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.



Lots Of Balls (In The Air)

That's a lot of balls for one man. I wish someone could help me with my balls. My wife probably wishes I weren't so childish. Just for that she doesn't get to touch my balls. I'm juggling a lot of balls at the moment. It's hard keeping track of so many balls. But no matter what I'm not going to get testy. Hey! Get your mind out of the gutter! Don't start reading into those innuendos and start thinking that they're innuendos. That's just nuts!

OK, enough of that, let's get busy. (heh)

Here's what's going on in no particular order:

  1. First draft of the Private Placement Memo is completed, second draft should be in my possession this week. If not, that's OK, I have plenty to keep me busy (heh). What this means is all you lovely, wonderful folks who've expressed interest in being a part of Panic Alarmist Brewing will soon have that opportunity. Stay tuned. Speaking of which, if you think you might be interested in investing in Panic please send me a message through the form on the Contact Me page. The minimum investment will be $8,000 and there will be lots of legal documents spelling out precisely what you get, what I get, what you don't get, and what I don't get. Everyone will be protected to the best of my attorney's ability, whom I trust completely.
  2. The first draft of my real estate lease RFP (request for proposal) is in my possession and I'm trying to get time to review it. My real estate broker, "Nick", has created this document which will be submitted to the real estate brokers/owners of the properties I've expressed interest in. This RFP spells out what kind of infrastructure I require such as electrical, plumbing, and floor loads. We'll see who offers some TI and/or abatements. See here for an explanation of those terms.
  3. I've started the small business loan process. I've spoken to several commercial lenders thus far. The response has ranged from extremely enthusiastic to mild irritation. The banks that responded professionally, got back to me, or loaned me money will be lauded on this website. The ones who didn't will also be mentioned as a warning to others. One lender, whom I spoke with on the phone today was very interested in the project. We will be meeting this coming Thursday. I am very excited.
  4. The first batch of beer from my 1 gallon rapid prototype process is ready to bottle. I split it into two different half gallon growlers and dry hopped them slightly differently. Can't wait to try the final results.

So that's a quick list of where I am. Still so much to do but things are really coming to fruition.

Oh, and there are quite a few secret developments happening as well. Really good stuff and I wish I could share, but instead I'll just tell you that I have some cool things going on and you should be titillated (heh).



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.



Remember me?

Hey, what is this place? Some sort of "web log" thing it seems. I vaguely remember being here before. Hi there! It's been over a month since I last posted! That's dumb! So are all of these exclamation points! There's another one! Crap.

Well, we're officially in that phase I call "Write Checks to Lawyers". In this phase, you get out your check book, write large numbers on the checks inside it, and make the checks out to, um, lawyers. Well, "lawyer", not "lawyers". I can barely afford one.

So what's this all about? Well, good question. I'll explain as best I can't 'cause I ain't no lawyer (but today I wish I was). Primarily, the things I'm getting out of this lawyer stuff are an Operating Agreement (OA), a Private Placement Memorandum (PPM), and a Subscription Materials (SM) document (I think). That sounds exciting, doesn't it?!

The OA (I'm not typing "operating agreement" a million times) is a legal document which defines how an LLC will operate including managerial rights (that's me) and members' rights (maybe that's you?). I should backtrack a second here. An LLC, limited liability corporation company, which is Panic's (now named Alarmist) chosen business entity, has members. Those members are me and anyone else I let be a member. The people I will let be a member are my wife (she'd kill me otherwise), Charlize Theron* (never mind, my wife will kill me anyway), and anyone who buys into the Panic Alarmist private equity offering. The OA protects me, my wife, and Charlize if things go wrong, and it protects the investing members by letting them know exactly how Panic Alarmist will operate. This includes things like how profits will be handled, who calls the shots (me and Charlize if she wants to), how taxation works, etc. The OA is all about covering our collective asses. There should be another Charlize Theron joke in that last sentence, but my wife might read this. That's all I know about the OA for now. Google it for far more information than I can provide.

The PPM is a different animal altogether. A PPM is more about informing would be investors of the potential risks involved if they decide to join me, my wife, and Academy Award® winning actress, Charlize Theron in this venture. It's another ass covering legal document that gives full disclosure of what the business is, what the financial projections are, what the value of a share is, how to invest, and much more. A large portion of the Panic Alarmist Brewing business plan will be in the PPM for potential investors to read and ingest.

Finally, there is the Subscription Materials document. This is an application, along with a check, that the investor signs in order to apply to become a member/investor in the LLC. It contains lots more legal mumbo jumbo and requires the applicant to answer various questions about themselves. Again, another covering of the ass.

Once all of the legal docs are completed, I'll be rounding up investors. I have several ready to write checks, but I'll need more. The documents will explain how I'll put all investment cash into an escrow account where it will stay, untouched, until a certain funding level is reached. Once that level is reached, the money will be available for Panic Alarmist to use.

It's important to point out that I'm just writing about what little I know thus far. Do not take any of this as gospel. The above paragraphs may have glaring errors so please don't rely on me for any legal advice. Use this as one tiny data point in a much larger universe of research you'll need to do.

So that's where we are. I should have a better idea of the timeline soon for document completion.

*Full disclosure: Charlize Theron is not a member of Panic Alarmist Brewing, LLC, but a man can dream, can't he?