How To Structure A Small Business Investment Offering In 943 Easy Steps

My elite legal team on Isle of Man is working 24 hours a day to finish up my investor legal documents, which I've given an overview of previously. You'll probably want to read that post before or immediately after this one as it gives a very brief description of those documents. So what does investing in Panic Alarmist Brewing, LLC or any LLC mean exactly? Investing in a publicly traded company is something many of us are familiar with. Investing in a privately held LLC is something quite different. I can only speak somewhat intelligently about my investment structure, but there are many, many ways to do this. Here we see Panic's projected first year profits. No expense will be spared to keep said profits safe, as long by safe you mean in a large bottle in the middle of an unnamed desert.

First let's get to the big question: what does an investor get for their investment? In other words, how does an investor make money? I'm glad you asked! An LLC doesn't have shareholders with shares per se, they have "Members", and Members have "Interests" instead of shares. I'm a Class A Member, my investors will be Class B Members. Any annual net profits less reserves/operational cash is what my legal documents call "net cash flow". Basically, I have a net profit, I subtract out whatever I think Panic Alarmist needs to maintain for operational cash flow, future expansion, etc. What's left is net cash flow. Net cash flow is divided between the Class A Member "pool" and the Class B Member "pool". In my case, I am the sole Class A Member. The Class B Members will share the Class B pool proportionally based on each member's investment amount. So naturally someone who invests $20,000 will get twice as much money as someone who invests $10,000. The big decision to make is how do you split that pool between Class A and Class B. In my case, Class A represents 67% of the company, Class B represents 33%. This is based on what percentage Class B Members total investment dollars represent to the entire start up amount required. So it would seem that you simply split the moolah up like that and you're done!

Well, not quite. Small businesses are a pretty risky investment, even craft breweries, so it behooves you to make the deal as enticing as you can in order to not have to spend 27 years seeking investors. There are many ways to do this. One way is to offer a larger share of the entire business. Another is to accelerate the payback to the Class B Members until they recoup their original investment, and that's exactly what Panic Alarmist is doing. Until each investor recoups their original investment, net cash flow will be split 20/80 Class A/Class B. That means 80% of net cash flow will go into the Class B Member "pool". This allows investors to recoup their initial investment much more quickly and is a nice reward for taking the risk when they could have put their money in historically safer investments.

But wait, there's more! First, understand that an LLC has something called "pass-thru taxation". This means that any net profits are added to each Member's taxable income proportionally based on their investment. Each Member will receive a K-1 form indicating the taxable amount (I have an accountant who will take care of this during tax time each year). Pass-thru taxation is good because company profits aren't taxed and then followed by a capital gains tax for each Member.  In other words, LLC's don't suffer from double taxation. So here's the cool part. If there's a loss, and there definitely will be during Panic's (now named Alarmist) first year of operation, each Member will be able to lower their taxable income for the year. Based on the advice from my crack legal team in the Cayman Islands, until Panic Alarmist Brewing Class B Members recoup their original investment, they will divvy up 90% of the losses, Class A will only get 10%. That means bigger tax deductions for Class B Members. Now, I'm not an accountant and I'm sure things are not quite as simple as I've written, so please, please consult with an account or an attorney on these matters. I'm only relaying what I think I've learned.

Once Class B Members recoup their original investment, the percentage of net cash flow will flip to the aforementioned 67% for Class A and 33% for Class B and that will remain in place until forever. By forever I mean until a Class B Member decides to sell their interests, in which case the Operating Agreement and Private Placement Memo clearly lay out how that happens. In my case, Class A Members (me) will get right of first refusal to purchase those interests at a negotiated price. Should I choose not to purchase those interests, the Class B Members will then have the right to buy them. Again, this is all described in detail in my Operating Agreement and PPM.

One consideration that any investor interested in something like this should understand, and it's very important that the managers/owners of the LLC explain this, is that profits do not automatically equal a cash distribution to the funding pools. As I mentioned earlier, "net cash flow" as defined in my documents (and this is typical from what I understand), as net profits less operating cash flow and any other amounts management deems necessary to maintain the health and growth of the business. In other words, if in year two, Panic Alarmist has a net profit of $300,000, much of if not all of that amount will very likely stay in the company's bank account in order to have a nice safety buffer for monthly cash flow (the #1 killer of small businesses!) and to use through out the following year for expansion. Brewing is a capital intensive business. Growth = more fermenters, more construction, new equipment. And of course more employees to help with that growth. I see this as a good thing however. Allow the company to grow now and reap the rewards of more profits down the road. Not everyone might understand this, so it's important to explain that very clearly. Investors looking for quick returns on investment might do well to look elsewhere.

