Raising Capital for Your Brewery: Do You Want It or Need It?

Founded and owned by Szymankiewicz, the North Carolina-based Beer Law Center is a boutique law firm focused on alcohol law. A former engineer and project manager, Szymankiewicz spent nearly thirty years homebrewing. He ran out of steam in engineering and pursued law school to focus on his true passions.

“I come to the law as Career 2.0,” Szymankiewicz says. “I enjoy drinking and making beer and love the industry.”

Szymankiewicz founded Beer Law Center shortly after earning his law degree from NC Central University School of Law in 2010. Since launching the firm, he has made it his mission to help breweries understand the legal issues around making alcohol—an unusual segment with just a few dozen such practitioners in the country, according to Szymankiewicz.

“We saw there wasn’t anyone dedicated to the craft beverage segment,” Szymankiewicz says. “And now that’s all I do.”

Beer Law Center can be viewed as a firm focused on business law with an alcohol overlay, helping with corporate structure, licensing, permitting, trademarks, federal law, buying and selling, and more.

“We help sort through things and help you know what it all means,” Szymankiewicz says. “We found that over the years, Beer Law Center has become more of a business counselor.”

Besides the money itself, of course, Szymankiewicz says the other two benefits to raising capital for your brewery are pretty straightforward.

“Having the money, enabling growth, and finding a long-term business partner or investor to stay in business,” Szymankiewicz says.

But with any good, there are downsides. Szymankiewicz notes that anytime you raise capital, you must be aware of what you are losing—control of the company, operating income, or even free time or personal sanity.

“When you raise capital, you are beholden to someone else—a boss—and if you give equity, they have a say,” Szymankiewicz says. “Additionally, when you raise money, you have to perform and get better. It always involves stepping out of your comfort zone and almost always involves a substantial amount of risk.”

“Do we need the money?” Szymankiewicz asks. “Or do we want the money?”

Breweries run into this conundrum from time to time throughout their growth, whether it’s startup, first-phase, or second-phase growth. Some claim to want money so they can make more money.

“That’s valid, needing the money because they need to grow, but what’s driving the need?” Szymankiewicz asks. “We need to grow to make more money to pay the bills? Why aren’t we paying bills? Because our cost of goods sold is too high? Our system is too small, and we’re brewing too often and not getting the most out of it? We need bigger stuff to make more to sell more?”

He adds, “If you aren’t selling everything now, you might not be ready for growth. If we can make incrementally more money just by signing up with a distributor, maybe it’s a good idea. Then, when we sell all that, we can talk about a second location.”

Szymankiewicz says one of two things has to happen to make it a good time for a brewery to seek additional capital.

“One, are the economics pushing me to get a second location?” he says, noting that this especially applies to breweries that aren’t self-distributing. “And second, do I need to do something strategically different?”

Something strategically different could be anything from buying a new canning line or pasteurization equipment to securing another van to help maximize self-distribution.

“So, [the two requirements] are we’ve got to do it to stay open and grow, or we are at a point of strategic change.”

The Beer Law Center founder points out that the craft beer industry saw much of the latter during the years at the height of the COVID-19 pandemic, where breweries switched from selling beer over the bar to putting it all in package.

“You’re either breaking through that ceiling holding you back [from] diversifying, or trying something else,” he adds. “In an ideal world, you could take a risk and fail and know that the business would still be OK, but that’s not realistic. I think more people are forced into doing something different than choosing to do something different.”

Szymankiewicz says some signs might hint towards whether you are ready for certain moves.

“Are you organizationally ready? Do you have the finances to support it?” he asks. “Some people have had too optimistic forecasts, and those made during lockdown—if we just have another ten barrels to support it, or just have another truck and a salesperson—just aren’t working now.”

Szymankiewicz believes that there is a significant faction that convinces itself that it needs to grow without soul searching on what it means to the business model.

“They believe, ‘I want us to grow this way because that’s the way I want to do something,’” he says. “You can do that if you can afford to—morally, financially, emotionally. But running a business, that’s not a decision you can freely make. Maybe what’s best for the business is not making that decision.”

