Free Beer Plus Profits! A Craft Brewery Investment Goes Full Circle

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“We should start a brewery,” I said. This was toward the end of an evening of ale sampling at a beer-tasting club I had started, the ad hops committee, back in 2010.

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There was no brewery within a 40-mile radius, and I figured our little town could support a small craft brewery. I found out I wasn’t the first person to conjure up such an idea.

That night, I learned that an acquaintance of mine already had the business plan, location, and a number of investors for a soon-to-be-launched local brewery.

Within a few weeks, I was an investor, too.

Just shy of a decade later, that brewery has been sold to a new owner. Today, I’d like to share my experience and return on investment as an investor in a microbrewery.

 

Free Beer Plus Profits! A Craft Brewery Investment Goes Full Circle

 

If someone else hadn’t taken the initiative, I highly doubt I would have actually gone ahead and started a brewery.

In 2010, I was working long hours, taking anesthesia call every 3rd night with no post-call days off. We had a one-year old baby boy at home and his brother was on the way. I was lucky to find time to enjoy a few beers, and I can’t imagine, even with a lot of help, how I might have managed to start something of my own.

Therefore, I am eternally grateful that others acted on the idea before I had a chance. They saved me from myself.

 

Brewery Investment

 

Starting a Brewery

 

The brewery was the brainchild of two recently retired executives. Sitting on a beach and sipping beers in Florida, they wondered what it would be like to open a brewery of their own. They did some brainstorming, found a brewmaster, and got serious about this endeavor.

By the time I was aware of it, the plan was fully formed. The two founders would each own 30% of the brewery, and up to about 10 investors, preferably people with something to offer the brewery in terms of knowledge, skill, or time, would invest the remaining 40%.

The brewery would be housed in new construction, and a shiny new 15-barrel stainless steel brewhouse would be installed. Such a setup does not come cheap. The building and equipment alone cost well over a million dollars.

Like most new buildings and new businesses of this nature, loans were utilized to get off the ground, and the project was more than 50% leveraged.

I was excited to be part of this startup brewery, and thankful that I didn’t have to do any of the legwork. I decided to purchase shares that would make me a 4% owner of the brewery.

 

My Role at the Brewery

 

Among the investors, I was one of the youngest, and easily the most “into” the burgeoning craft beer scene. I had lots of ideas, but my opinions didn’t carry as much weight as I had hoped they would.

In the early days, I took on the role of brewery photographer. I photographed the groundbreaking ceremony and took pictures of the construction and installation of equipment as the project progressed.

When the brewery opened, I snapped photos of all the merchandise we’d be selling to be displayed on the website.

I began brewing my own beer at home — being an investor in an actual brewery is a great excuse to get started — and I was able to talk shop with the brewmaster and try his beers as soon as they were ready (and sometimes before).

 

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Turmoil

 

A couple months after the only brewery in town opened, the only hospital in town was failing. I lost my job, and the hospital shut down shortly thereafter. We moved many hundreds of miles away.

For better or worse, I had also recently attended an auction and purchased a small lake cabin in the area just weeks before losing my job. That turned out to be a blessing, as having a summer place there kept us connected to the family and friends we had in the area, and it kept us coming back to the brewery, as well.

There was some turmoil at the brewery, also. Business was pretty good, but not great, and in order to continue growing, the investors were required to pitch in more money.

There were a total of 5 of these cash calls in the first 4 years, and the sum of them equaled about 1/3 of my initial investment.

Employee turnover is natural in this business, and the brewmaster was replaced in those first few years. The next brewmaster helped right the ship, coming up with a recipe for a popular beer that now accounts for the majority of the beer brewed at the place. He eventually left for another startup, and the brewery operations are in the capable hands of brewmaster number three.

 

Brewing Success

 

The 2010s were a time of rapid expansion in the craft brewing industry. When this brewery started, it was among the smallest of about 100 in the state.

By the end of the decade, it was one of the 20 largest out of about 400 statewide in terms of production. That is a success story by any measure.

The brewery had found its niche — it’s most popular beers were flavored with fruit. Blood oranges, blueberries, yuzu fruit, and cherries adorned the labels and beer names. With so many breweries proliferating, they had to find a way to stand out, and they did so with fruit.

They also implemented a number of the suggestions I had made way back before they opened or shortly thereafter. They just waited at least a few years or more to do so.

I pushed hard for cans back in 2010. They bought a bottling line. Now, they have a mobile canning service come by regularly to can their products.

“Brew an IPA,” I cried! The second brewmaster heard me, and it’s now a flagship beer of theirs.

