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Advice for brewers: Funding business growth

Whether you are looking to invest in new equipment, hire more people or move to a new site, you may be thinking about ways of finding funding to grow your business. 

Recent transaction activity has shown appetite in the market for acquisitions and investments into UK craft beer, particularly in relation to partial or full sales to trade and crowdfunding. But while the sector remains active, it is worth considering the options available now to take advantage of the strong consumer market and grow your brand as quickly as possible. 

Last month, Australian headquartered Lion acquired 100% of the shares in Fourpure, just five years after brothers Dan and Tom founded the brewery. The sale marks the conclusion of a competitive process and also the fifteenth transaction that Dan has been involved in. Dan sold his first company, UKSolutions, to private equity-backed Six Degrees Group in 2011, following which he was involved in a 'buy and build' strategy that saw Six Degrees acquire thirteen more companies. 

Before the sale, Fourpure considered crowdfunding, private equity and bank debt as ways of raising funding so Dan is well placed to provide an industry perspective on the key advantages and disadvantages of each.  

Selling a stake to a trade buyer

This involves the shareholders of a brewery selling some or all of their shares to a trade buyer (a buyer in the same industry as the brewery being sold, such as Lion in the case of Fourpure), who will have the resources to invest in the brewery moving forwards. 

The buyer will first want to complete due diligence, which is the process of investigating a company to find out as much as possible about the company and its business, assets and potential liabilities. The buyer can then decide whether it wants to proceed with the purchase and, if so, on what terms (especially in relation to price). 

The sellers (the owners of the shares being sold) need to provide a lot of information at an early stage of the process, by responding to the buyer’s information requests and uploading documents to an online ‘data room’ including: 

Company information – statutory books (the registers that a company needs to keep by law e.g. a register of shareholders and directors) and articles of association.
Financial and tax – accounts (statutory and management) and any information requested by the buyer’s accountants.  
Banking – loans, overdrafts and charges.
Contracts – material customer and supplier contracts. 
Employees – employee details, contracts, policies, disciplinary or grievance processes and employment disputes.  
Pensions – current scheme(s), auto enrolment compliance and contributions.    
Assets – fixed and leased assets (e.g. equipment leases).  
Intellectual property – owned or used (e.g. trade marks and domain names) and any disputes over brand protection. 
Information technology – hardware and software owned or used (and related contracts). 
Data protection – including compliance with the General Data Protection Regulation. 
Property – freehold and leasehold land (and any disputes).
Planning – applications and permissions granted. 
Litigation – ongoing, threatened and resolved (within a set period).  
Consents and compliance – e.g. a trade effluent and feed assurance scheme. 

Due diligence can be very time consuming if the information is not readily available so it is worth organising the above information now if a sale is likely in the future. An option for sellers is to complete ‘vendor due diligence’ ahead of a sale, which involves going through a due diligence exercise to pull together the necessary information and deal with any gaps or issues (e.g. updating or preparing statutory books) before a buyer gets involved. This makes the process quicker and easier once it gets started and will present the business as being on top of its compliance and record-keeping requirements.

Advantages

A trade buyer offers resources to invest in equipment, people, premises and safety. With Lion’s investment, Fourpure is planning to increase brewery capacity, invest in its people and champion safety. It is unlikely that Fourpure would have been able to raise the amount of money required through bank debt or asset finance, Dan says, as banks “will not lend to the necessary debt ratio on the basis of future projections” and the “challenge” with asset finance is to “get good interest rates and loan to value ratios in this market”. 
Benefit of technical experience and skills. 
Possible additional distribution channels, such as new international markets (depending on the buyer). 
As they are in the same trade, they should understand the business and its market and can help with due diligence and price expectations.  

Disadvantages

The due diligence process can be time consuming, although preparing beforehand should help. Dan explains that the Fourpure team had “built the business with good back end systems that allowed for the extraction of data” when the time came.  
Large trade buyers are also “only likely to do one meaningful transaction in craft in the UK”, in Dan’s view, limiting the number of possible acquisitions in the future. 
Possible negative reaction in the market (depending on the buyer). 