One other item related to the previous paragraph. In the same example, if Panic Alarmist were to make a net profit of $300,00 in year two and distributed none of it, the profits would still be reported as income for each member proportionally based on their investment amount. That means all members could have a tax liability or at least an increase in income tax. The solution to this problem is for the LLC to disburse at least enough funds to the Class A and Class B pools to cover the additional tax liability. However, this may or may not be possible based on the cash flow requirements and growth plans of the business. Do you buy another couple of fermenters to increase your production which would return significantly more profit down the road, or do you instead disburse the money to negate any tax liabilities for the Members? Well, that's something you'll have to figure out and you need to address that in your operating agreement and PPM. I've handled it by basically stipulating that Panic Alarmist will try to disburse funds to cover increased tax liabilities, but not necessarily. That will be a judgement call I'll have to make. I don't want to dramatically hurt the growth and health of the business, but I also don't want to saddle my investors with a tax burden. This is something I'll figure out as we go along and work with my investors to reach an amicable solution. Remember, any money not invested back into the business has a cost in the long (and maybe not so long) term.

There is much more to LLC investment than just cash distributions. There are voting rights, limitations on transferability of Class B interests to other parties, management rights, and lots of other considerations. I'll try to go into those topics at some point in a later post. Let me stress that this is but one way to do this. I know of another Chicago based brewery who relied mainly on promissory notes to raise their start up cash. As I understand it, that's basically a loan with interest paid at an agreed upon rate to the lending party. This has the advantage to the owners of not having to give up any equity in the company. One disadvantage of this approach is having the ability to make those payments on time without harming operational cash flow and such.

My philosophy is that I am sharing this journey and I think anyone who is willing to risk their hard earned money with someone like me who has never run a small business, let alone a brewery, should have the potential to reap some nice rewards for the long term. Hope this helps anyone thinking about taking on investors for whatever venture they might be planning and hopefully clarify some things for potential investors.

Cheers, G

Where You At?

Chicago Craft Beer Week is over and what a week it was! My favorite part of the whole week was meeting new Panic Alarmist fans and admirers. I've lost count how many people came up and thanked me (I was wearing my Panic T-shirts all week) for sharing so much and offering wonderful words of encouragement at the four events I attended. My wife, Bridget, who isn't usually a big beer festival fan, accepted that beer events would be a part of our lives from now on and joined me for all of them. She really got to see first hand how much all this work I've done has started to pay off and she's more excited than ever to get this brewery up and running. And as usual, people liked my wife more than they liked me. I'm used to it. This is what I hope to be the home to Panic Brewing. There's lots of space, but the other tenants are either a bit insular, pregnant, or dead.

Let me start with the biggest news thus far: I've found a space I'd like to lease. I like it a lot. It's almost perfect. I say it's "almost" perfect as there are some potential zoning issues I'm trying to hash out with the alderman's office for the location. I want to be able to open a retail store first, and then a tap room down the road. There could be some problems with the current zoning, but like everything else, it will all work out. As much as I'd love to reveal the address, I can't let the cat out of the bag just yet. There's a lot that has to happen before I can sign the lease and it will definitely be several weeks or more before the deal is done, but I REALLY want this space. I'll gladly share the ins and outs of leasing once I have it signed.

Another big deal for me was opening a business checking and credit card account, which I did last week. Yes, it's easy to do (you need to be a registered business entity with your state and get your EIN from the IRS, which is easily done online here), but I had put it off as I thought it might be an additional expense I wasn't ready to take on yet. Turns out, it's pretty cheap and actually free if you maintain a certain balance. An easy task, but it's checked off the list, and that's a good thing.

Now, the big question is, where is Panic Alarmist now in the process? It seems like I'm always saying, "almost ready to fund raise", or "finishing up the legal investment documents". Well, I'm almost ready to fund raise. I'll officially begin once we finally finish up the legal documents. I spent 2 hours on the phone with my attorney last week to go over the damn near final versions of the operating agreement and PPM. We've agreed to have these 100% completed by mid June. Monday, June 17 to be exact. I'm sure I'll have to go through at least a couple more reviews before then, but that is my focus right now. I want this shit done NOW!