You have to have the mindset of what it will cost you financially, what it will cost you in terms of your business focus, and the emotional personal cost.

“I’ve had clients get divorced because of the stress they take home from the business,” Szymankiewicz says.

The number one thing you need to have in place is a business plan. Szymankiewicz says information about the business and a solid P&L statement are essential when planning to raise money.

“What do you need to raise? What is it going toward?” he says. “Beyond that, you need to ask, how much is it worth, and how am I going to get the money? What am I willing to give up to get it?”

Szymankiewicz provides a hypothetical in which a brewery seeks to raise $200,000.

Things you’ll need to plan for when you aim to raise that much capital include: “Am I willing to give up a portion of my company? If so, how much? Do I want to go into debt? How much debt? For how long? Five years? Twenty years? What kind of payments do I want?”

Szymankiewicz adds, “What is it worth to get this? How confident are you in the return? You are selling equity or selling debt. In either case, the creditor is confident you are going to return the money.”

Now that you know what it’s worth, what’s the best way to get that?

There is not just one way to get money. Szymankiewicz says, “You can get creative with raising capital.” But the bottom line is that there are multiple ways to approach it.

“When we talk about raising capital, debt is a way to raise capital. That includes bank loans,” he says. “It is often a good idea to diversify your portfolio of where you get money.”

Szymankiewicz says there are six surefire good ways to raise funds, “but you have to think your way through it.” Those include the aforementioned bank loans, private loans, equity sales, non-equity crowdfunding, equity crowdfunding, and hybrid models—the latter of which is one that converts to equity at a later time or has a planned buy-out at a later date.

Private loans are when a company sells debt in the company to private lenders, such as investors and pays it back as a promissory note. Then there is equity, where the company sells equity in the business in exchange for the investment.

“You can sell equity, but the downside is those folks are owners and are hard to get rid of,” Szymankiewicz says. “Debt is good because it has a beginning, middle, and end, though it can be expensive.”

Szymankiewicz says he worked with a client that was able to raise close to $2 million in investor funds through a combination of debt sales (private loans/investors) and equity sales (purchasing ownership in the company).

Another client “is currently going through a small-ish fundraising campaign using equity sales to bring on additional ownership and capital, looking to raise around $350,000 to expand production and enhance their THC beverage business.”

Szymankiewicz adds that down the road, there is a trigger point. In the early going, no one wants to take on the ownership but would rather be a creditor.

“It’s better to be a creditor than an owner. The creditor gets paid before the owner does. But if the company does well, you want your share of the profits,” he says. “The promissory note can be converted to equity.”

But when you do that, there are other things to consider.

“Like if you need to restructure classes of the company’s structure,” Szymankiewicz says. “When it comes to equity, everyone wants to keep control. Are these nonvoting [equity] units or manager-type units?”

Szymankiewicz adds, “You need to be intentional. There are a lot of pieces, but you have to think of it with the end in mind.”

He worked with another company that successfully went this route.

“A different client was looking to grow to second-tier level and restructured their equity ownership to allow investor purchases while retaining operational control through a combination of equity sale and [hybrid] convertible notes,” Szymankiewicz says, “ultimately raising $500,000.”

Szymankiewicz says when it comes to those private loans, that’s when some major pitfalls can arise.

“The sale of private equity is a security—as in a SEC. You have to abide by securities laws,” he says, noting fifty to eighty percent of the breweries he works with don’t know that’s a problem.

Szymankiewicz offers an example of a brewery that sold an investment in the business—$50,000 for X percentage of the company—before raising $300,000 with that money. The investor went to the Secretary of State and told them they were selling equity, and the Secretary of State went after them. “They violated North Carolina and federal security laws,” says Szymankiewicz.

He notes that the general rule is that the sale of private debt or equity should be registered with the SEC. But from a brewery perspective, Szymankiewicz says it makes little sense because of the expense. The last one he was part of, about a decade and a half ago, cost $40,000 in attorney fees.

