Capital raising pros and cons
Brewery lawyers, Ramsden Lawyers, offer advice on the pros and cons of different capital solutions when starting your brewery…
Opening a brewery can be a costly experience. It is important to ensure that you have adequate financial capacity to fund your planned operations.
Most new breweries are self-funded by owners or funded through external sources such as investors, loans or crowdfunded (either ‘rewards-based’ or ‘equity-based’). Each option has its advantages and disadvantages – we discuss each briefly below.
Option 1: Self-funded by owners
The least complex and most straightforward arrangement.
Pros: You are the owner – meaning no loan repayments, no interest payments and no shareholders or investors to manage. This is a simple and straightforward means of funding your brewery.
Cons: Breweries are expensive! You may find it financially onerous to fund everything on your own, it may not be the best use of your money i.e. you could have your money invested elsewhere.
Tip: Ensure that you properly structure your business to minimise tax obligations and to mitigate legal risk. This may require incorporating a company (or multiple!) and/or establishing a trust.
If you are going into business with others (even if they are family!), it is important that you have the arrangement properly documented with a Partnership Agreement or a Director and Shareholder Agreement tailored to your circumstances.
Important things to consider include – Who is responsible for what? Who pays for what? Who is liable for what? What if someone wants to leave / sell/ becomes sick or dies?
Option 2: ‘Traditional’ financing
The most common method. Banks and other financial instructions often fund new and expanding businesses.
Pros: This type of financing allows you access to capital upfront and over time, allowing you to open and expand operations. There are a few different types of finance whether it be a line of credit, standing overdraft or specific finance arrangements (i.e. a number of companies offer specific brewery equipment finance). Applying for and obtaining bank finance is typically a straight-forward process that can occur in a relatively short timeframe.
Cons: You will be liable for interest repayments! You may also be required to provide collateral or personal guarantees. It is also not unusual for some financial instructions to only fund operating businesses who have demonstrated cashflows.
Tip:Seek advice about structuring your personal affairs ahead of applying for finance. There are legal ways to ensure that your assets (i.e. your house) are protected should you default under your finance facility.
Option 3: Funded by investors
More complex than being self-funded. Generally, investment is by way of ‘angel investment’ or ‘venture capital’, which are both forms of private investment that involve investors giving money to the business in exchange for some form of ownership (generally shares in the company i.e. ‘equity’ and/or a right to have a say in business decisions).
However, investment can also be through ‘private capital raising’ options utilised by the company.
Pros: Fast/easy access to money. Can be on terms more favourable than that offered by banks/financiers. The funding arrangement can be tailored to the business (i.e. if money is required upfront, overtime or at certain events).
Tip:If you plan to raise capital privately, it is vital that you comply with legislation in particular as to how you plan to raise money, who from, how much and how you will advertise the raise. Penalties can apply if you fail to comply with the legislation.
Cons: You have to manage your investors! This may include providing accounts or seeking their consent for certain activities if they are a shareholder. Most investors will want to have a say in business decisions. Some investors will only invest on inflated terms. Depending on your arrangement with your investor, you may have to repay amounts at certain times, give up a share in your company, pay dividends, provide security for the investment or provide personal guarantees.
Tip:Ensure that your investor arrangement is properly documented with a Loan Agreement (or similar if the investor is not becoming a director or shareholder) or a Director and Shareholder Agreement (if the investor is becoming a director or shareholder).
Option 4: Funding by a lot of investors i.e. ‘Crowdfunding’
Increasingly, breweries are opting to raise capital through crowdfunding campaigns, both ‘reward-based’ and ‘equity-based’.
Crowdfunding has been available in Australia for a number of years in one form or another. Traditionally, crowdfunding has been limited to charitable or ‘rewards based’ campaigns (i.e. if you invest $x, the company will give you a reward usually a limited release t-shirt or beer etc.).
In late 2018, legislation changed allowing private (i.e. Pty Ltd) companies to offer ‘equity’ crowdfunding. Equity crowdfunding allows the general public to buy shares in the company.
Pros: Businesses can ‘crowdfund’ up to $5,000,000 in any 12-month period (subject to eligibility and a range of other criteria). Crowdfunding means your business receives funding while being widely advertised through campaign marketing. Investors who take part in crowdfunding campaigns often become loyal customers and advocates for the business!
Success Stories:UK based BrewDog famously crowdfunded their breweries (called ‘Equity for Punks’). In Australia, others have followed suit including Black Hops Brewing, Endeavour Brewing Co, Your Mates Brewing and Dainton Brewery.
Cons: A crowdfunding campaign requires a lot of work! You will be required to prepare documents (including company financials and accounts), undertake extensive marketing, manage the campaign, respond to investor queries etc. The company must do what it said to investors that it would do with the money raised (within reason). You will need to manage a lot of investors. This may require a lot of interaction with investors and may make seeking consent for certain activities onerous.
Tip:Ensure that your business is structured appropriately for a crowdfunding campaign and that your Offer Document (i.e. the document made public) are compliant with legislation. Penalties can apply if you fail to comply with the legislation.
The above is a short list of matters relevant to funding a brewery and should not be relied on as specific advice for you or your circumstances.
You should seek professional advice in relation to any of the above. Ramsden Lawyers are experts in beverage law and regularly advise clients on compliance matters.
If you produce beer, wine or spirits and have queries or concerns about your operations, please contact one of our expert beverage lawyers.
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