I have some final tweaking to the business plan that I will be finishing up over the next two evenings and then that's it. No more business plan changes. Over the past couple of months I've received some new equipment quotes and learned some new info that has allowed me to make some pretty significant changes to my financial analyses ranging from start up costs to ongoing monthly costs. Some changes are required due to how some banks underwrite loans. I'll go into painful detail on bank loans, especially SBA backed ones once I have my loan in place.

Let me go into my business plan process real quick. I finished the plan months ago. Since then I've made numerous revisions both big and small. This is how I operate. When I am learning something new, I iterate over and over until at some point I feel comfortable with the result. I'm not looking for perfection with the business plan, but I'm definitely looking to not commit any egregious errors. Perfect example: there are so many things that could go wrong during the construction process that my costs could be way beyond what I've budgeted. I've tried very hard to mitigate that. But at some point, you have to let it go, roll the dice, and do your best. Most people would've started the dice rolling much sooner than me. That's ok. Everyone is different and I'm very comfortable with how I learn and execute. It's now time to execute.

So here's kinda how the rest of this story unfolds, as I see it:

  1. I get the completed investor documents from my attorney (which is my current primary focus)
  2. I contact all the folks who've expressed interest in investing (there are quite a few), email them the operating agreement, PPM, and some other stuff.
  3. We meet or talk on the phone, I answer any questions investors may have. (more on this when the time comes, which is SOON)
  4. Investors invest, money goes into an escrow account and stays there until a certain funding level is reached
  5. Once a certain funding level is reached, I continue my conversations with the banks I've been dealing with. They see I have investor money and personal investment, they analyze the business plan, they approve, the SBA agrees to guarantee it, loan gets funded. This takes several weeks.
  6. As soon as the loan is funded, I order equipment. Brew house and fermenters require about 6 months to arrive.
  7. Also, as soon as loan is funded, lease is signed. This will take a few weeks of negotiation.
  8. Once lease is signed, contractors allowed to bid, contractors hired, work is completed. How much and what type of work will depend on the space I lease.
  9. On the day the lease is signed, I will submit my paperwork to the TTB (Federal agency in charge of breweries amongst other things). I will have begun completion of this paperwork way before this. TTB approval takes about 2 months. Could be more, could be less.
  10. Once TTB approval is received, I can then start the Illinois state approval process which can take up to 2 months. It would be nice to start this process in parallel with the TTB, but that would make Illinois business friendly.
  11. Construction finishes, equipment is installed, licenses all received, brewing begins.
  12. Beer is brewed, packaged, and sent to a distributor in the Chicago area. I will not be self distributing.
  13. Once operations are smoothed out and cash flow is good, I'll begin the process of opening up a retail store or tap room, depending on zoning and Chicago liquor license bull shit.

So, that's the plan. There are lots of mini tasks in there as well, but this is a good overview of what's involved yet. From the day I get the loan, we're looking at at LEAST 6 months to opening day, most likely 7 or 8. Who knows?

But this I can promise you, it's moving along better now than ever before. It feels very real and there's no stopping.

Last note: My latest batch of Panic Pale Ale is finally in the ballpark of what I'm looking for. There's a lot of tweaking yet to do, I'll be experimenting with some hop schedules, but it's close. Very close.



When Is Alarmist Brewing Going To Open?

In this artists rendering, the City of Chicago will look much like this by the time Alarmist is operational. Fortunately by then we'll be able to transport beer directly to customers via the "Ionic-Suds-O-Particleizer 3000".

In this artists rendering, the City of Chicago will look much like this by the time Alarmist is operational. Fortunately by then we'll be able to transport beer directly to customers via the "Ionic-Suds-O-Particleizer 3000".

Ahhh, the eternal question. Second most popular question we get after "Where is the brewery going to be located?" and "Do I have to call the police on you again?". I've been blogging this journey since October 11, 2011. You would think this thing would be up and running right? I remember back when I first started thinking about opening a brewery. I foolishly assumed that the entire process would take a year. Youth is wasted on the young.

Here's the deal. Nate and I have been presented with an awesome opportunity that will make this journey a lot easier and cheaper. We can't divulge all the details yet as there are many things that need to happen to make it come to fruition. It will no doubt add a few extra months to our timeline, but it will be totally worth it, trust me. We're calling this new development "Plan A". We spent hours coming up with that name. Nate initially wanted to call it "A Plan" but I pointed out that he was stupid and he agreed. Our original plan is now entitled "Plan B". Nate also wanted to call that plan "A Plan". Again I pointed out his stupidity and then he parried with "Plan B". Touché Nathan Barth, touché. We will one day do battle again and you will not be let off so easily.

