Sorry for being a little slow to update the blog. We have been super busy trying to get our permits. There is so much to talk about since our last post, so I’ll try and put everything in the best order I know possible. The biggest news is our move from OKC to Midwest City, so I’ll go into the details surrounding that first. After we filed for our TTB license, which we thought was going to be the hardest one to get, we filed for our license with the Oklahoma Alcohol and Beverage Laws Enforcement Commission, or better known as the ABLE Commission. The ABLE Commission regulates any alcoholic beverage above 4.0% ABV.
One of the items on the checklist for the license paperwork is something called a “certificate of compliance”. A certificate of compliance is a statement issued by the city to the ABLE Commission stating that the brewery has been approved by the health department, it is zoned properly, and it meets safety and fire codes. What’s not on here is that the building has to have the correct permitted use. A building that hasn’t been permitted for use as manufacturing requires a brewery to upgrade the facility/ Now for a building that is fairly new it wouldn’t require more than a simple plan drawn up of where the building’s exits are, bathrooms, equipment, fixtures, etc. So, despite the fact that a property is zoned properly it CANNOT be used for a specific purpose. The majority of people even in the commercial real estate business don’t understand this. In fact all of the real estate agents we spoke to didn’t know about this. In fact the process of rezoning can be easier that just bringing the building up to code.
This is exactly the situation we ran into at the 1 NE 14th building. The building was built in 1934 by the Santa Fe Railroad Company and wasn’t upgraded since then. It had always been grandfathered in and never needed to be upgraded. Once we tried to switch it’s use from storage to warehouse it required the building to be upgraded. Like a good boy I took my 18 x 24” prints on the building and the site down to city hall. They were reviewed there and I was told I needed to add 2 ADA bathrooms, a 60’ ramp or a wheelchair elevator, an extra exit and 26 parking spots including 2 handicapped spots. Now because of alcohol laws in Oklahoma we are not allowed to sell beer directly to customers, so the brewery was going to be completely private.
After I made my adjustments I printed off my new plans and took them back down to the plans review department. Again, I needed to make a change and this happened about 5 times. Finally my plans were approved for review. During the review the process got held up on silly questions like whether or not us milling grain was going to create a fire hazard. Remind you that the building is solid concrete with no wood structure. I was also told on numerous occasions that we would most likely not need a fire suppression system. During the plan review the reviewer can make what they call variances, which is based upon our anticipated needs. For instance the 26 parking spots I had to put in the original plan was narrowed down to six and the ADA bathrooms were cut down to one.
The final review came about 6 weeks after the first time I had approached the department to see what I needed to do to get the certificate of compliance. To our surprise the final review showed that we needed to install fire suppression in the entire building. All 35,000 square feet, even though we were only leasing 5,000 square feet. That translates to at a minimum of $100,000. After going back and forth proposing solutions to our problem the reviewer said no to each one. Even after going over his head pleading my case to the head reviewer all we got was no.
As the lessee we didn’t want to upgrade the entire building, not that we could have anyways. The landlord also didn’t want to upgrade the building, so our options were vastly limited and we finally had to do the thing that we had been trying to avoid for so long. We had to move.
For anyone looking to open up a business I would check to make sure the building you are looking at would work for you. If you are thinking about putting something in like a bar or restaurant I would definitely hire a contractor to steer you through all the codes, rules and regulations.
With our roots firmly planted in the OKC market and investors on board, we needed to verify that we could receive a loan for the business. As I have already developed a good relationship with MidFirst Bank it was easy for us to approach them with our idea and see if it would be something they were interested in. I got the sense from my many conversations with the bank manager and business manager at a nearby branch that it would be. It probably also helped that the company I work for had a significant relationship with the bank and I had recently moved most of our business over there.
Upon completing an application and providing some necessary paperwork we were approved in the span of 72 hours. I know our contact over at MidFirst really helped to push our application along, because not only was that really quick, but it is a little unusual for them to receive apps from business start-ups seeking capital.
