In 2010, I invested in a local startup craft brewery. In 2020, the brewery sold. I share my experience and return on investment as a microbrewery investor.

Today’s Classic is republished from Physician on Fire. You can see the original here.

Enjoy!

“We should start a brewery,” I said. This was toward the end of an evening of ale sampling at a beer-tasting club I had started, the ad hops committee, back in 2010.

There was no brewery within a 40-mile radius, and I figured our little town could support a small craft brewery. I found out I wasn’t the first person to conjure up such an idea.

That night, I learned that an acquaintance of mine already had the business plan, location, and a number of investors for a soon-to-be-launched local brewery.

Within a few weeks, I was an investor, too.

Just shy of a decade later, that brewery has been sold to a new owner. Today, I’d like to share my experience and return on investment as an investor in a microbrewery.

Free Beer Plus Profits! A Craft Brewery Investment Goes Full Circle

If someone else hadn’t taken the initiative, I highly doubt I would have actually gone ahead and started a brewery.

In 2010, I was working long hours, taking anesthesia call every 3rd night with no post-call days off. We had a one-year old baby boy at home and his brother was on the way. I was lucky to find time to enjoy a few beers, and I can’t imagine, even with a lot of help, how I might have managed to start something of my own.

Therefore, I am eternally grateful that others acted on the idea before I had a chance. They saved me from myself.

Starting a Brewery

The brewery was the brainchild of two recently retired executives. Sitting on a beach and sipping beers in Florida, they wondered what it would be like to open a brewery of their own. They did some brainstorming, found a brewmaster, and got serious about this endeavor.

By the time I was aware of it, the plan was fully formed. The two founders would each own 30% of the brewery, and up to about 10 investors, preferably people with something to offer the brewery in terms of knowledge, skill, or time, would invest the remaining 40%.

The brewery would be housed in new construction, and a shiny new 15-barrel stainless steel brewhouse would be installed. Such a setup does not come cheap. The building and equipment alone cost well over a million dollars.

Like most new buildings and new businesses of this nature, loans were utilized to get off the ground, and the project was more than 50% leveraged.

I was excited to be part of this startup brewery, and thankful that I didn’t have to do any of the legwork. I decided to purchase shares that would make me a 4% owner of the brewery.

My Role at the Brewery

Among the investors, I was one of the youngest, and easily the most “into” the burgeoning craft beer scene. I had lots of ideas, but my opinions didn’t carry as much weight as I had hoped they would.

In the early days, I took on the role of brewery photographer. I photographed the groundbreaking ceremony and took pictures of the construction and installation of equipment as the project progressed.

When the brewery opened, I snapped photos of all the merchandise we’d be selling to be displayed on the website.

I began brewing my own beer at home — being an investor in an actual brewery is a great excuse to get started — and I was able to talk shop with the brewmaster and try his beers as soon as they were ready (and sometimes before).

Turmoil

A couple months after the only brewery in town opened, the only hospital in town was failing. I lost my job, and the hospital shut down shortly thereafter. We moved many hundreds of miles away.

For better or worse, I had also recently attended an auction and purchased a small lake cabin in the area just weeks before losing my job. That turned out to be a blessing, as having a summer place there kept us connected to the family and friends we had in the area, and it kept us coming back to the brewery, as well.

There was some turmoil at the brewery, also. Business was pretty good, but not great, and in order to continue growing, the investors were required to pitch in more money.

There were a total of 5 of these cash calls in the first 4 years, and the sum of them equaled about 1/3 of my initial investment.

Employee turnover is natural in this business, and the brewmaster was replaced in those first few years. The next brewmaster helped right the ship, coming up with a recipe for a popular beer that now accounts for the majority of the beer brewed at the place. He eventually left for another startup, and the brewery operations are in the capable hands of brewmaster number three.

Brewing Success

The 2010s were a time of rapid expansion in the craft brewing industry. When this brewery started, it was among the smallest of about 100 in the state.

By the end of the decade, it was one of the 20 largest out of about 400 statewide in terms of production. That is a success story by any measure.

The brewery had found its niche — it’s most popular beers were flavored with fruit. Blood oranges, blueberries, yuzu fruit, and cherries adorned the labels and beer names. With so many breweries proliferating, they had to find a way to stand out, and they did so with fruit.

They also implemented a number of the suggestions I had made way back before they opened or shortly thereafter. They just waited at least a few years or more to do so.

I pushed hard for cans back in 2010. They bought a bottling line. Now, they have a mobile canning service come by regularly to can their products.

“Brew an IPA,” I cried! The second brewmaster heard me, and it’s now a flagship beer of theirs.

