You have reached the point where your beer finally tastes good, sales are ramping up, and you are starting to hit the limits of your production capacity. It is hard to argue that business growth is a bad thing, but if growth is not managed properly within the financial and operational capacity of the business, it can pose undue pressure on the business owner to continue to operate successfully. Take your business to the next level by familiarizing yourself with the pros and cons of financing options for your brewery, corporate tax structuring, and tax credits you may be eligible for.
Most start-up ventures almost always initially rely on personal savings or investment from friends and family, but as the business starts to grow, create value and, perhaps most importantly, begins to generate cash flow, the number of available financing options expands as well.
Of course, the pros and cons that relate to each available option should be evaluated with care. While non-exhaustive, the list below should give you a sense of the various combinable financing methods available to your business.
Before you have the ability to obtain a major funding round, angel investors can provide the capital and even some operational expertise to help grow your company. Angels are largely relying on the company increasing in value over time to generate a return and therefore do not generally expect structured re-payments.
However, most angels will likely want an equity component of your business and can often try to put additional pressure on management to produce returns.
Recent developments in the crowd funding model now allow for equity crowd funding – meaning that instead of receiving a traditional funding perk like a pre-sale access or a free t-shirt, you can now own a portion of the business. This becomes a true advantage when it comes to attracting investors. Where bringing angel investors on board could be a time-consuming process, crowdfunding platforms streamline the process by allowing companies to post their pitch in one spot where it can be viewed by a broad range of investors.
Be wary of the potential fees that the platform charges and also consider the potential implication of having a number of new shareholders (whether they have voting rights or not).
Federal Government Tax credits, Grants & Bursaries
One of the most overlooked resources offered by the Federal Government is the Concierge Program. Concierge is a single access point to funding, expertise, facilities, and global opportunities for small-businesses. While not all businesses will qualify for funding, you will have a dedicated consultant to help you navigate all of the government programs to figure that out. Most importantly, it is absolutely free!
Often only associated with tech-focused start-up businesses, there are plenty of local economic development incubators that offer a number of services such as funding programs, consulting, and HR. These resources are offered to a wide range of businesses and are often available for a small membership fee.
Friends and Family
You have undoubtedly heard it said to never to do business with friends and family, but in a lot of cases they may prove to be your best access to capital. The interest rate and repayment options will likely be flexible and they might be willing to accept more modest returns than a typical angel investor.
Or course, the last thing anyone wants is to end up entangled in a heated lawsuit with a family member, but such unfortunate situations are certainly not unheard of when mixing business with family. Ensure that expectations are clear and formally documented from the start, and clarify that investment in your business does not equal decision making capacity.
A traditional bank loan will generally be assessed based on a mix between the value of the underlying assets of the business, the amount of existing leverage, and the cash flow available to service the debt. Primary advantages are that the interest is tax deductible and there is no loss of equity.
One of the paramount disadvantages to bank loans is that they are very difficult to obtain unless a business has a successful track record or hard assets to serve as collateral. Further, banks are inherently risk averse meaning that in the event of default every attempt will be made to recover any lost funds including going after personal assets.
Equity financing is attractive because it does not demand repayments, but unfortunately it often represents the most expensive form of financing because you are giving up ownership of the business, the impact of which increases as the business grows in value. Equity funding can be particularly relevant if the business does not initially generate a profit and has no ability to pay off debt.
Structuring for Growth – Corporate Tax Considerations
It is never too early to start thinking about the appropriate corporate structure to facilitate growth for your brewery, plan for a possible exit strategy, or to pass the business on to the next generation.
One of the most important first steps is to ensure your corporation has the appropriate share classes authorized for issue. If it does not, then you should consider amending your business’s articles of incorporation to allow for the appropriate types of shares to facilitate a tax planning transaction. If you are starting a new corporation then consider consulting with your lawyer and accountant to ensure the right types of shares are included in your original articles of incorporation.
Consider the most common corporate structures that facilitate growth and tax planning:
- Creating a holding company to hold the shares in your business is one option to keep in mind as your business grows and accumulates wealth. It is always a good idea to move some of your brewery’s wealth outside of the company walls and into a separately owned holding company. This way, wealth can be accumulated in the separate holding company which ensures your operating company remains clean and creditor proofed.
