How to Win Big in the Whiskey Industry
American Whiskey is Booming.
In a recent study, the Kentucky Distillers Association announced that Kentucky bourbon alone pumps $8.6 billion into the state's economy each year, creates more than 20,100 jobs, pays up to $1 billion in annual wages, provides $235 million in local and state tax revenue and is in the midst of a $2.3 billion construction boom.
With that kind of success, many people want to get into whiskey manufacturing. But it's one of the more difficult industries to penetrate because it takes such a long time to generate a return on investment. After all, good whiskey takes time to age, which doesn't lend itself to making a quick buck. In addition, banks are turning away from distilleries and rarely lend to start-ups or existing distilleries.
So, typically, new distillers ask friends and family for money or seek help from investors.
Seeing the need for distillery assistance, last year, Louisville, Kentucky-based bourbon investor Chuck Morton began helping up-and-coming distillers. I interviewed Morton about the whiskey funding situation. [Fred Minnick previously interviewed Morton on The Bourbon Quest. The following interview is new.
Why Is It so Difficult for Distilleries to Obtain Financing
Standard institutional lenders have historically made decisions based on bricks and mortar and are not structured to view aged spirits as appropriate collateral. Capital expenditures such as buildings, stills, fermenters, etc. are tangible items that are more easily financed through typical lending mechanisms. Whiskey, however, is a different animal altogether and requires extensive research that most traditional lenders are not comfortable with.
What Kind of Risks Are Involved in Investing in a Distillery
One of the main risks - that the whisky does not do well. The most important variable in the success of a whiskey distillery is the ability to secure high quality, blended expertise and experienced distillers at the helm. As my good friend, [former Four Roses Master Distiller] Jim Rutledge likes to say, "A nice label and a well-designed bottle will help you sell the first bottle, but it's what's inside that sells the second, third and fourth bottles."
There are always typical questions that any investor will ask when looking at a deal - the 5-year forecast, the core team, what makes the brand/company unique, the market opportunity, the competitive landscape, etc. That said, when looking to invest in a distillery, it is important to dig deeper into the people, experience, financial plan, product layout, potential brand recognition and their existing relationships in a tight whiskey environment. The ability to penetrate the distribution channel is critical, and not an easy task. An equally daunting factor is access to the all-important retail establishments.
Finally, the company's internal structure, operating agreements, existing contracts and employee agreements in particular need to be solid when assessing risk. Personally, I look for deals where key employees have ownership in the business and non-competitive elements that ensure the longevity of the team. Of course, one must keep in mind that team chemistry is the key factor.
What Are You Looking for When Considering Investing in a Winery
We look at a variety of factors, including but not limited to solid revenue projections, proven financials (historical and current), a solid business plan, addressable market considerations, and the experience of the team (this includes the winemaker, sales, marketing, and CFO). It's also important to dig deeper into industry-specific elements - distribution experience, capacity and long-term expansion plans, and much more.
I can't reveal all of our secrets, but having a pair of boots on the ground in the heart of Kentucky bourbon cannot be understated.
What Are the Red Flags
There are some obvious key indicators that something is wrong with the deal. Undercapitalization is pretty typical; lack of industry experience; lack of experienced stills; failure of personal background verification, and my personal favorite that we see all the time - "We'll build a high capacity still on my grandfather's farm with an expansive visitor center, gift store, and beautiful scenery" - if they first build a brand, have an experienced distiller and have revenue from product sales in multiple states, that would be great.
What Kind of Background Checks Do You Do on People
We start by asking all potential distillers looking for funding to provide a complete due diligence checklist. There is always the typical personal background check that must be done, but it is equally important to ask questions of trusted parties within the small network of the distillery space to uncover any positive and negative industry skeletons that could be key indicators.
What Spirits Are You Most Interested in and Why
Currently, we are focused solely on the bourbon and rye opportunities, with a growing interest in the Irish whiskey market. We are also keenly aware of the growing rum and tequila markets for future consideration. With being firmly displaced in the Bluegrass State, whiskey is an obvious choice for us.
What Are Some of the Distilleries You Have Invested in
Because we take confidentiality very seriously, I can't disclose who we've worked with in the past, or any current clients. That said, I can tell you that to date, we have funded companies of all sizes and focuses within multiple states in all regions of the country. I can also say that companies ranging from small regional brewery clients to large corporations with sales in all 50 states, as well as those with international sales, are part of our current client list.
If you want to learn more about single malt whiskey, you can click bolded words.
Edition: Rubick L.