24 Oct Craft Beer Is A Business After All, and There’s Much to be “Accounted” For
Opening a craft beer brewery isn’t as easy today as it was even five years ago. The amount of competition for the craft beer drinker’s dollar has increased dramatically, and certain regions could be considered at least full, if not saturated.
In this environment, the normally tight budgets for breweries become even tighter; a brewery needs to offer both great beers and great experiences at a price that will bring patrons to their door again and again. Certainly the personal relationship that a brewery builds with their patrons is important, but today it requires much more than just innovative beer and a memorable experience – it takes business savvy.
Nobody opens a brewery with the intention of losing money, but there are definitely some breweries that handle the business side of brewing better than others. Small chances to save money or spend it wisely can make the difference between not breaking even and breaking the bank. Without exaggeration, a brewer can mismanage themselves right out of business.
The vast majority of craft breweries are small operations, a few people working together while learning those parts of owning a business that they had no idea existed. Doing the books is one thing – keeping track of credits and debits along with paying employees (and hopefully themselves), but knowing the ins and outs of tax law, federal monetary regulations, and planning for the stability of the business in the future is something very different. Wouldn’t it be nice to have a team of experts on a brewery’s side?
In our continuing series on industries and entrepreneurs who have carved out a spot along the edges of craft beer, here is the story of an accounting firm that has learned to do more than just taxes and financial statements when it comes to breweries. Somerset CPAs and Advisors has become experts in the issues related to the financial and regulatory health of a brewery, and more breweries are learning how to make the most of what tax and regulatory laws allow in order to maximize their profits.
Somerset CPAs and Advisors started as Whipple & Co. in 1960, acquired some other accounting firms, merged with First Indiana, and then spun off as Somerset in the early 2000s. The company now has its main offices here in Indianapolis, but has clients all across the country.
Somerset is a local firm with many CPAs, but it was one in particular, Becky Fromm Quintana, who brought a specific idea of how breweries could possibly make a tax law work for them because of the nature of their work. From this grew a sub-specialization of the firm’s work. There are other accounting firms that specialize in brewery operations (mostly in Oregon and California), but Somerset is the first I have noted to use a group of industry partners to cover all financial aspects of brewing.
Becky was quick to hone in on the financial implications of brewing, mostly because she is an accountant with a love of craft beer. She told me that she drank cheap beer in college at U. Indy because that was what she could afford, but as craft beer came to Greenwood, she started experimenting. First she became a fan of Oaken Barrel, and then expanded her palette and explorations as Mashcraft and Taxman opened. The more she tried, the more she wanted to try, and it was this immersion into craft beer that got her to wondering if brewers were making the most of the laws as they were written.
I don’t pretend to know anything about tax law and I know that I am not going to explain this in complete detail, but basically Becky, with the help of Dan Dickerson and Jay Feller at Somerset, determined that if a brewery brews any experimental beers or otherwise experiments with their processes or ingredients, then they could take a Research & Development tax credit against the payroll taxes on a brewer’s salary (there is some timing issues involved there and where you can take the credit, but the details vex me). Imagine how many brewers would like to have advice and help in saving money in ways like this.
Jay Feller was eager to expand Somerset’s consulting work into the brewery area, in part because he too is a craft beer fan. Growing up with beer as a good German Catholic, Jay found the Melody Inn as a student at Butler. He drank Sam Adams when it was the only real craft beer out there and liked the quality of these beers so much that he expanded his repertoire as more breweries opened. Now he and his wife enjoy traveling around to visit breweries in different cities and states. It was a natural fit to bring brewery consulting into the firm.
As part of the restaurant, bar, and brewery industry specialization group for Somerset, Jay, Becky, and Dan have assembled a group of representatives from many companies that help them devise ways to help these businesses make the most of the tax and financial rules under which they operate. Any accounting firm could prepare taxes and financial statements for a brewery, but Somerset has assembled a team that can delve deeper into the specific issues that brewers deal with to find credits, deductions, and benefits.
Somerset uses the expertise accumulated by lawyers, insurance agencies (especially Kitto Insurance, more on them soon), banks, real estate companies, environmental specialists, security firms, etc. to maximize what they can do for each brewery client (which I can’t name due to client confidentiality issues. No really, I can’t, they wouldn’t tell me). They meet as a group almost every month to keep on top of regulations, issues, and to find ways to benefit their brewery clients even more.
For example, I know that equipment will depreciate over time and can be used to lower a tax burden, but some brewing equipment can undergo accelerated depreciation to help with lower taxes in the short term. Or, how about the volatility of brewing ingredient availability and the fluctuations in pricing for those ingredients.
Hops and malted grains are grown in most cases by small to mid-size farmers, and demand always out strips supply. The largest breweries can negotiate hop contracts years in advance, which has its own issues, but small breweries have to make do with spot markets and exchanges. The prices can vary greatly within a season or season-to-season; this makes budgeting and planning difficult for the brewers. Hedging budgets against changes in availability and price is a way for brewers to guard against these fluctuations. A good advising and consulting group is going to be able to help a brewery with this, but only if they know and understand the issues involved.
This is where the sub-industry specialization of a company like Somerset makes the difference. The specialty group of partners with which Somerset works will work to gain and use the appropriate knowledge, and if that fails to be sufficient, Somerset can call on the greater network of their industry partner – BDO Global (one of the biggest international accounting and consulting firms). Basically, what Somerset is offering is the skill and knowledge to find any tax or financial implications in those parts of business that are specific and unique to brewing.
These unique circumstances might include the issues involved with expansion. The costs associated with a second location can be credited on taxes, and training grants or credits can be applied to breweries that distribute out of state. By selling beer in another state, a brewery is actually pulling assets from that state into Indiana, so the laws are geared to help them do that – if a consulting and accounting firm knows that they are there and how to apply them.
Finally, craft beer is just reaching the stage where brewers/owners are going to be looking to retire, and perhaps sell or pass on a brewery/brewpub to their children. The tax and financial implications of exit strategies is another area where a consulting firm that knows the brewing industry can help.
Potential clients are often afraid of the cost of bringing on a consulting account, but Jay was quick to point out that Somerset can work with clients to charge less in the early days of collaboration and make up those costs when a brewery is on more stable footing. And he also noted that implementing just one or two of the firm’s programs could save a brewery enough money to pay for Somerset’s services.
Here is an established company that has expanded its consulting and services into the realm of craft beer because they realize how much of an impact craft breweries can have on their business. And the opposite is true as well, in this environment of increased competition and a need to make wise and well-reasoned decisions about their tax and financial liabilities, breweries can’t afford to be without this kind of advice. Somerset is just one more example of how craft beer has opened up niches and jobs in other industries, and how savvy business folks have found ways to make craft beer work for them, while at the same time making craft beer a stronger industry.
Somerset is a major sponsor of Hendricks County Hoppy Halloween on October 28th in Plainfield. Any brewery interested in discussing their unique financial issues with these seasoned professionals can visit them at their booth during the festival, visit their website, or call 800-469-7206.