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.
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.
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.
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.
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.
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.
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.
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.
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.
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.