We’ve been spending a lot of time wading through the options for our brewing system. Anyone involved in craft brewing today knows that used equipment is very hard to come by and is typically overpriced. We’ve circled around on that issue for a while and ultimately decided that we should select some good, new equipment. Fortunately, it appears that Portland is the beer equipment capital of the US. We’ve sent out quote requests to all the usual suspects and a couple that we weren’t familiar with. We’re looking for a 15 Barrel system that can support a production level of around 5000-6000 barrels at capacity. We feel like that is the best size for a small production facility like ours.
The quotes we’ve gotten back have a pretty wide range of costs and features. In typical engineering geek tradition, we’ve created a spreadsheet to keep track of each quote and to compare the pros and cons of each system. We’ve also made several trips to Portland to visit manufacturers and get a feel for what they’re all about.
Basically these systems are manufactured by small teams of welders in very industrial settings. Each company seems to place a different emphasis on functionality of design vs. aesthetics. We’ve basically decided that we’re looking for the Subaru of brewing systems, not the Ferarri. We want it to be highly functional, reliable, and to make great beer, but don’t really care if it is a work of art. This has led us to narrow the field down to just a couple options. Our loan should be coming through shortly and hopefully our lease shortly thereafter, so our goal is to be ready to pull the trigger when those planets align. It’s about to get really fun.
As we discussed the tenant improvements we need on the new building, we were told by the Port that projects over $50k are bid under a “Prevailing Wage”. That’s not something I’d heard of before, so I’ve been doing some research. It turns out to be a pretty hairy proposition. Basically the state sets a wage rate for each classification of job and by stating “Prevailing Wage” as part of a bid, you’re forcing the bidders to pay their employees those wages as part of the bidding process. If the wages are set reasonably, that would not be a big deal, right? We got our first glimpse into what that means yesterday when talking to a flooring contractor about putting down floor coatings on the concrete.
It turns out they pay about $25/hr to their lead contractors and about $15/hr for the other workers that lay the floors. The “prevailing wage” for those same workers is $44/hr. So our labor costs just doubled for exactly the same job.
How frustrating. It looks like our tenant improvement budget is going to go a lot quicker than we anticipated because of it. It is looking likely that we’ll have to scale back on our plans since we won’t have enough money to do everything we want. Our fingers are crossed as we wait for the plans and estimated pricing to come back from the architect.
Picking a location is one of the toughest challenges with starting a brewery. First off, we’re starting a brewery, not a brew pub. We need some good light industrial space with space for a nice tasting room where people can come and experience our beer. We want a location that highlights the beautiful place we live (Hood River, OR). We also want our location to highlight our commitment to sustainability and the environment. As our founders all are parents of small children, we also want our business to be family friendly. We consider ourselves very fortunate in that we found a building that is a great fit for us right out of the gate. The location is a little higher than what we had originally budgeted for space, but we feel that it is worth the extra cost.
The Halyard Building is owned by the Port of Hood River and was built in 2009/2010 right on the Hood River waterfront. It is a great area that attracts families and outdoor enthusiasts alike. It’s located across from Waterfront Park, a location that attracts locals and visitors alike. The building is attractively designed and is LEED Platinum certified. From the rainwater collection system that is used to irrigate the vegetation around the building, to the natural lighting, to locally sourced materials, to the solar panels on the roof, the Halyard building aligns with our desire to create a local and sustainable company.
We’ve submitted a proposal to the Port and are working our way through the process of getting the lease. The Port commission meets every other week, so we’re worried that this could take some time to work through. Fortunately the Port has been gracious about getting an architect to scope out the required building modifications before the next commission meeting to help speed things up. We’re really excited and hopeful that this will all work out and we’ll have the building as of March 1st.
This is the unfinished interior. There’s a lot of work to be done, but it’s a great canvas to start from.
Here is the view from the font of the building:
We’ve raised the investor capital we need. That’s huge. Now we’re in the middle of the equipment loan process and that appears to be going well. We started by approaching big banks about an SBA loan. We’ve been told to select a bank that does a lot of loans with the SBA since they’re familiar with the process. It turns out that bankers get a fair number of calls from startup breweries. Several of the banks I contacted started off by firing off a list of questions about the team. Apparently they get a lot of home brewers with big dreams looking for money and it must not be a recipe for success based on what they’ve told me. They want a team that has been successful in business before and has good experience brewing in production. US Bank would not even send us the loan application before they’d had a chance to review our business plan.
There are a couple ways to go with business loans. Most large banks won’t lend to a startup without an SBA guarantee to cover their butts. Typically that involves a 7a or 504 SBA loan. In our case, our loan is to cover equipment which allows us to look at both options. If you need operating capital the 504 won’t work for you. Both loan types involve some pretty hefty up-front fees along with personal guarantees from all founding partners with over 20% ownership. Based on input we had from several bankers, we decided the 7a was probably the best way for us to go.
We were within just a couple days of submitting an SBA loan application when Josh and I ran into a local banker at a wedding. He’s the husband of our son’s preschool teacher and is a great guy. After a short conversation we decided to submit the loan to his bank. So far we feel that it’s been a great decision. Our banking relationship is much more personal than it would be otherwise and they’ve taken the time to get to know us and our business.
It started with sending the business plan and pro forma and was followed shortly thereafter with a face-to-face meeting. I walked into the meeting thinking it was an opportunity to explain our business. In reality it was an interview. There was a large degree of skepticism going in, but after about an hour of spanish inquisition style questioning, we all walked out of the room with everyone really excited about what we’re doing.
We had put together a detailed financial model of the business with all kinds of assumptions and detail behind it. The bank had never seen something so detailed before, or a business plan at that level. We didn’t do it for the bank, but really did it to understand the sensitivity of the business to different variables that we may encounter along the way. That said, it was a very valuable tool to get the bank excited and confident about what we’re doing.
It looks like we’re going to get around needing an SBA loan and just get a regular commercial loan. That means lower fees and less red tape. Plus the bank is actually really pleasant to deal with and really cares about our business. We’ll be dealing locally with our banking from now on.
We decided on the loan amount based on the level of risk we were willing to assume if the business were to fail. With personal guarantees, you are on the hook for whatever is left on the loan after the equipment is liquidated. We picked the number we were comfortable with and here we are. God forbid that ever happens, but we’re ready for it if it does.
We thought that raising investor capital was going to be the hardest part of the whole effort. We started to get really excited about the potential of the opportunity. The more excited we got and the more we tasted the beer, Rudy and I started to ratchet up the amount of money we were willing to risk on this opportunity. At the end of the day, we decided to fund the whole thing between the two of us and get a loan for the rest. It’s a little scary thinking about it, but here we are. To say that we’re committed would be an understatement…
Working on a business plan is an enlightening process for someone not very familiar with the industry (like Rudy and I). I’ve started a handful of businesses and each one has unique aspects. A brewery is a complex and capital-intensive business. It’s unlike any that I’ve been involved with to date. I’ve spent countless hours on the phone talking to equipment suppliers, researching used equipment opportunities, and trying to understand everything that needs to come together for this effort to be successful. I’m a firm believer in uncovering as many surprises as possible at the very beginning. In business, the rate of surprises is a critical variable to watch since it is an indicator of how well you’ve got things under control. We’re finally getting to a point where I feel like we’ve got our arms around what needs to happen and have uncovered most of the “known unknowns” that we started with along with a number of “unknown unknowns” that so far haven’t been too bad.
Now that we’ve got the investor capital in place we’ve moved onto the banking process. More to follow…