With that in hand we needed to decide which marketing firm to go with. We had been talking to a company called Taphandles, which obviously specializes in beer, and develops some really great graphics. They were actually much cheaper than the Dallas firms we had spoken with and really understood our business. I felt it would behoove us to speak with some local firms before we cut the check to Taphandles. I did a simple web search for “brand building Oklahoma City” on ye ol’ Google and came up with some less than stellar results. After sifting through the top 10 I narrowed my list down to 3 companies. One didn’t answer, one of the numbers didn’t work and one was MidWest Media. Midwest Media was very excited about the project and wanted to setup a meeting. I was also referred to 3 other larger firms in OKC that I met with. At the end of the day the difference was the enthusiasm they showed for us, the extra deliverables they were going to provide. The competitive price also helped.
Now with the marketing in place we needed to finalize our equipment order. All of this is going on at the same time mind you. I just wanted to chronicle the events in the order they were finalized. By the time the loan was approved we had about 6 different quotes in hand. Unfortunately it became apparent that we would be forced to order equipment from China, the reason being is that it is about half the cost. Of course there are some advantages to not ordering from China. The quality is typically better, you don’t run into fitting size problems and you don’t have to wait near as long for shipping. But with us already needing every penny we had, we just couldn’t afford to buy American. But for everything else we were going to try and Keep It Local, as we hope you do ;)
We had really narrowed down our search to two companies offering basically brokered services on importing the equipment to us. We had recently stumbled upon a new broker on probrewer.com. He was substantially less than the broker we were planning to go with and was very helpful and quick to respond to our questions. This new guy was a startup and we realized were taking a big chance. If something went wrong we would have been screwed. Upon receiving his contract I thought it looked ok, but when given to our legal counsel he thought differently. He pointed out the clear problems with the contract, which in essence would allow our broker to walk away from the deal should anything happen. This is why you have good counsel. We were really unable to agree upon anything, and needed to get something ordered ASAP as the time clock was now ticking. We decided to go back to the other vendor, and will hopefully have the equipment by early December.
With the difficulty in raising enough money to cross the threshold into feasibility in Dallas we started to look into ways that we could make the brewery happen in OKC. The problem with going with anything less than a 15 barrel system is you really start to spin your wheels as it becomes very difficult to grow the business organically. You spend all your efforts trying to keep up with brewing and your net cash proceeds aren’t enough to make upgrading to a larger system possible.
Realizing this dilemma we tried to figure out a way we could get the business up and running and create positive cash flow very quickly. Doing some quick calculations we realized it might be possible if we kept our day jobs and worked for free until the workload became too much. At that point we could quit our day jobs and work for the business for some paltry sum. We were both willing to do that because we realize the potential for the business, especially in this part of the country.
With this being the new plan we revised all our numbers and presented our new ideas to our investors. Although we had one investor drop out, due to personal reasons, our investors overwhelmingly supported our new plan. In the span of about a week something that seemed distant quickly became a reality, and we were about to be brewery owners.
After the realization that an SBA loan was not going to happen we realized we started to rethink the way we planned on raising the money. Now knowing that we could probably raise somewhere in the neighborhood of $150,000 from the bank, and not the $575,000 like the SBA told us, we needed to find the rest of the money from investors. Now, as I have mentioned in a previous blog, we projected needing $720,000. This estimate was extremely pessimistic. It covered a year of getting setup and another year of expenses should we not sell any beer at all. So, in total two years of expenses without selling one beer. We also factored in some expenses that we would need down the road, but could purchase once we needed them. In general though we grossly overestimated everything.
Now that reality had set in, we went back and look hard at each line item and realized we could get up and running with about $420,000 instead of $720,000. So we were still going to need a lot more external capital since the bank was probably only going to give us around $150,000, and we had only raised $85,000 at that point.
We never really felt like Angel investors would be the right direction to go because they typically don’t invest in things like this. They usually stay in tech related fields where the growth potential is extremely high. I had read a couple books The Craft of Stone Brewing Co. and Beer School: Bottling Success at the Brooklyn Brewery. With both businesses they raised funds through angel investors. Although both cases occurred during the late 80’s and mid 90’s we really had nothing to lose.