Mug club. Discount nights. A pilot brew series. My ideas weren’t original ideas, but I had my finger on the pulse of the craft beer industry. Although my suggestions were largely dismissed, most of them came to fruition eventually. Better late than never!

By 2016, the brewery was firing on all cylinders and we received our first dividend check. It was equal to 4% of my original investment. We received the same 4% dividend check in 2017 and 2018 as the brewery continued to be profitable.

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The Big Announcement

 

In July of 2019, just one month before I’d be moving back to the area as an early retiree, all of the investors were invited to participate in a conference call with the founders.

Hmmm…

Although I hadn’t heard so much as a rumor of a sale, I had an inkling that was going to be the topic of discussion. The founders had worked hard to grow this business, and they had used nearly a decade of their supposed retirement to make it happen.

My suspicion was confirmed. The brewery would be changing hands in four to six weeks.

Four to six weeks turned into four to six months and then some, and the deal didn’t actually close until March of 2020. My check was literally lost in the mail, and I was finally paid out in May of 2020.

With the nation on lockdown, the spring of 2020 had to be a terrible time to take ownership of a brewery, but that’s how it worked out. Based on a conversation I recently had with the current brewmaster, it sounds like they actually weathered that storm better than most.

 

The Return On Investment

 

Before I share the numbers, I have to say that our return on investment was more than monetary. It was never really about the money, although I am glad to have turned a profit.

For nearly a decade, we owned part of a brewery. I gave tours to friends. I sampled new beers before they were offered to the public.

I could act like I owned the place because I did! Well, I owned a few bar stools and maybe a table or two, but still.

There was also the policy that employees and investors were entitled to two free pours any time they stopped by the taproom. Although we lived a couple of states away, we did manage to get there quite a few times every summer to take advantage of said policy.

 

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On to the Numbers

 

I will be intentionally vague in some respects, but I can tell you my precise internal rate of return. I earned an annualized 5.41 percent.

That figure is calculated using the XIRR function in Excel that takes into account the amounts and dates my money was invested via both the original investment and follow-up cash calls, as well as the dividends paid out and the check I received when the brewery sold.

Another way to state my return on investment is to say that the total return was 58%. That is, I got all of my money back, plus an additional 58%, again factoring in the capital cash calls paid in and the dividends received.

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How does that compare to the S&P 500 over the same timeframe?

Not favorably.

According to the DQYDJ calculator, the money I had invested in US large cap stocks from September of 2010 to May of 2020 had a total return of 214% or 12.6% annualized.

I must say I was surprised and somewhat disappointed to realize that the returns from a successful craft brewery that benefitted from thousands of hours of free labor put in by the two founders and other investors would pale in comparison to the return of an index fund.

I was also disheartened to learn that about 1/3 of the profits from the sale of the brewery went to a broker that was used to identify a buyer and arrange for the transaction. As far as I know, none of the investors were offered an opportunity to put together a bid to maintain ownership, and we were not offered the right of first refusal, either.

If it weren’t for the hefty broker’s fee, my returns would have been closer to 8% annualized, and there’s also the chance that I might still be an owner of a larger portion of the brewery.

 

The Value of Free Beer

 

Since we weren’t around most of the year to take advantage of the free beer policy, we used to make every excuse in the book to run into town and stop by the brewery.

 

“That book we had on hold at the library came in — let’s go pick that up and hit the brewery on the way home.”

“Why don’t we take the kids to the park and then stop by the brewery.”

“We’re getting low on milk. And beer.”

 

It just so happens that our kids loved going to the brewery, too. They had some games to play, the popcorn was unlimited and outstanding, and we usually let them play games on their Kindle there — a rare treat.

I always left a $5 bill in the tip jar, so the taproom trips weren’t exactly free, but technically the beer always was — and my wife and I would usually have up to 3 to 4 of them between the two of us.

Over nine years, let’s say we stopped by an average of 20 to 25 times a year. We’ll call it 200 visits. That’s maybe 700 free beers we enjoyed, give or take a couple hundred.

If those 700 beers were worth $40 apiece, our return on investment would have equaled that of the S&P 500.

At a value of maybe $5 apiece, we didn’t fare quite as well. But like I said, it was never about the numbers, anyway.

I’m also happy to report that my free beer tapline has not run dry. This was one of two investments I’ve made in small town breweries, and the other one promises in writing that I’ll get free beer for life (the life of the brewery or me, whichever ends first).

 

With this investment, we wanted to be a part of a budding beer business in our small town. Although it didn’t all work out for us exactly as planned, and we only lived nearby for a few months of its existence, it was still fun while it lasted.