Regardless of which plan ends up working out for us, and one of them definitely will, we won't be opening doors until early 2014.

The reasons for this timeline are quite simple: new equipment requires at least 6 months to be manufactured and delivered, business loans require 2-3 months of processing and analysis (especially SBA ones, according to our sources). We can't buy the equipment until we have secured the loan. Then there are construction timelines, but those in theory would run in parallel with the equipment manufacturing. Oh and the leasing process. That takes some time as well. And then there are some other events that need to occur prior to all of these, adding some extra months as I mentioned previously.

Nate and I have really started to get the loan process figured out and we've begun to reach out to all the potential investors who've contacted us over the past 18 months or so. So all the financing stuff, the most important part of this process, is really starting to come together. Our ability to get a loan looks fantastic and it appears we won't have much trouble getting enough investors on board.

I can tell you that between now and opening day, we will be very, very busy. There are so many things we need to do and there will be very, very few lulls during the run up to opening day. We have to update our branding, figure out package design, finish our recipe formulations and trials, conduct investor meetings, legal documents need finalizing (including partnership stuff which is new to the game), planning our hop contracts, the list goes on.

Nate is as big of a fan of having one's ducks in a row as I am and we are both ruthlessly researching numerous aspects of opening a small business. I can tell you that once we are open, we will have rock solid legal and financial foundations so that we can immediately get to the task of what this is all about: making great beer and getting it to customers.



Screw Glaciers! Panic Is On The Express Train!

Funny how things change in just a few weeks. Two weeks ago, I couldn't stop wearing pantyhose and now I want nothing to do with them! No wait, that's not what changed! I mean, yes it did. No, no...oh never mind!

What's really changed is that my glacial pace, as mentioned here, has become more of a missile-like pace! A high speed bullet train-like pace! A Millennium Falcon-like pace! Some other analogy regarding something really quite fast-like pace! One reason for this change is that with the increased rate of global warming, glacier references won't be very meaningful to people who should happen on this blog in a couple of years. Another reason is, well, I'm in my zone and it's time to finish this up. I have beer to brew and people who want to drink it! At least I hope people want to drink it.

First, let me explain that even though I'm not blogging every day or even every week or even every year (it seems), I am constantly writing quick status updates on the Panic Alarmist Brewing Facebook page. So if anyone is interested in very up to date news, that's the place to be. If you're not interested in reading what I had for breakfast or why Panic Alarmist will not be brewing any beer with turnips, well, I can't say I blame you.

Now, onto the news....

Here's what I've done since the last brewery related blog post (not the post about correspondence, that one is boring):

  1. Worked with my attorney to finish up the operating agreement. It is now 99% completed. There will be amendments once the financial picture becomes clearer, but the hard part is almost complete.
  2. Hired a CPA to review the financial statements in my business plan for accounting accuracy (balance sheet, profit and loss statement). I will also be hiring her for all general accounting and tax issues for Panic Alarmist as well. She has my latest business plan in her possession and I should have that wrapped up next week.
  3. Received feedback from my CPA and made lots of tweaks and changes to my financial analyses. Most changes were simply accounting related, but I want to ensure that any would be lender or investor is confident in my business plan, and that confidence is directly proportional to the accuracy of the business plan finances.
  4. Requested and received an updated quote from DME, one of the brewing equipment manufacturers I'm strongly considering. They are the manufacturer of choice by no less than three brand new breweries here in Chicago and all three breweries have told me nothing but good things about them. I also have a lead time from DME as of yesterday. That lead time is 18-20 weeks, meaning the amount of time from the date I order to the time it arrives. Pretty typical timeline and not as long as some other manufacturers.
  5. Started the real estate search. That's right, you heard me. Real estate. The location of Panic Alarmist Brewing. The answer to the most oft asked question about Panic Alarmist will soon be answered. I am searching for a space to lease somewhere on the North/Far North/Northwest/Far Northwest side of Chicago. Nothing fancy, just your standard commercially zoned area. I have a commercial real estate agent looking for me. We'll be doing our first tour tomorrow. I'm very excited.
  6. Decided that Panic Alarmist will definitely have a retail store before a tap room. Eventually both, but due to probable capital limitations (the bane of all start ups) at the outset, I will only be able to do one or the other. After talking to Gabriel and Matt, owners of Half Acre Beer Company, which has both, it became obvious that the retail store was the way to go. I think when they said, "Retail store, not even close" was probably what won me over. Why a retail store first? Revenue. Money. Cash inflow. I'm going to be a nervous wreck until this brewery is cash flow positive and then profitable. Until that time, I will be focusing on figuring out how to maximize revenues. Based on Half Acre's experience, a retail store generates much more revenue than a tap room because of sheer volume. Fear not, there absolutely will be a Panic Alarmist tap room, but first I gotta make sure the business is healthy.
  7. Decided to begin a new fast recipe prototyping process with 1 or 2 gallon batches using "brew in a bag". I spent a couple hours working out the water calculations in my fancy brewing spreadsheet that I've been using for a couple of years. Now I simply click the "Brew in a Bag" check box and all volumes convert automagically. This involves using a single brew pot for both the mash tun and kettle. No sparging, no pumping. I'll ferment in growlers which will allow me to try different yeast strains, fermentation temperatures, and/or dry hop schedules. I'll then bottle/carbonate the finished beer in 22 oz bombers. I thought of doing this months ago and finally getting around to doing it. Should be interesting.
  8. Received the first draft of the Panic Alarmist Brewing PPM (Private Placement Memorandum) from my attorney. This is the second of three documents required to execute the LLC member interest offering. That's the correct legal term for "investors" in an LLC.