Mug club. Discount nights. A pilot brew series. My ideas weren’t original ideas, but I had my finger on the pulse of the craft beer industry. Although my suggestions were largely dismissed, most of them came to fruition eventually. Better late than never!

By 2016, the brewery was firing on all cylinders and we received our first dividend check. It was equal to 4% of my original investment. We received the same 4% dividend check-in 2017 and 2018 as the brewery continued to be profitable.

The Big Announcement

In July of 2019, just one month before I’d be moving back to the area as an early retiree, all of the investors were invited to participate in a conference call with the founders.

Hmmm…

Although I hadn’t heard so much as a rumor of a sale, I had an inkling that was going to be the topic of discussion. The founders had worked hard to grow this business, and they had used nearly a decade of their supposed retirement to make it happen.

My suspicion was confirmed. The brewery would be changing hands in four to six weeks.

Four to six weeks turned into four to six months and then some, and the deal didn’t actually close until March of 2020. My check was literally lost in the mail, and I was finally paid out in May of 2020.

With the nation on lockdown, the spring of 2020 had to be a terrible time to take ownership of a brewery, but that’s how it worked out. Based on a conversation I recently had with the current brewmaster, it sounds like they actually weathered that storm better than most.

The Return On Investment

Before I share the numbers, I have to say that our return on investment was more than monetary. It was never really about the money, although I am glad to have turned a profit.

For nearly a decade, we owned part of a brewery. I gave tours to friends. I sampled new beers before they were offered to the public.

I could act like I owned the place because I did! Well, I owned a few bar stools and maybe a table or two, but still.

There was also the policy that employees and investors were entitled to two free pours any time they stopped by the taproom. Although we lived a couple of states away, we did manage to get there quite a few times every summer to take advantage of said policy.

On to the Numbers

I will be intentionally vague in some respects, but I can tell you my precise internal rate of return. I earned an annualized 5.41 percent.

That figure is calculated using the XIRR function in Excel that takes into account the amounts and dates my money was invested via both the original investment and follow-up cash calls, as well as the dividends paid out and the check I received when the brewery sold.

Another way to state my return on investment is to say that the total return was 58%. That is, I got all of my money back, plus an additional 58%, again factoring in the capital cash calls paid in and the dividends received.

How does that compare to the S&P 500 over the same timeframe?

Not favorably.

According to the DQYDJ calculator, the money I had invested in US large cap stocks from September of 2010 to May of 2020 had a total return of 214% or 12.6% annualized.

I must say I was surprised and somewhat disappointed to realize that the returns from a successful craft brewery that benefitted from thousands of hours of free labor put in by the two founders and other investors would pale in comparison to the return of an index fund.

I was also disheartened to learn that about 1/3 of the profits from the sale of the brewery went to a broker that was used to identify a buyer and arrange for the transaction. As far as I know, none of the investors were offered an opportunity to put together a bid to maintain ownership, and we were not offered the right of first refusal, either.

If it weren’t for the hefty broker’s fee, my returns would have been closer to 8% annualized, and there’s also the chance that I might still be an owner of a larger portion of the brewery.

The Value of Free Beer

Since we weren’t around most of the year to take advantage of the free beer policy, we used to make every excuse in the book to run into town and stop by the brewery.

“That book we had on hold at the library came in — let’s go pick that up and hit the brewery on the way home.”

“Why don’t we take the kids to the park and then stop by the brewery.”

“We’re getting low on milk. And beer.”

It just so happens that our kids loved going to the brewery, too. They had some games to play, the popcorn was unlimited and outstanding, and we usually let them play games on their Kindle there — a rare treat.

I always left a $5 bill in the tip jar, so the taproom trips weren’t exactly free, but technically the beer always was — and my wife and I would usually have up to 3 to 4 of them between the two of us.

Over nine years, let’s say we stopped by an average of 20 to 25 times a year. We’ll call it 200 visits. That’s maybe 700 free beers we enjoyed, give or take a couple hundred.

If those 700 beers were worth $40 apiece, our return on investment would have equaled that of the S&P 500.

At a value of maybe $5 apiece, we didn’t fare quite as well. But like I said, it was never about the numbers, anyway.

I’m also happy to report that my free beer tapline has not run dry. This was one of two investments I’ve made in small town breweries, and the other one promises in writing that I’ll get free beer for life (the life of the brewery or me, whichever ends first).

With this investment, we wanted to be a part of a budding beer business in our small town. Although it didn’t all work out for us exactly as planned, and we only lived nearby for a few months of its existence, it was still fun while it lasted.

We are now selling that little cabin just down the road from the brewery that we nabbed at auction for $15k, too.  I anticipate a return much better than 5.41% on it.

Cheers!

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