Craft Beer’s Ticking Time Bomb: Succession planning

Craft beer has a succession planning problem that nobody ever talks about. I guess it’s not a sexy topic. Beer is cool. Lawyers, bankers, and accountants are not cool. However, almost all craft breweries will face this problem, and it needs to be addressed well before the owner starts looking for the door. To make matters worse, the nature of craft beer culture, business, and ownership exacerbates the problem.

That, and the flying monkeys. But there's not much we can do about those.

…and the flying monkey problem. But there’s not much we can do about that.

Small businesses and the next generation of flunkies
Realistically, most craft breweries are small businesses, nearly all of which are closely-held, if not completely family-owned. Unfortunately, family-owned businesses are notoriously unsuccessful when passed to the next generation. And it could be worse for craft successions occurring as market growth begins to slow, inter-craft competition increases, and craft consolidation begins.

Sure, you could argue that won’t happen, despite decreasing headroom for premium shelf space, an increasing number of players vying for a share, and the expansion of formerly regional breweries soaking up more of that share at lower prices. We could also pretend that people who love beer produce offspring with better decision-making skills. But I assure you…I love and drink a lot of beer, and I also have an aggregate of 65 pounds of “Why the hell would you do that?” wandering my house right now that says you’re wrong.

Shocking, but not surprising.

Shocking, but not surprising.

Hookers & Blow
Everyone is familiar with family-owned business drama worthy of Falcon Crest and little Johnny being more interested in hookers & blow than taking over the business. Certainly, craft beer is not immune to these clichéd problems. But there are other issues more endemic to craft beer that can affect the decision (or indecision) whether to hand the reins over to the kids or transition out of the business another way…possibly even aided and abetted by the Big Beer Boogeyman.

whiplash The trapped child
Actually, little Johnny may be perfectly capable. In fact, little Johnny may have forgone higher education or other job offers to benefit the family business. Further, little Johnny probably has kids, a wife, and a mortgage. Little Johnny is trapped and needs the business. Or at least that’s how his parents perceive it. But even if keeping the business family-owned or passing it on to little Johnny was initially the assumption, it may turn out not to be the parents’ best option…or even feasible.

Undercapitalized beer
Undercapitalization is apparently a rampant problem within craft beer. A major business issue in and of itself, undercapitalization poses a major problem for a successful generational transition. The parent is going to want to transition out in a way that doesn’t leave the parent exposed to the dangers of an undercapitalized business, including the inability of the business to respond to input price increases, macroeconomic changes, and the need to expand to remain competitive. In fact, that last one may have been a major impetus in the sale of Goose Island to A-B InBev.

That, and he's a beady-eyed, greedy sell-out who only thinks of himself, his family, and his employees. Fucking jerk.

That, and he’s a beady-eyed, greedy sell-out who only thinks of himself, his family, and his employees. Fucking jerk.

Not enough debt…wait, what?
Further, and perhaps counter-intuitively, the business might not have enough debt. The disadvantages of being over-leveraged are obvious. But an under-leveraged family-owned business often means too much of the parent’s wealth is wrapped up in the business. This tips the scales in favor of cashing out in a way other than family succession. Because anything other than a major cash-out of the parent’s interest leaves the parent lean in retirement and burdened with business risk.

Personal goodwill
Adding to the problem, craft beer is an extraordinarily personality-driven and relationship-driven business. Craft beer is rife with breweries the owners of which are nearly as prominent as the beer itself, not to mention the narrative of craft beer as a big, happy love-in of personal relationships between owners, suppliers, and the beer-drinking community. Absence of these personal relationships and personalities upon succession, however, can gravely affect a business’ ability to survive in the next generation (or even with a third party), particularly when little Johnny needs to start throwing some craft beer elbows to survive in an increasingly competitive craft beer arena.

sorry i elbowed you Worse yet, a lack of institutionalization often follows from a personality- and relationship-driven business. The business and its operations depend on the person who started the business, rather than other personnel and management. If not addressed, businesses like this are bound to struggle after the owner’s transition out.

Hmm, Stone must be implementing a succession plan. There's a little less Greg Koch and a touch more private equity character in this batch.

*sniff* This batch seems to have a bit less Tom Schlafly and a touch more private equity.

