Issues to Consider When Buying and Selling a Distillery
The distillery business is growing and presents a lot of opportunities for successful investments. Several high-profit acquisitions happen every year, and the trend is expected to continue. Whether you are looking to buy or sell a spirit brand, there are a few issues that could cause some setbacks, but with the right, due diligence everyone can walk away from a winner.
Structuring the Transaction
When it comes to selling a spirit brand, the owner has two options regarding the sale; they can participate in a sale of stock or a sale of assets. Both provide benefits and the choice of which one is better depends on what you want from the deal.
A stock sale revolves around the buyer stepping into the seller's shoes and taking over complete responsibility for the business. This takeover includes the business entity such as the corporation, limited liability company, and partnership. Include in this action is the buyer acquiring assets and liabilities. In a stock sale, the seller gets to walk away from the deal clean and leaves behind everything involved with the company to the buyer.
The biggest difference between an asset sale and a stock sale is the amount of control the buyer has. Both the buyer and the seller negotiate terms, deciding what or how much becomes the buyer's responsibility and what stays the seller's responsibility. It's a division of assets. This type of deal takes a little longer because of the back and forth while negotiating. Many buyers need to make sure they are acquiring all the necessary components of the business to operate such as obtaining the recipe, trademarks, and copyrights.
Before honing in on the type of sale that looks most attractive, keep in mind each one brings about a list of tax compliances that may sway your decision. Generally speaking, stock deals are beneficial for the seller because they can take advantage of the lower capital gains tax rate on the money brought in from the transaction. However, buyers may lean towards an asset deal because they get to take a step-up in taxes based on the purchased assets. The buyer can obtain tax savings through depreciation and amortization deductions.
Running a spirit brand comes with a lot of regulations, permits, licenses, and approvals on both state and federal levels. With such strict guidelines for a company to operate on a daily basis, it should come as a no surprise that buying and selling an alcohol company will come with just as many rules. A seller has to maintain federal permits to distill and trade their product. However, during a stock deal, the seller will not need to worry about limitations because they can continue production as usual. It's the buyer who needs to consider the limited window of opportunity they have between closing the deal and filing amendments for the business to continue operation.
In contrast, during an asset sale, buyers must apply for a new Basic Permit and DSP Registration that usually comes with a wait time. Ideally, when acquiring new assets, you don't want to shut down temporarily while waiting for permits. In most cases, during an asset deal a "Transition Services Agreement" is reached whereupon the seller agrees to continue working the distillery until the buyer secures all the necessary documentation.
Once you've considered the federal regulations, you then need to tackle the requirements needed to operate at a state level. Each state has its own set of rules, and some often align with federal laws. However, this isn't always the case, and while ironing out the deal, you need to consider what setbacks might pop up while securing the transaction.
When buying and selling a spirit brand, the buyer will want to do their due diligence and review all the assets and liabilities of a company to make sure they are getting the best deal. For the seller, it's a great idea to beat the buyer to the punch and conduct an internal review. This can help prevent problems from arising down the road that might result in a price drop or stop the deal from moving forward. Things a seller could look for is:
- Making sure all state and federal taxes are paid in full.
- Ensuring all of the business's licenses are active and have nit lapsed.
- Identify all of the distillery's licenses.
- List all officers, directors, and owners
There is one aspect of selling a spirit brand that transcends all business deals, and it's a contract review. Buyers in an asset sale, want to ensure they are not left with an "anti-assignment" clause that either prohibits the assignment of the contract without consent from the other party or prohibits transfer at all. When a seller is conducting their review of the business before a sale, they can get the ball rolling on receiving necessary consents or waivers to reduce the number of delays in the transaction.
Another clause that could trip up a smooth closer is the "change in control." This clause impacts buyers and sellers in stock deals. Much like the anti-assignment, the change in control requires one or both parties to the contract seek the other's consent if they undergo a change in control. Some stock deals, however, can be affected by verbiage in an anti-assignment clause and should look for language that defines "assignment" in a way that includes a change in control of the business.
These issues are just the tip of the iceberg regarding the sale of a spirit brand. When you are in the process of buying or selling a distillery, you need the support from someone who understands the challenges, risks, and rewards. At Brindiamo Group, we have a long resume of mergers and acquisitions that have been successful, and it’s getting longer all the time. Contact us today to put our expertise and experience to work to make sure that you get the deal that you deserve.
Marc E. Sorini and Barret K. Lopez, “Issues to Consider When Buying or Selling a Craft Distillery.” American Spirit, Winter 2016. Pages 23-25.