reach a point where different terms are offered, I might give it a second look."
2. "My time is probably worth more than my money. Let me put in some of that sweat in return for some of that sweat equity." (you'd be an insider...)
3. "If you don't complete this round of financing, let me know. Maybe I can help you better then, whether with cash or with advice." (the price might be better at that point; or enough data might appear to change your mind)
4. "Do you have any customers yet? I pledge to be your first customer."
There are more, but I'll stop.
I financed a friend's business idea for a few thousand bucks. He had no serious business plan, and it showed. During his descent into undeclared bankruptcy, he withdrew from friendship because he felt he needed to "work on the business" instead of talk...until it was too late and he had to quit in embarassment, stiffing all investors and all suppliers. Your pals may get more benefit from you staying in touch proactively as a non-investor than they will from the cash they think they want right now.
Best of luck regardless!!
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Potential amount = $5,000. It's less than 1% of my net worth, and I think it'd be fund and potentially lucrative in the long run. It would be my first time with private equity (not publicly traded).
The only way of getting a return on the investment is via annual profit sharing. I'd own 0.5% of the business, so I'd get 0.5% of the true profits (after expenses, servicing loans, etc).
i have the business plan and operating agreement. shares cost the same amount for everyone. profit sharing goes by how many shares you own. they're taking out a $180,000 loan.
The founders have 50% of the shares and draw $35,000/yr salary. They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment. So there are $500,000 of real dollars being invested. And $500,000 worth of founders "sweat equity" I think you'd call it.
I'm not going to make any big predictions but I broke out my 4-function calculator and noticed a problem.
You're paying $5000 for a 0.5% share; so $10,000 for every 1%.
They are investing $20,000 (cash) + $180,000 (loan) for a total of $200,000 and get 50%; so $4,000 for every 1%.
You mention the shares in the company cost the same amount for everyone but that is clearly not the case; you seem to be paying 2.5 times more for your share of the company than they are.
Here is a nice article I found - How Funding Works – Splitting The Equity Pie With Investors (http://fundersandfounders.com/how-funding-works-splitting-equity/)
Have they registered the company so that they can issue shares?
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AC, I'm guessing you already cut your friends (?) a check.
If not, consider that there are more options than "No...crap, I'll be left out if I don't donate" and "Yes, here's my money to fulfill your desire." Examples:
1. "I'm not in now, but keep me posted. If you ever reach a point where different terms are offered, I might give it a second look."
2. "My time is probably worth more than my money. Let me put in some of that sweat in return for some of that sweat equity." (you'd be an insider...)
3. "If you don't complete this round of financing, let me know. Maybe I can help you better then, whether with cash or with advice." (the price might be better at that point; or enough data might appear to change your mind)
4. "Do you have any customers yet? I pledge to be your first customer."
There are more, but I'll stop.
I financed a friend's business idea for a few thousand bucks. He had no serious business plan, and it showed. During his descent into undeclared bankruptcy, he withdrew from friendship because he felt he needed to "work on the business" instead of talk...until it was too late and he had to quit in embarassment, stiffing all investors and all suppliers. Your pals may get more benefit from you staying in touch proactively as a non-investor than they will from the cash they think they want right now.
Best of luck regardless!!
Nope - I have not invested yet.
To give you an idea of how well craft beer is doing in my area: I tried to buy a growler fill last Friday from a small brewery, and the response I got was "We only fill our own growlers, so you'll have to buy one for $3. And we don't fill them with our most popular beers." So I went to a different brewery to buy a growler fill using my own growler.
Point is, yes, the craft beer market here is very hot. So hot they make it hard to buy their dang beer. Because they can.
+1 to lithy on not starting too small of a brewery.
Maybe I'll ask for a beer dividend.
I had a very similar opportunity last year except they valued it at 1.2million- 1% share cost @ 12k. 3 owners who have 20% ownership each and will not take salaries for first 3 years. The other 40% is owned by investors like myself and we have an anti-dilution clause and some other safegaurds.
I went ahead and bought some shares; however, there were some different justifications:
The location that they have opened in is extremely prime. Tap room has been full every night since opening about 3 months ago (I made the initial investment last year) and it *should* continue to flourish. This was the major cost of the initial investment.
The craft beer market has not been saturated in this area yet and there are only 2 other competitors in the area none with current plans to be medium scale distributors.
Income comes from tap room until wholesale contracts are in place this year currently- at 15barrel system with plans to expand to a 30barrel system if/when sales are steady at 3000bbls/yr
They have the brewing licenses- a huge step for this business.
The brewmaster is well known and has several brewing awards from around the nation
One co-owner has opened and owns a successful similar business in another state (he has some experience)
Agreements had been reached for medium scale distribution in local grocery stores/shops on opening of the 15bbl system.
The business model is "green" something that people love forking money over for nowadays and they advertise this well (and practice it too).
The amount invested fell within my gambling portion of my account- I will not miss it if all is lost - I think this is key because I don't plan on seeing any shareholder dividends for a little while....
Again I think it could have been a foolish "investment" if I didn't just consider it an all or nothing "gamble".
Oh and they provided free kegs for my sister's wedding and the wife and I get free beer when we visit (part of the contract).
Once concern I do have is the area that they are opening in has a typical craft beer cost of $5- seems a little low to me but I guess the lower price brings people in the door...
How did the 3 owners get their 20% each? By putting money in? Or something else?
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I have to echo the poor valuation.
I find it very hard to believe a brewery startup being worth 1MM+ even if it owned a serious operation including all necc equipment to scale, and the building/land + distribution established.
I have a lot of friends who have started startups or work for them, and SMB that focus on one product and have little assets are valued way more conservatively than large business.
Just a rule of thumb, such a business might be valued at 1-2x annual revenue, thats revenue, not cash flow.
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bluecheez's example - the 3 founders there are getting actual sweat equity. No salary for 3 years. That's how they get 60% between them. Another way to look at it is each of these guys compensation is 6.66% of the business per year for the first 3 years. Obviously a huge incentive for them to do everything they can to make the deal profitable - if this thing tanks, they get nothing for 3 years of work, likely a lot of work.
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bluecheez's example - the 3 founders there are getting actual sweat equity. No salary for 3 years. That's how they get 60% between them. Another way to look at it is each of these guys compensation is 6.66% of the business per year for the first 3 years. Obviously a huge incentive for them to do everything they can to make the deal profitable - if this thing tanks, they get nothing for 3 years of work, likely a lot of work.
OP, this is one reason why people were saying that your potential majority partners aren't getting "sweat equity" since they are getting paid a decent salary regardless of performance of the business.