With that we started emailing our plans to different groups around DFW. I was shocked to get an email back from one of them that said they were interested. Thinking this might have been a form letter I called to confirm. During our conversation it was revealed that they would like us to come down to present the next day. They do presentations every third Tuesday of each month. Now, the problem was that we had no presentation ready, as we had not been approaching investment groups before. With that we had to hustle to get something put together. Per the group’s leader’s instructions we put together a 10 slide deck. Just as a side note. Anyone that is interested in raising money from a group like this should know that PowerPoint’s are rapidly replacing business plans. A lot of tech companies don’t even make a business plan.
To make a long story short, we made two presentations to these guys and spent a majority of our time trying to explain what craft beer was. At the end of the day the investor’s had two main things stopping them from investing. #1 They didn’t know the beer business. They were tech guys. #2 They, like the bank’s, had a tough time valuing risk. Unlike tech start-ups we won’t have the same trajectory of growth, but at the same time won’t have the same level of risk. They were expecting us to have a 10X return on investment over the course of five years like other tech start-ups. That was most likely not going to happen. After speaking with other start-up breweries trying to raise funds from angels our suspicions were confirmed and we halted our search for angel funds and switched strategies again.
Through my dealings with approximately 30 banks in the DFW metroplex and the SBA, I have come to realize that the SBA is pretty much worthless, and here’s why. The SBA guarantees a bank up to 75% of their losses if they go through the SBA, but banks are severely risk adverse and don’t want to lose a penny, so they don’t even enter into loans where they think they have the risk of losing a penny. Banks also don’t value risk, meaning they don’t look at a loan and say, “well company A is more risky than company B, so why don’t we charge company A 2% more interest on their loan compared to Company B”. Either the bank will lend the money at some really low interest rate or they won’t lend it at all.
From talking with the banks it seems they will pretty much lend you 75 cents for every dollar of hard assets you buy, so for us the equipment and kegs. Of course if you anticipate having any type of rent expense, utilities, salaries, etc., you better bring that money to the table. In the end we were able to get a 7 year 5.5% loan from MidFirst Bank without having to deal with the SBA at all, but I’ll get to that later.
So quite a bit has happened in the formation of the craft brewery known as Roughtail to this point, so I want to fill you in on where we started and how we got to where we are now. For me it started rather serendipitously. I was visiting Munich after a summer internship in Europe, and absolutely fell in love with the culture surrounding the beer. Aventinus made by Schneider & Sons really made a large impact on me. I decided then that I wanted to make home brew. For a couple years I dabbled in homebrewing, mainly in the german style beers, but it wasn’t until the Great American Beer Festival in 2010 that I decided I wanted to make a career out of brewing.
Tony had a similar experience to myself in that him and his friend thought it would be really cool if they started making beer together. Like myself, Tony’s friend didn’t think it was so cool after the first batch or so and fizzled out. Tony started making beer around 2005, but decided a few years after that it was something he wanted to take very seriously and started reading every book involving the science of brewing.
When Tony and I first realized that we wanted to “go pro” and started talking, we originally thought the best market nearby was the Dallas market. At that point there were no craft breweries in that market making flavorful American-style ales. Oklahoma City on the other hand, had a few breweries that had just come on line and were producing some good beers. There was also the issue of the size of the two markets, with obviously the DFW market being a much larger market than Oklahoma City. With those factors we originally chose Dallas as the place the setup shop.
Over the next three months (August 2011 through October 2011) we worked to write the business plan to present to investors. Our original amount we anticipated needing was going to be $720,000 for a 15BBL brewhouse. We anticipated raising $180,000 from private investors and another $540,000 through an SBA backed loan, I’ll get to that in the next post. In March of 2012, after raising approximately $90,000 from investors and ourselves, we hit a dead end. We had run out of leads and the potential for friends and family to finance the project looked bleak.