Attorney Insights for the Craft Beverage Industry
In addition to financial and staffing concerns, navigating legal questions is one of the toughest tasks a craft beverage company owner can face. For the most part, all breweries/distillers/cideries have very similar questions and decisions. Jason Sleeman, National Craft Beverage Lender for United Community Bank, reached out to some craft beverage focused attorneys to provide some insight. Here are the responses he received from: Mike Drumm with Drumm Law/Beer Attorney in Colorado, Scott Burger with Allen Stahl + Kilbourne in North Carolina, Brook Bristow with Bristow Beverage Law in South Carolina, and Matthew McLaughlin with McLaughlin Law Firm in Mississippi.
Q: In 2023, we have already seen a number of brewery ownership transitions. What is the top thing a brewery should know if they are looking to buy or sell?
Mike Drumm – When looking to buy, breweries need to carefully evaluate the market and prospective acquisition targets, not only to assess financial viability but to ensure that they align with the brewery’s overall strategy and goals. This due diligence should include reviewing financial and operational performance and potential, as well as assessing any possible risk factors, but should not discount the compatibility of existing business models, market footprint, and brand recognition.
If a brewery is preparing to sell, it’s crucial to prepare a detailed and comprehensive package of financial and operational information to present to prospective buyers. This includes financial statements, production metrics, and any relevant legal or regulatory documents and contracts. Additionally, it’s important to have a clear understanding of the brewery’s valuation and to have a well-defined negotiation strategy to maximize the value of the sale.
Scott Burger– If they’re looking to buy, they will want to structure it as an asset purchase. Buyers should push for a management agreement to maintain continuity while obtaining their own permits (i.e., be able to continue operating under the seller’s permits for a period of time after closing). Sellers will generally want a shorter management period and to be completely out of the business sooner than later. The seller needs to analyze and determine whether they’re going to hold to selling everything at once (probably preferable) or piecemeal (different equipment to different buyers). Is the seller keeping the brand and just selling equipment?
Brook Bristow– If you’re a buyer, don’t try to force a deal. Make sure it’s the right deal instead of just a deal. Not in this environment. That’s especially true if you’re a first-time buyer, and/or it’s your first foray into the industry. And if it is your first foray into the industry and you’re someone with a passion for the business, really think about it. Turning a hobby into a career might sound great as you sit in a cubicle, but it’s a real business and has to be treated that way.
If you’re a seller, I’d say don’t put pressure on yourself to “win” the deal. An offer is a blessing right now if you’re looking to make an exit, so be reasonable rather than radical. There’s so much competition in terms of other small businesses that could be purchased. And while they might not be as sexy, they have a much better cash flow, so just be aware of that and don’t try to nitpick every point of your deal.
Matthew McLaughlin – Prior to looking to buy, it’s helpful to first understand why you’re doing it. Does the brewery need additional capacity? Is it a strategic acquisition? Is the brewery trying to diversify product lines? The answers to these questions should guide the due diligence process and the deal terms.
As a buyer, during due diligence, you are trying to determine two fundamental and highly interrelated things: value and risk. The target brewery has value based upon any number of generally accepted valuation methods, but these methods may not fully account for the inherent risk.
By way of example, suppose the target brewery employs 35 people, 7 in management roles and 28 in support roles. If none of these individuals are subject to employment contracts or bound by standard employment terms and conditions in a handbook, there is a risk that a current employee could misappropriate a trade secret with little or no recourse.
On the seller side, my recommendation is to be incredibly organized and thorough prior to commencing due diligence with a buyer. Buyers are performing due diligence on targets to determine the truthfulness of representations made about the business and to assess legacy risk. We had a multi-million-dollar acquisition nearly fall apart over a trademark filing.
As a seller, make sure you are getting the right counsel and guidance on the front end. In almost every instance, a well-versed M&A lawyer and advisor will net a greater purchase price than going through a sale alone or with someone that does not have the requisite experience.
Q: Trademarks are always something breweries need to be aware of. What are the top things breweries need to know about trademarks in 2023?
Mike Drumm – Trademarks are a critical consideration for breweries at any stage. They not only protect your brand and keep your intellectual property strong, but they are a key component in avoiding time-consuming and costly legal issues. Whether you are opening a brewery for the first time, acquiring existing IP, or expanding your operations, you’ll want to consider some or all of the following:
- Conduct a comprehensive search. Before selecting and registering a trademark, breweries should conduct a thorough search to ensure that it is available and does not infringe on any existing trademarks. This can involve searching the USPTO database for registered trademarks, online research with resources like Untappd, and even on-the-ground prospecting (did you get the idea for that great name when you were out at another brewery having a beer?). You may also consider working with a trademark attorney to identify any potential conflicts, as they will likely have resources and procedures in place to look for red flags.
- Register the trademark. Once a prospective trademark has been vetted, breweries should consider registering it with the US Patent and Trademark Office (USPTO) to obtain legal protection against others using it. This can involve working with a trademark attorney to navigate the registration process and ensure that all requirements are met. It should be noted that the USPTO is averaging 9-11 months before they look at new applications due to a backlog. This means that it may take a year or longer before a registration is issued.
- Monitor for infringement. Even after a trademark has been registered, breweries should remain vigilant. This can involve conducting regular searches, communicating your trademark rights to infringers, and, if necessary, taking legal action to enforce your rights and defend your trademark.
- Avoid infringing on others’ trademarks. Of course, there are two sides to every trademark coin, and breweries should also be careful to avoid infringing on existing trademarks owned by others. This means there should be equal due diligence when selecting new brand names and label designs, and the use of anything that could be seen as confusingly similar to existing trademarks owned by someone else should be avoided.
