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.

I Drink Beer, Dammit

I think I’m late to the recent craft beer hullaballoo that followed the Brewer’s Association’s bitchy, little missive about the Big Beer Boogeyman trying to swoop on craft beer’s game with brews like Blue Moon and Shock Top. There has been enough whining, though. So, this might not be popular, but the Curmudgeon must speak.

I drink beer. Period. And I’ve said it before: So as long as your beer is tasty, I’ll drink it…well, as long as it wasn’t made from orphan tears, or something messed-up like that. But I’m willing to make an exception if the orphans were already crying anyway.

orphan

Except for her. Keep this orphan’s tears the F away from my beer.

For me, it started on December 12th, when SABMiller executive chairman Graham Mackay asserted that the basis for craft beer success is the desire for more variation and interest and “it’s also local, anti-marketing, anti-global, anti-big, and more focused on experience and knowing that about where beer is from.” This elicited immediate mockery from the Big Beer haters about how Big Beer just doesn’t get it, and how it’s about quality and taste.

Then, the next day, the Brewer’s Association fired-off a press release reiterating their standard for what constitutes craft beer, lamenting Big Beer’s sinister foray into the craft beer market, and claiming that Big Beer should be required to clearly label their masquerading beers as being made by the Big Beer Boogeyman (and, thus, not true “craft beers”). Hmmm. So, apparently it’s not all about taste. Otherwise, why does this matter?

Now, thisiswhyimdrunk makes a compelling case for the distinction between the Brewer’s Association lamentations and Graham Mackay’s claims of anti-big sentiment. However, it’s hard to deny the general contempt for Big Beer that courses through the veins of the majority of beer nerds. The accusations run the gamut: Their beers all taste like crap (not true); they are unrelenting and sometimes nefarious in their efforts to gain market share (probably true); they like to eat kittens (totally true).

whiplash

Graham Mackay thinking about kitten recipes.

But we operate in a capitalist system. Making money and gaining market share is what you’re supposed to do. It’s what makes the system function well, subject to smart regulation and enforcement, of course.

In fact, the capitalist system is like a zoo with lions, tigers, polar bears, and cute little animals like koalas and penguins. When a polar bear escapes and fulfills his lifelong fantasy of eating a penguin, or when the lions and tigers get out and eat the koalas and some zoo patrons, do you blame the lions and tigers and bears? No. Sure you might think the carnivores are dicks for eating cute animals and people, but that’s what they do (and partly what makes a zoo cool). You should be blaming the f-ing zookeepers.

And what do you think the purpose of the Brewer’s Association cockamamie definition of craft is (which actually seems simultaneously over-inclusive (Sam Adams Light) and under-inclusive (August Schell Brewing))? It’s about inventing a term to solidify a market niche and to gain and protect market share to the exclusion of others. Gasp!

And the label idea is silly. It’s not even worthy of the zoo’s suggestion box. These offending Big Beer brews are a completely different product line from their other beers and are geared to an entirely different market. Of course they’re going to label and market them differently. Are you mad that a Lexus doesn’t come with “TOYOTA” emblazoned across the back? The few people who actually care about this will know or easily find out.

It all boils down to this: I’ve had some good brews made by Big Beer and many terrible beers from so-called craft breweries. To me, it’s all about gettin’ the yummy in my tummy and what’s best and available at the time, not about what constitutes craft beer or who gets to call it that. So, maybe the Big Beer Boogeyman realized that he needs to get in on selling tasty beer. Wah. Deal with it. Just drink beer.

Update: Go read John Cochran’s thoughts (From Terrapin Beer) here. He masterfully drives home the point: This is all so silly. He also lists some of the goofier results from the Brewer’s Association line-in-the-sand.