“Point is, if you don’t know that’s an issue, it’s easy to run into issues and criminal charges,”

Image courtesy of Oznr

Szymankiewicz says crowdfunding won’t move the needle enough to help achieve the type of capital a brewery could need, but he’s not opposed to some of the models. There are two different crowdfunding efforts: non-equity and equity.

Non-equity crowdfunding includes sites like Kickstarter or GoFundMe ​​that let people invest in the company without getting ownership interest. Equity crowdfunding is done through specialized sites/organizations to allow people to invest in the company and receive some ownership in the company.

“The Indiegogo or Kickstarter [models] where you say, ‘I’m doing this, would you give me money and I give you this?’” Szymankiewicz says. “Those are donations. Those are great.”

Both Stone Brewing and Four Saints Brewing have used crowdfunding efforts to their advantage.

“Stone Brewing—not one of my clients—and Four Saints Brewing—one of my clients—both used non-equity crowdfunding to fund some major work,” Szymankiewicz says. “Stone used it to raise a bunch of money to open their Berlin location, which they later closed. Four Saints ran, at the time, the largest fundraising for a brewery through Kickstarter several years ago, raising more than $45,000 with little or no downside, and they’re now celebrating their tenth anniversary.”

However, other efforts raise funds—the equity crowdfunding sites—while giving people a piece of the pie in owning the company.

“That’s when things begin to change,” he says. “You need to work with a website specifically designed to do that, get some legal advice, follow state laws, and it will cost you a lot more. There are a lot more legal compliance issues.”

Szymankiewicz says there are a couple of bad ways to raise funds, but they stem from folks not taking the time to think “real hard first” about it.

“Believe it or not, there are still predatory lenders, there are still loan sharks out there,” Szymankiewicz says.

He adds that having good relationships with individuals, banks, or even credit unions can be great, and when bad loans are procured, it’s because people aren’t shopping around for them.

“You can get drastically different options from different organizations,” Szymankiewicz says. “Shop around and take the time and pain to do multiple loan applications.”

For instance, bigger places tend to have lending programs that will take on bigger risks, but local banks might loan to a place that makes alcohol. “They know you, the money stays in the community, and they are willing to work with you more,” advises Szymankiewicz. “It’s important to shop around. Try different ones.”

Szymankiewicz shared several anecdotal “Do Nots” when it comes to raising funds through his experience with Beer Law Center.

“One brewery kept selling equity to outside investors to fund ongoing operations until it could sell a piece of property they owned,” he says. “They ended up diluting the original owners’ past ability to control or steer the company. Now, nearly all investors are either a) losing their money or b) are extremely upset and threatening litigation. Or both.”

Szymankiewicz adds that another brewery raised enormous amounts of money through equity investment and conventional loans but couldn’t deliver on their projections. He says they are now seeking bankruptcy protection.

He cites another that kept refinancing through the Small Business Administration to reduce costs.

“They pulled out ‘equity’ until they could no longer service the debt,” Szymankiewicz says. “Now they’re in bankruptcy.”

Bottom line: When it comes to raising capital for your brewery, you have a lot of decisions to make and things to consider. Sometimes it’s helpful to get advice from someone like Szymankiewicz, who has experience in all these areas.

“One piece of wisdom or caution,” Szymankiewicz says. “You cannot borrow your way out of debt.”

According to Szymankiewicz, ANY way to raise capital CAN be a good way, if it meets your strategic goals. But, any way to raise capital could also be problematic if you don’t do it correctly.

When asking others for money to help your business, bring in legal help early on—take the CYA approach, Szymankiewicz advises.

“The earlier the better,” he says. “I see with clients that you need help early on to get what you want out of this, to select what you want, and then I’ll turn you loose for five or so months.”

Here is where the advice and expertise of someone like the Beer Law Center can really help steer you around all these complicated pitfalls.

Though not licensed in all fifty states, because the alcohol law field is so niche, Szymankiewicz can also put you in touch with a lawyer licensed in your state.

You can find everything you need to know at www.beerlawcenter.com and on all the social media sites @beerlawcenter, or email Szymankiewicz directly at [email protected].