Ultimately, breweries should focus on selecting trademarks that are memorable, unique, and make sense, then take steps to protect and enforce them, avoiding potential legal issues that could impact their business and brand reputation.
Scott Burger – If they haven’t registered to protect their brewery name/logo yet, they should be talking to their trademark attorney about it immediately and getting that done (if possible). The same goes for any flagship beers or popular beers that they would not want to lose the brand on (or have others use the same). If they already have registered trademarks, they should make sure to file maintenance documents/renew them and proactively police their trademarks in the marketplace.
Brook Bristow – There are more trademarks in the alcohol categories and associated categories than ever before—so it’s getting more difficult to get the name you want. And filings as a whole are down. Economic conditions are certainly contributing to that. That all being said, we’re seeing less appetite amongst our smaller producers for filing applications due to the costs, and an increased appetite among our bigger producers to file new applications, renew registered trademarks, and police their existing ones.
Matthew McLaughlin – Take them seriously and stop ripping off candy bar labels for adjunct stouts. It’s lazy and costly.
In all seriousness, trademarks are so incredibly nuanced, it is difficult to limit this to one or two issues. With the sheer number of products on the market and the introduction of new malt-based and distilled spirit-based products, it is getting increasingly more difficult to navigate trademarking.
Our best-practice advice is to trademark the name of the brewery and core, year-round products. While this appears simple on the surface, it is a grueling process at times that requires advice and guidance from a well-versed trademark attorney.
Q: If a brewery is going to branch out from its normal core beer, what are some things they need to be aware of as they add additional products (spirits, cider, wine, CBD, NA beer, RTD)?
Mike Drumm – For breweries planning to expand from beer-only production to a wider beverage portfolio, whether that means cider, spirits, wine, CBD, NA beer, or RTD (ready-to-drink) beverages, understanding the regulations and legal requirements for each product category is critical. This will largely come down to licensing, which varies from state to state. You’ll also want to ensure that you have the necessary equipment and expertise to produce each type of beverage and carefully evaluate the market demand and profit potential of each new product line. Additionally, it’s important to consider how the new products will fit into the brewery’s overall marketing strategy, what branding will look like, and how these rollouts will impact your sales approach for both on-site and distribution.
Scott Burger – Permitting and planning are paramount. Talk to your attorney. Plan before building out new spaces and buying new equipment. Layouts of spaces for distilleries and the rules for sales are very different from beer/wine. There are different labeling/formula requirements for NA beer. CBD beer isn’t legal anywhere, other than using sterilized hemp stalks and seeds.
Brook Bristow – One thing I love about the industry is the innovation and the constant evolution of the businesses in it. But sometimes, industry members run before they can walk. Wanting to launch new product lines is great, but each one carries with it different rules and regulations than you might be accustomed to. Also, it might not be legal in your state. So, make sure you’ve done your homework with a professional before spending the time and resources on the development.
Matthew McLaughlin – A brewery expanding its product line needs to initially be aware that many of these other products are regulated differently at the federal and state level. You cannot just go purchase a still to make spirits without the proper federal and state licenses and permits. In some instances, the brewery will need to physically isolate or close off the other business product lines from the underlying brewing operations.
Q: What roadblocks/issues do breweries face with changing their model, (i.e., reducing distribution footprint, going direct to consumer, opening more taprooms)?
Mike Drumm – Breweries can face several roadblocks and issues when changing their business model. These include:
- Legal and regulatory hurdles such as obtaining the necessary licenses and permits for direct-to-consumer sales or taproom operations and complying with state and federal laws related to alcohol distribution and sales.
- Financial challenges with the cost of building or expanding taprooms, hiring additional staff, or investing in new equipment and infrastructure.
- Operational complexities like managing inventory and supply chain logistics, coordinating multiple distribution channels, and ensuring consistent quality across all products and locations.
- Branding and marketing considerations like maintaining a consistent image and messaging across all channels and managing customer expectations for product availability and quality.
- Competition from other breweries and beverage companies, as well as changing consumer preferences and trends in the craft beer and beverage market.
Overall, breweries must carefully consider all of these factors and develop a well thought out plan for changing their business model to ensure long-term success and sustainability.
Scott Burger – The biggest roadblock is exiting a relationship with a distributor if they have one. Going direct to consumer and opening new taprooms isn’t overly difficult, other than identifying suitable taproom space(s), securing it, and obtaining permits for it. It’s important to keep in mind the “3 satellite retail locations” that North Carolina allows and to plan accordingly (the taproom connected to a brewery does not count as a satellite) as the brewery grows and expands to new areas.
Brook Bristow – Laws are always slow to adapt to the industry, and that’s true in some states more than others. We’ve certainly seen COVID provisions that extended rights be rolled back and then not put into law in some states, while in others, legislators saw what worked and helped businesses and codified them. But besides laws, changing models in midstream certainly could bring on other challenges—whether it be the need for ownership changes, new equity needs, better employee procedures, trademark additions, or maybe licensing challenges.
Matthew McLaughlin – Many of the roadblocks are regulatory in nature. It’s not as simple as just changing your business model.
By way of example, in some states, additional taprooms are allowed, but all of the beer sold out of each taproom must actually be brewed and packaged in that taproom. This means that a brewery cannot transfer beer produced at a production facility to a taproom.
In terms of potentially reducing a distribution footprint, every brewery needs to be aware of the franchise laws that apply to the relationship between the brewery and its distribution partners. Most franchise laws will not allow a brewery to unilaterally terminate a distribution relationship. The distributor must consent to the termination, and the brewery may have to buy its way out of the relationship or withdraw products from a particular market for a period of time.
Attribution: Article Retrieved from United Community Bank, written By Jason Sleeman, National Craft Beverage Lender for United Community Bank .
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