Business Basics

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

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

3. Question • What is business?

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

5. Advantages and disadvantages of different forms of small business ownership • Four types of ownership

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

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

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

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

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

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

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

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

14. Tell me “Why” • Start with Why

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

16. Make Your Mark Ken Grossman Jim Koch

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

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

19. Stand Tall • Do you have: • Generosity • Forbearance • Curiosity • Appreciation • Wisdom

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

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

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

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

24. Talk to Me • Describe this

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

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

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

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

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

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

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

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

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

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

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

36. QUESTIONS?

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

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

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

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

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

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

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

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

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

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

47. Choosing an Accountant • Services • Personality • Fees

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

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

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