Private equity investment

A private equity investor will provide funding for growth in exchange for shares, with the aim of selling their shares to a trade buyer, another investor or on the stock market within three to five years of investing (what is called an ‘exit’). Craft breweries are “high growth and on trend” so of interest to private equity, Dan explains. 

A private equity investor will also conduct due diligence but in Dan’s experience their focus will be slightly different to that of a trade buyer. A trade buyer will be particularly interested in “infrastructure and brand” but a private equity investor’s focus is “all about meeting the business plan”. A trade buyer is also more likely to “take a view” on certain due diligence issues that are common to the industry as they will have more subject matter expertise to evaluate the risks. 

Advantages 

A private equity investor offers resources and experience to accelerate growth, including adding experience to the board. 
They will want to see a strong return on their investment on exit so have a vested interest in making the brewery as profitable as possible.  
They have a “hands off” approach that does not interfere with the running of the business when all is going well, in Dan’s experience. 
Management remains in control of the day to day business. 

Disadvantages 

Not in the industry so not providing technical or operational skills.
A medium rather than long-term investment as investors will look to exit and make a return in three to five years ideally. 

Crowdfunding

Equity-based crowdfunding typically involves a large number of individuals investing small amounts of money in exchange for shares, such as the recent fundraising campaign by The Five Points Brewing Company. 

The process usually involves working with one of the crowdfunding platforms, such as Crowdcube or Seedrs, to set up a profile setting out who you are, why you need funding and how much you are looking to raise so that potential investors can decide if they want to invest in your company. This is known as the 'pitch' stage. 

The company's articles of association will need to be amended before the process starts if these do not already provide for a separate class of shares that will be offered to investors. These are usually different from the existing founder shares and may be non-voting ‘B’ shares without pre-emption rights (the right of first refusal to prevent dilution before new shares are issued). It is also sensible to include ‘drag along’ rights to allow the existing (‘A’) shareholders to force the ‘B’ shareholders to sell their shares if a third party wanted to buy the brewery in the future.  

The Financial Conduct Authority’s ‘financial promotion’ rules mean that crowdfunding platforms will not open a page to the public unless they have verified that every statement is ‘fair, clear and not misleading’ and substantiated by evidence. This verification process can take time, particularly if breweries are not aware of the various requirements when first drafting their pitch page. 

It is also worth noting that there are different types of crowdfunding available, including rewards-based crowdfunding. This is where, instead of receiving shares in the brewery, individuals invest money in exchange for unique rewards such as exclusive discounts or brewery tours and events, with the type of reward depending on the level of funds they invest.  

Advantages 

Crowdfunding can offer non-voting shares with limited rights (equity-based crowdfunding) or invite investment without having to offer shares at all (rewards-based crowdfunding). 
Increased brand awareness and loyalty, both during and after a campaign. 
Particularly successful or creative campaigns can attract significant media interest. 

Disadvantages 

In Dan's opinion, it is difficult to raise a large amount of money unless a brewery has a “significant retail operation to engage people at grass roots level”, such as Brewdog. Dan added that Brewdog is unusual for crowdfunded breweries in offering a “secondary market in its shares” (through the Asset Match platform).
Most campaigns are aimed at “the same universe of people”, in Dan’s view, who may not have the appetite to keep investing in the same sector and might seek to diversify their risk outside of craft beer.
Crowdfunding requires “ongoing maintenance” of a very wide investor base, Dan added. 
The verification process can take several months to complete. 
There are administrative difficulties associated with having a large number of shareholders, particularly on a future sale or investment, as well as ongoing communication requirements. 

Conclusion

Given the various funding options available, breweries should carefully consider the advantages and possible disadvantages of each in light of their short and long-term objectives and seek appropriate professional advice in relation to the legal formalities involved before proceeding.

Author: Holly Evans, corporate solicitor 

This article was first published by The Brewers Journal. 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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