- Creating a family trust to hold the shares in your business is an attractive option if you are beginning to consider family succession. With this in mind, this corporate structure may not be useful if you have limited income splitting opportunities and an exit strategy is not something you are considering for the near future. With a family trust, you have the opportunity to income split with beneficiaries of the trust and it also facilitates the transition of your business to the next generation. Another benefit of creating a family trust is the potential to multiply the capital gains exemption on the sale of qualifying company shares.
When Audits/Reviews/NTR are required
There are three main reports provided by a public accountant, Audits, Reviews and Notice to Readers.
Audit and review requirements are generally imposed by third parties for example; a lender may require an audit or review of a company before granting and in maintaining credit facilities. It is also not uncommon for shareholders to require audited and reviewed financial statements for their business.
Generally the most costly, audits are a comprehensive inspection of an organization’s books of account. The objective of an audit is for the auditor to obtain reasonable assurance that the financial statements are free from material misstatement. Audited financial statements must be preparing using an appropriate accounting framework for example Canadian Accounting Standards for Private Enterprises. Examples of procedures that an auditor performs can include inspection of documents, inquiry and discussion with management, external confirmation, observations, and analysis.
Reviews are typically less costly than audits, and are completed with the aim to conclude that an organization’s financial statements are plausible or worthy of belief. The financial statements must also be prepared using an appropriate accounting framework. During the review, an accountant will perform inquiry, discussion with management, and analysis.
A notice to reader or compilation engagement is the least expensive of the three reports. The accountant does not provide any assurance that the financial statements are free of material misstatement. Instead, the accountant arranges the information provided by the company into a financial statement. Readers are cautioned that the financial statements may not be appropriate for their purposes.
Keeping clean records is the key to executing a successful audit, review, or notice to reader engagement that is on time and on budget. Not having the appropriate record keeping and bookkeeping processes in place will result in a stressful year end close. To avoid the latter, consider hiring an experienced bookkeeper to help you with these needs which will allow you to focus on what you do best-running your business.
A good bookkeeper should be diligent with invoicing, entering bills, tracking inventory, and reconciling bank and credit cards on a regular basis. If your business is becoming very large, you should consider investing in additional bookkeeping assistance by way of a controller as well as a contract or full time Chief Financial Officer to help oversee the financial accounting team at your business.
Tracking inventory in a brewery can be a complicated process. There are a lot of moving parts, raw materials, stages of production etc. that need to be considered. On a yearly basis, or more often if you can, count your inventory to ensure your financial statements reflect an accurate value for your inventory held. If you are required to provide audited or reviewed financial statements an inventory count is required. There are software options in the industry for tracking inventory specifically for breweries. The software should integrate with your existing accounting software package.
SR&ED Activities in the Brewing Industry
One of the best known tax credits offered in Canada comes from the Scientific Research and Experimental Development (SR&ED) program. The SR&ED program is an incentive program offered by both federal and provincial governments that provides refundable tax credits to companies engaged in scientific research and experimental development (activities that are the foundation of any brewery). A brewery may be eligible to claim refundable tax credits, above and beyond their regular deductions. For qualified projects, the refundable tax credits can be as high as 65% for eligible salaries and 43% for other eligible costs, including contractor fees, materials and overhead.
The unique perpetuity of evolution inherent in the nature of craft breweries makes them a perfect fit for SR&ED credit. With micro adjustments in recipes, the pioneering of new practices, and the introduction of surprising ingredients, they are the epitome of innovation in everything that they do. The SR&ED program was developed for businesses exactly like this. The spectrum of SR&ED eligible activities is vast, including, but not limited to:
- Developing innovative beer styles using local or atypical ingredients
- Enhancing stability parameters (i.e. the impact of barrel aging, filtration, bottling, kegging)
- Experimenting with yeast cultures
- Reducing environmental impact through modified processes
The SR&ED program is open to Canadian breweries performing qualifying activities in Canada.