ISSUES TO CONSIDER WHEN BUYING OR SELLING A CRAFT DISTILLERY BY MARC E. SORINI AND BARRETT K. LOPEZ
O
ne of the last things anyone thinks about when embarking on a new, exciting venture (like opening their own distillery), is how things will come to an end. The fun is in the journey, in the craft – and those are rightfully the focal points for entrepreneurs running their own craft distilleries. But, inevitably, the time comes for the next adventure, the next enterprise, the next journey. That time may come when an entrepreneur seeks to recoup the investments they have made in their business or wants to transfer that business to the next generation to carry it forward. No matter the driving force, there comes a time in the life cycle of every business that requires an entrepreneur to consider a sale or some other form of transaction. On the other side of the equation are those looking at the recent boom in craft distilleries and asking themselves: How can I get in? The number of craft distilleries has exploded in recent years. According to the American Craft Spirits Association, there are more than 1,300 craft spirits producers currently operating in the U.S. – more than three times as many as in 2007. The rapid growth in the number of craft distilleries and the sales of craft spirits has generated a corresponding growth in the number of opportunities available for potential buyers. There have been several high-profile acquisitions of craft distilleries in the past year, and we expect that trend to continue as opportunities proliferate. This article explores at a very high level some of the issues involved with buying or selling a craft distillery.
ASSETS VS. EQUITY – STRUCTURING THE TRANSACTION An owner generally has two choices in terms of how to structure the sale of a business: a sale of stock (or other, analogous equity interests) or a sale of all or substantially all the assets of the business. In a stock sale, the buyer steps into the shoes of the seller as the WWW.ARTISANSPIRITMAG.COM
Marc E. Sorini is a partner in the law firm of McDermott Will & Emery LLP, based in the Firm’s Washington D.C. office. He leads the Firm’s Alcohol Regulatory & Distribution Group, where he concentrates his practice on regulatory and litigation issues faced by supplier-tier industry members. His practice for distillers includes distribution agreements, distribution counseling and litigation, product formulation, labeling, promotional compliance, compliance strategy, and federal and state tax and trade practice enforcement defense.
owner of the business entity (e.g., the corporation, limited liability company, partnership). This means that all of the entity’s assets and liabilities (including undisclosed liabilities) stay with the entity and become the buyer’s responsibility, subject to any indemnities negotiated as part of the deal. Sellers like a stock deal because it allows them to walk away from the deal “clean,” leaving behind all of the assets and liabilities of the business. In an asset sale, the buyer and seller negotiate what specific assets and liabilities will be sold to the buyer and what assets and liabilities will remain with the seller. This clear division of assets and liabilities gives the buyer more certainty with respect to exactly what is and is not included in the sale. Though a buyer may prefer the certainty provided by an asset deal, the process is often NO MATTER THE more onerous than a stock deal. DRIVING FORCE, A buyer in an asset deal must THERE COMES A TIME be careful to ensure that all of the assets necessary to IN THE LIFE CYCLE operate the business as a OF EVERY BUSINESS going concern are included THAT REQUIRES AN in the sale. This includes negotiating the transfer ENTREPRENEUR TO of intellectual property CONSIDER A SALE OR (e.g., recipes, trademarks, SOME OTHER FORM copyrights) and the hiring of key employees. OF TRANSACTION. Tax issues also play an important (sometimes the most important) role in determining how a deal is structured. As a general matter, stock deals are beneficial to the seller because the seller is able to take advantage of the lower capital gains tax rate on the proceeds of the sale. A buyer, on the other hand, may prefer an asset deal because they get to take a step-up in the tax basis of the purchased assets.
23