Cheers!

 

 

Have you invested in a craft brewery or similar small business? Tell us about your experience.

 

15 thoughts on “Free Beer Plus Profits! A Craft Brewery Investment Goes Full Circle”

  1. I talked to a brewer who has a well known brewery in a touristy area that includes grocery store distribution and he told me his other far less interesting business is the one that makes an actual profit. Sounds like a tough business but seems like something you do for fun (and free beer).

    Reply
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  3. So the free popcorn probably pushed you over the S&P? Or was there upfront cost before the all you can eat popcorn policy kicked in?

    I always wondered how these places did. So many of these popped up when we were living down in North Carolina (2008 – 2016). I had this in-depth theory that they were dramatically eroding at the market shares of big beer. I never looked into it too deeply though. I would pull up the Boston Beer Company Stock or something and be prove myself wrong – they seemed to be doing just fine. : )

    Hope you are well,

    Max

    Reply
    • You’d have to put an awfully high price on that popcorn to make the numbers work, but it is mighty tasty. They also had a half-dozen or so different shakers to add flavor. The cheddar bacon was quite good, as was a combination of jalapeno and ranch seasonings. Hopefully those will come back when COVID restrictions are lifted some day.

      The overall beer market has been flat or declining as spirits, ciders, and seltzers have gained market share. Within the beer segment, craft has made a dent in the consumption of big, bland beers like Budweiser, but the cheap fuzzies have made a comeback during COVID. It’s been interesting to watch the industry trends as someone with a small stake in it.

      Cheers!
      -PoF

      Reply
  4. POF,

    I’ve always been curious how about this investment you had. A liquid and not so liquid asset at the same time. I used to be an investor in a restaurant with a focus on craft beers. Tasty food paired with a perfect beer. The perks were similar to your experience. Looking back, the money would have clearly done better elsewhere, but I had some fantastic meals and hard to find beers on tap. The experiences were a different kind of return. Glad to see your investment has come full circle.

    Reply
    • Ah, the liquidity joke! I’ve used that one many times, but somehow neglected to drop it in the post. So true.

      Interesting how a successful business doesn’t necessarily translate to a successful investment, isn’t it? Glad yours worked out reasonable well, though, too. It’s about more than just the money, right?

      Best,
      -PoF

      Reply
  5. I love that you ran the calculation hopeful that the free beer would bring you closer to the sp500 (I would have done the same). Another benefit is that you have a successful exit under your belt making you an investor with a proven track record now if you want to get in on other deals in the future 😉

    Reply
  6. Blood Orange Honey got sold. Also being in the top 20 with names like Bells, New Holland and Founders ain’t to shabby. Will it go the way of Founders so you can find the beer under another name in Spanish Supermarkets?

    Reply
    • Sadly, no, but that was a fun surprise to find Michigan beer in Valencia, Barcelona, and Madrid!

      The new owner is an individual, not a brewing conglomerate, so I don’t anticipate any major changes in the operation right off the bat. They’re hoping for a smooth transition that will barely be noticed. So far, the pandemic has created far more changes than the change in ownership.

      Cheers!
      -PoF

      Reply
  7. When I retired, our financial advisor said to me, “Just don’t do anything speculative, like investing in a restaurant or something.” He then regaled me with stories of clients of their firm who lost their FIRE because of such dreams. Sounds like you missed out on a hot market, but you didn’t lose money, so all is good. The fun of the experience is worth something, too.

    Reply
    • That’s excellent advice, and I definitely wouldn’t bet my retirement on something like this.

      I’d say it was play money, although it was not an insignificant sum ten years ago early in my career. But I knew it was money I could afford to lose.

      Cheers!
      -PoF

      Reply
  8. Yes! Well sort of…We didn’t actually become investors in our local brewery, but we did provide a short term (5 year) expansion loan to our local brew house when they needed to upgrade to larger equipment (3 barrel system) and ~1200 square feet of expanded brewery space. We did a personal loan with no payments due the first year, but interest continued to accrue and was due at the end of year one in a single interest payment. The brewery then has four years to then repay the remaining balance with continued interest via monthly principle and interest payments. We setup the loan as a simple interest rate of 5% fixed. It was a huge help to our local brewer, who didn’t want to use a bank for the expansion, and gave us an opportunity to help a wonderful local business…and yes we have our own bar stools! Great beer and the brewery is growing! I could have certainly made more money in real estate or the stock market, but we love helping our favorite local small business!

    Reply

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