This allows the buyer to realize tax savings in the future through depreciation and amortization deductions, as well as through lower taxable gain on those assets in a subsequent sale. As you might expect based on the descriptions above, typically a buyer prefers a stock deal and a seller prefers an asset deal when structuring mergers and acquisitions (M&A). But there are certain unique considerations that can create exceptions to the general expectation when a craft distillery is involved.
REGULATORY “ISSUES” – EVERYBODY HAS THEM Anyone who has run a craft distillery knows that it can require seemingly countless licenses, permits and approvals at the local, state and federal levels. It should be no surprise then that the same complex regulatory structure a craft distillery must navigate on a daily basis can play a significant role in determining how to structure a sale of the business. At the federal level, every craft distillery is required to maintain a Distilled Spirits Plant (DSP) Registration and Distillery Basic Permit issued by the Alcohol & Tobacco Tax and Trade Bureau (TTB). When engaging in a stock sale, the buyer can generally continue THE SAME to operate the business under the same COMPLEX Basic Permit and Registration that REGULATORY was in effect prior to the sale. The buyer has a limited timeframe STRUCTURE A CRAFT after the closing of a stock deal DISTILLERY MUST to file amendments to the Basic NAVIGATE ON A DAILY Permit(s) and Registration(s) that adds the information for any new BASIS CAN PLAY A officers, directors and owners SIGNIFICANT ROLE IN of the business. Barring any DETERMINING HOW issues that come up in processing TO STRUCTURE A that amendment (e.g., an officer, director or owner with a criminal SALE OF THE record or some other “red flag”), the BUSINESS. business should be able to continue operations as usual. In contrast, when a buyer purchases only the assets of a craft distillery, they generally must secure a new Basic Permit and DSP Registration for the business. This can result in a transition period where, technically, the business is not licensed to operate. Few buyers want to purchase a craft distillery (or any other business) only to learn that they have to shut it down for a month or more while waiting to secure the necessary permits. To alleviate this issue, the buyer and seller can negotiate an arrangement (generally known as a “Transition Services Agreement”) where the licensed seller continues to work at the distillery while the buyer secures the permits necessary to operate the business. But this type of arrangement raises a host of other liability concerns that can result in additional indemnification obligations by both parties – including the risk that TTB or state regulators will disapprove of the arrangement. Another approach to
managing the transition issue is to engage with TTB and state regulators early in the process to obtain pre-approvals of the new licenses (subject to the regulators’ willingness to cooperate) so that they can be issued at the closing of the sale. In addition to the federal permit concerns, the distillery’s state licenses will also likely need to be amended or transferred or new approvals secured in connection with the transaction. Because every state has its own regulatory framework, significant work is required to identify the requirements for each license in each state where the distillery is licensed. Sometimes those requirements align with federal rules, but often they do not. Working with regulatory counsel early in the process to understand the federal and state-specific issues that you will face when buying or selling a craft distillery can play a significant role in ensuring a successful transaction. Regardless what structure the parties agree to, all of the issues we have discussed so far can, and should, be anticipated and addressed well in advance to make sure the transaction goes off without a hitch. The key ingredient to that “perfect deal” formula is due diligence.
DILIGENCE – GETTING IT RIGHT THE FIRST TIME In an M&A transaction, the buyer will generally engage in a due diligence review of the business they are buying. The purpose of this review is to identify all of the assets and liabilities of the business, flag potential issues and make sure that the price is right. An entrepreneur selling a craft distillery can facilitate the transaction process by doing their own, internal due diligence review before ever engaging with a potential buyer. This can help prevent problems arising down the line that could result in downward adjustments in the purchase price or even stop the deal from moving forward. One aspect of selling a craft distillery that is no different from selling any other business is contract review. Buyers in asset deals should be on the lookout for “anti-assignment” clauses in the seller’s contracts. These clauses will typically either prohibit the assignment of the contract without the consent of (or notice to) the other party or prohibit any assignment at all. These clauses appear in supplier contracts as well as in co-pack and distribution agreements. Proactive sellers that conduct their own due diligence process before engaging with potential buyers can begin the process for getting the necessary consents or negotiating the necessary waivers to eliminate or reduce delays in the sale process. “Change in control” provisions present much the same obstacles in stock deals that anti-assignment clauses do in asset deals. These provisions typically will require that one or both parties to the contract seek the other party’s consent in the event they undergo
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