Lots of big stuff happening all at once. Yes, it's stressful, yes I'm busy, but I love it and this train isn't stopping until the beer is brewing. There is oh so much more to share and I will when I can. Again, for quick updates, check out the Panic Alarmist Brewing Facebook page.



Where We Are, Where We're Going

I've been very bad about posting updates. I'm in kind of a transitional phase in this monstrous process. Finishing the business plan (which will require some additions and some modifications to the numbers) was a great feeling, but after I completed it I realized this: shit just got real. Working on my business plan seemed like the biggest hurdle in the world. Now that it's completed, it's really dawned on me that from here on out things are going to get very real and very busy. This is indeed the calm before the storm. I always knew this would be the case, but I was inside the business plan bubble and not really focusing on the next steps. That time has come. So the three biggest tasks ahead are also three of THE biggest ones of the entire process. Money, money, and finding a suitable location to lease.

First, money. I require two sources of capital to get this brewery running: debt and equity. Debt means a bank loan. In order to get the bank loan, which will be north of $400,000, I will need to present the business plan. Before I do that however, I need to register Panic Alarmist as an LLC with a federal tax id and such (I'll get to that in a second). This will be a very interesting challenge and one I don't know a lot about yet. Once I meet with the different banks, I'll definitely post what I learn.

My esteemed attorney.

Second, money. Equity means selling equity shares to private investors in order to raise money for operating cash flow, construction, and other expenses that a bank won't loan me money for. See this post for info on that. In order to offer equity, I require legal documents. These documents spell out precisely the terms of the offering including things like what the investor gets for their investment (a picture of me mashing without pants), whether or not they'll be allowed to sell the shares (they won't), and what my role is in the business. Here's what I can tell you about the legal stuff thus far: it's really fucking expensive. If you are thinking about moving into a career as a brewer or brewery owner, stop right now and apply to law school. Work for 10 years, then open a 300 bbl brewery with all the pocket change you have in your Armani suits. Lordy. I've accepted the fact that it's expensive, but it took about 48 hours for it to sink in. But guess what, it's just another problem to be solved. I'll pay an attorney a princely sum, get the documents I need, get the investors on board, then the ship sails to brewery land!

Third, location. I have no idea where the brewery is going to be exactly. I'm pretty confident that it will be on the far north or northwest side of the the city. It needs to be a reasonable commute for me plus all the other features that I would like or require. I discussed that briefly in this post. Once this part really gets rolling, I'll post everything I find out. I've been doing lots of online research on TIF districts, which are special areas in Chicago that provide city funded rebates for improvements to property. These rebates are quite significant as in $100K+ but they require a multiple step process, which will be a thrilling ride, I'm sure.

As I mentioned above, before I can secure a bank loan, I will have to get Panic Alarmist registered as an LLC and have a federal and state tax id. In order to get those tax ids, the business has to be a formal legal entity. This process will happen very, very soon. As in next couple of weeks soon. I may do it through an attorney or I might just do it myself. I'll find out more next week. I'll announce that little milestone when it's completed.

Finally, I will not be able to advertise on this site when I'm officially looking for investors. Them's the rules. That's all I can say.

So that's where we are. Make no mistake, this process is about to get very, very intense very very soon. I think I've written that several times before, quite prematurely. Well, we're here now. I cannot wait to get this brewery up and running!