Close

Risk Management When Establishing a Winery, Brewery, or Distillery

Share on facebook
Share on twitter
Share on linkedin

Blog 7

Proper business organizational planning is important in the alcohol industry. Production of any beverage has inherent risks given the fact that the beverage might become compromised in a manner that makes an individual ill. Further, by its very nature, alcohol is intoxicating and the reality is that some consumers drink to excess. These factors make the alcohol industry particularly aware of risk management, where a business identifies, assesses, and prioritizes certain risks, including the risk of litigation, with the purpose of minimizing economic loss. Ideally, risk management begins at the establishment of the business organization that will operate the winery, brewery, or distillery.

One objective of business planning is to create a shield between the liabilities of the business entity, whether it is a limited liability company or a corporation, and the owners of that entity. These owners may be individuals or other business entities. This shield is important to encourage investment in businesses, to grow the economy, and to create jobs. Without this incentive, investors would be reluctant to subject their capital to the risks associated with business operations.

The law doesn’t provide absolute protection for business enterprise owners, whether they are limited liability company or corporation owners. If owners fail to treat their relationship with the business organization properly, they could be subjected to liability. In fact, failure to operate appropriately could result in a personal liability to the owner for the obligations of the business entity if a court would allow a creditor or plaintiff in a lawsuit to “pierce the corporate veil,” accessing the pockets of the individuals or business owners behind the entity operating the alcohol producer, in this instance.

So, how does the owner of the business enterprise decrease the likelihood of having a court “pierce the veil?” It is helpful to look at factors that most U.S. courts review when a plaintiff alleges that it should be able to hold the business enterprise owners personally liable. This review could be looking for:

  • Accurate and proper business records
  • Maintenance of arm’s length relationship with related business entities
  • Intermingling of assets between the business entity and its owners
  • Lack of proper functioning officers and/or directors
  • Significant undercapitalization of the business
  • Treatment of business assets as if they were really the owners
  • Business entity used as a facade for actual personal dealings

Lack of business formalities, as addressed above, while operating the business enterprise could cause a court to allow a plaintiff access to the pockets of the business enterprise owners.

The objective of business planning at the organizational stage and beginning operational stage will be to make sure that formalities are followed. This may mean that the distillery makes sure that its shareholders are not purchasing the still in their own name with their personal cash. Rather, cash contributions should be made to the business entity and the still should be purchased in the name of the business entity. Or, an individual that has a vineyard with hopes of opening a winery on the same site may be prudent and create two business organizations – one for the vineyard and one for the winery. The winery may have a tasting room that attracts the public to the facility. These entities would want to treat each other in an “arm’s length manner” by crafting a proper lease between the entity owning the winery/tasting room operations and the entity owning the vineyard. Fair market value for rent should be determined and even more importantly – paid. This type of activity can decrease the likelihood of subjecting a valuable asset – the real estate of the vineyard – to the liabilities of the winery.

There are many more actions that business enterprise owners can take to avoid liability risks. In addition to these, the entity will want to acquire proper commercial liability insurance for the operation. Proper insurance will not only reduce the burden of a court judgment, but will many times provide for legal representation paid for by the insurance company. Proper business formation and operation, along with insurance coverage are some of the most important ways to manage risk as an alcohol producer. Should you have any questions, please contact our office.

We're Here to Help

Dear friends in the alcoholic beverage industry,

As we as an industry, nation and planet collectively try to navigate this unprecedented period the coronavirus has brought us, We’d like you to know that we at Craft Beverage Consultants (the other CBC!) are here to answer any question you may have (or not know you have) about not just surviving this time but positioning yourself to thrive as soon as social distancing measures allow your business to function at full capacity again.

If you schedule a free 60-minute phone or video conferencing consultation with me or any of my 11 highly specialized colleagues, we’ll help you figure out any of your immediate and/or longterm business needs, or “everything but the staffing,” as we like to say. We’re not high-pressure sales kind of people, especially these days, so you don’t have to worry about fending off annoying pitches. Make an appointment on our website or Facebook page, or just call us the old-fashioned way at 314-768-0220.

Our experts have a combined 150 years in the alcoholic beverage industry, with deep knowledge in everything from sales and distribution, production, and regulatory compliance to marketing, package design, event planning, IT, (social) media, hospitality, and even values-based executive coaching. 

For example, we can coach you through this season when chain accounts have canceled their spring, in some cases, fall resets and distributors have drastically cut orders. Our director of business strategy and compliance can save you money – now – on excise taxes, caution you to avoid naming your beers in ways that risk alienating your buyers (Wuhan Wheat? Coronavirus Cream Ale? Groan. No.), and secure TTB approval for the tastefully named beers you do make. Our creative director and web team can get your e-commerce site up and running and launch a social media campaign that keeps you top of mind for current and future customers. Our director of storytelling can put you in front of the press so you can tell your story to your community. 

Once you’re ready, we can look forward together. Now is the time to talk about post-virus. We all suspect the legal landscape to look different. But how? And how do you prepare yourself in a way that positions you to charge out of the gate ready to maximize the potential and profit of whatever the “new normal” turns out to be? Please get in touch so we can talk about it. 

CBC’s roster includes local and regional clients like Epic Brewing, Logboat Brewing, Piney River Brewing, SudWerk Brewing, Waves Cider and Common Cider Company, just to name a few.  The agency was founded in 2004 by Jacob and Beth Halls, formerly known as Convergence Consulting; Rick Laxague, joined as a partner in charge of sales, marketing and distribution consulting in 2019. 

Rick hase close to 20 years of experience, a bulk of which was with Crescent Crown Distributing in Arizona. His last role there was Area Sales Manager for the dedicated craft beer division, coaching and leading a sales team to be nationally recognized. In early 2014 Rick helped take a regional brewery national as their Director of National Accounts and increase that segment of their business from 30,000 cases to almost 300,000 cases in two years, an increase that equates to $4.8 million in IRI dollar sales. 

Co-founder Jacob Halls brings 17 years of experience in regulatory compliance, business strategy, marketing and craft brand management to the company. In his former position as craft brand manager for the N.H. Scheppers Distributing Company in Columbia, Missouri, Jacob helped lead his team to winning the 2016 Distributor of the Year award from New Belgium and to a nomination for the Brewers Association’s Distributor of the Year award. Jacob is also the founder and director of the South East Craft Beer Fest and several other industry specific charitable event marketing festivities. Beth Halls is Director of Business Operations and Coordinator of Charity Operations for the festivals and events run by CBC, such as the South East Craft Beer Fest, MO Bacon & Bourbon, and many more. 

Again, please reach out to us for anything.  CBC can be reached at (314) 768-0220 or at craftbeverageconsultants.com.

We look forward to meeting/talking soon.

Sincerely,

Rick Laxague, Jacob Halls, and Beth Halls