Dithering over the taxman Oh, people love to whine about taxes. And with a maximum gift and estate tax rate of 40 percent, how couldn’t you? Listen, I’m a tax attorney, and I have an LL.M. in tax. Don’t blame taxes. Inaction because of the taxman is worse than the taxman himself. If you start early enough, there are plenty of tools at your disposal to set the succession plan in motion, minimize tax exposure, and continue to control the business until you’re good and damn ready to be put out to pasture: Recapitalizing with different classes of stock and debt, planned gifts with valuation discounts and maximizing the annual exclusion and lifetime exemption, ESOPs, incremental sales at lower capital gain rates, trusts, preferred rates on certain small business stock gain…

However, as with all the other issues above, planning needs to start early. Like 10 years out. Options shrink with each passing year.

meme This is depressing. I need a beer.
And guess what…most of the stuff I talked about above negatively affects the value of a business, too. So, drink up and enjoy our craft beer renaissance while you can. When enough owners develop a sparse gray hackle and start looking for the door…we’re screwed. Although, Goose Island, Schlafly, Boulevard, New Belgium, and Full Sail all cashed-out successfully, or are in the process of doing so. The next big one in line appears to be Bell’s.

Unfortunately, they all have something in common: They’re relatively big craft breweries. It’s going to be much harder for the mid-sized and small breweries to survive succession. It will be interesting to see what happens. Your beer depends on it.

The Haybag: Congrats. Way to make beer boring.

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21 thoughts on “Craft Beer’s Ticking Time Bomb: Succession planning

  1. Scary. Perhaps all these brewers need a Tax Attorney (why’d I cap that?) with an eye and passion for beer? “Beerbecue, Tax Attorney (if you do it twice, people think it’s right) to the beer stars!” Has a nice ring, no? Great post.

  2. I think this same problem exists in the writing side of the beer world too. Everyone is SUPER DUPER MEGA EXCITED about beer, but such a small percentage of that group brings anything to the table in terms of keeping the industry going.

    • But that would require sticking your neck out! Although, I would like to think there are plenty who would help, but it’s like a crowd passing by someone possibly in need assistance. Nearly everyone assumes someone else is going to do something.

  3. Hey Scott,
    I’ve had so many conversations over the past few years about when BMC are gonna start buying everyone out; I keep telling everyone to look at the age of the owners of their favorite breweries. The idea of small-production brewing by small businesses isn’t going anywhere; the names, faces, and label are going to change dramatically, however.

    Also: “Beerbecue; Dick Joke-Telling Beer Lawyer” would be an even better job title than mine.

    • Exactly. It’s only a question of where the money is going to come from. Big beer, private equity, very occasionally local money (which will fairly regularly result in failure), and maybe a little from big craft. But at this point, I only see money possibly coming from Sam Adams (although they seem to only currently be interested in getting in on stuff at the very front end) and Craft Brew Alliance. For the foreseeable future, I see places like New Belgium, Lagunitas, Stone, Sierra Nevada, and Deschutes wrapped up only in their own expansion.

      And the ones who manage to cash out now will be the lucky ones.

  4. We’re gonna see this playing out big-time in Vancouver. Last count there were at least 85 craft breweries jockeying for market space. Even I can’t drink enough to keep up with them. And of course the big breweries are marketing “craft” beer, which I think they can do without getting into trouble because the term isn’t legally defined. But the little guys…we’re gonna be watching them gobble each other up for the next while…

  5. Interesting post. I have thought about this before, but not in terms of my favorite brews. I have friends who have inherited family businesses and for the most part they want to get out. To me it seems like a great way to start a career. But I guess it needs to be a good match and the talent to carry on needs to be there. Not to mention tax/estate planning.

    • That’s definitely an issue. The parents may assume that Little Johnny needs the business, but Little Johnny might not really even want it or is doing it because he feels obligated or realizes they hate it after succession. And as someone else pointed out, there might not even be a Little Johnny, which pretty much means you have to sell to a third party eventually and probably stay on in some capacity for awhile. But in that case, many issues above still affect your ability to sell and for how much and the likelihood of the brewery thriving after the sale.

      Thanks for stopping by and commenting (and reading my atypically long post).

  6. Pingback: MR | First Edition, July 2014 | Drunken Speculation

  7. Pingback: Meet The Beer Media – Beerbecue | beer is your friend

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