As of November 2015, there were 4,144 breweries in the U.S.—more than the historic high of 4,131 breweries in 1873, according to the Brewers Association. In such a crowded market, making good beer and opening the doors isn’t enough anymore.
But, the good news is, if all these people could start a brewery, then you can too—as long as you know what you’re getting into and have a solid business plan for your brewery.
From running coolant pipes to navigating regulations, starting a brewery is no easy task. It’s a messy, convoluted job full of twists, turns, delays, setbacks, and surprises—but it’s also one heck of a ride.
In this guide to starting a brewery, we’re going to talk with brewers who’ve been-there-done-that, and we’ll get insights from experts in supporting industries such as insurance and finance, as well as discuss regulatory issues.
While it may be your dream to brew great beer, this guide will help you identify the aspects of the business side of the process that you have to get right, in order to make it possible for you to brew your dream beer day in and day out.
This guide will cover the seven essential steps to starting a brewery:
- Planning a brewery
- Finding a brewery location
- Choosing brewery equipment
- Building relationships with vendors and the local community
- Funding a brewery
- Obtaining insurance before opening a brewery
- Keeping regulations in mind when starting a brewery
Step 1: Planning a brewery
No matter its size or age, every brewery was once a startup.
For Dan Hughes, Director of Operations at startup brewery ColdFire Brewing, he and his brother have been hard at work on business development and recipe formulation, navigating bureaucracy, and enduring the inevitable delays that come with brewery construction, equipment delivery, and regulatory approval. Nonetheless, their 10-barrel brewery came online in December 2015, and they began pouring beer locally and in their tasting room in early 2016.
“We began to get serious about starting our brewery four years ago, and we were still working out details as we prepared to open our doors,” says Dan, discussing the process of starting a microbrewery. While working out additional details as they worked every day to bring their vision to reality, the Hughes brothers also developed a solid plan and built a core team. Backed by a team of private local investors, ColdFire gained access to additional capital through an SBA loan.
In addition to Dan Hughes heading up operations, his brother Stephen is head brewer, and they have a director of finance and a brand director. Having a key financial person in place has aided cash flow and monitoring of financial status and needs, says Dan Hughes. By focusing on branding even before construction had begun on the brewery, ColdFire has been building a local following through social media and building buzz for their grand opening.
Dan Hughes offers this advice for others looking into starting a brewery:
1. The most important detail is defining a clear vision.
“We know what kind of brewery we want to create and we have tried to let that vision drive all of our decisions.”
2. There has to be a commitment to the craft.
“We find this opportunity to open a brewery a privilege, and we certainly aren’t doing this for the money. In fact, we’re taking a significant pay cut to have the privilege to open a brewery. We do so with a vision toward creating a quality brewery that honors the traditions of those that have gone before us.”
3. Every relationship is important.
“When you build a few good relationships, suddenly they open the door for more relationships, and that pattern has only continued to hold true. Our bank had heard of us before we ever met them, and our landlord had been approached by other breweries in the past. Fortunately we have always found it important to treat people well and listen to good people who have good advice. That has ended up serving us well.”
4. Every license and regulation has been a challenge.
“They take time—so much time—to file, follow through, and gain approval. Having been planning this for so long, we kind of knew what we were getting into and have thus far been able to get through most of these challenges to-date. But they all take so much time. With that said, the federal license, or TTB [Alcohol and Tobacco Tax and Trade Bureau] permit, was the longest and most arduous. The more complex the operating structure of a business, the more information and time required.”
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Sedibeng Breweries is a medium-scale brewery located in the growing industrial center of Selebi Phikwe, Botswana. Initial plans are to produce three main lines of beer. These products will be distributed to remote, yet extremely viable areas where the market is appreciative of readily-available, good-quality brew.
Located in Medford, Oregon, Martin Cove Brewing Company has been a successful microbrewery for the past three years. This year, Martin Cove Brewing Company, will gross $520,000 in sales. With this money, they plan to expand its distribution to selected metro areas within the state of Oregon. In addition, they will introduce a new product, a traditional German Marzen style lager.
Step 2: Finding a brewery location
From land use to public taste, where you plan on opening a brewery will present you with crucial decisions. Generally, brewers want to set up shop in their own backyard.
When it comes to where you plan on opening a brewery, here are some questions to consider:
- What are the relevant local and state laws affecting breweries? (And there will be plenty—brewing is one of the most regulated industries in the country.)
- Where in your area will you find land or a building with the right zoning, size, facilities, and access for bringing in raw materials, attracting customers, and/or shipping out finished beer for distribution?
- What local favorites will you need on tap to appeal to the market, and where can you innovate to stand out?
- Will you only brew ales, or will you also make space for lagers, a barrel-aging program, and so on?
- What type of brewery will you be: production brewery or brewpub?
- How wide do you want to grow production and distribution, or do you want to focus on selling over your own bar?
- Do you want to scale to multiple locations?
- What construction will be needed to get the doors open on your first location?
All these questions and more will influence the right space for your brewery. However, the main thing is to start with the right space—and one that will be bigger than what you think you will need, says Jason Jordan of Propel Insurance. “I cannot tell you how many brewers I have talked to in year two to three in business,” he says, “and they all said their biggest regret was not getting a bigger space that they could grow into.”
However, brewers also need to be willing to take a hard look at where they want to locate and do their homework to make sure they can establish a successful brewery there. When it comes to starting a microbrewery, word of mouth is no substitute for market research, says Ben Price, co-founder of Hard Knocks Brewing, a small brewpub in its second year of operation.
“The single biggest mistake I have made was locating my business in a town that could not care less about craft beer,” says Ben. He recommends brewers use data firms such as Insightics to see where and how people spend their money in an area. “You’re looking for a number of 70 precent or more within five miles of the zip code you desire,” says Ben. “I made the mistake of trusting word of mouth. You want locally oriented people, people who want a good product, made local.”
Step 3: Choosing brewery equipment
Your initial system will likely be seven to 15 barrels. A new system might be subject to delays, especially if demand from other breweries is high, but you’ll be able to design to your needs and specifications, and you’ll have support when issues arise (and they will). A used system might be through the door quicker and might save you money up front, but make sure you’ve thoroughly reviewed the system and seller—and remember that when you have problems, you’ll likely be on your own to fix them.
“You’ll probably start with a seven-barrel system, spend anywhere between $130,000-$175,000 new,” says Patrick McCarthy, who works in the financial sector and aids breweries with capital and business planning. “Used systems are almost as expensive, so you’re really not saving anything, but you might get it sooner than ordering new. Some folks cut corners by ordering equipment made offshore. Many brewers avoid that due to perceived qualitative differences.”
Ninkasi Brewing began in 2006 on a 15-barrel system and produced 1,650 barrels. According to the Brewers Association, in 2014 Ninkasi was the thirty-sixth largest brewery in the U.S., and the fourth largest in its home state of Oregon, after powerhouse brands such as Deschutes, Rogue, and Full Sail.
Co-founders Jamie Floyd and Nikos Ridge leased their startup system from a family running a German restaurant out of a former brewpub. While brewing and self-distributing their beer, Floyd and Ridge purchased property where they could relocate and expand operations. They moved into their current location with a 20-bbl brew system, three 60-bbl fermenters, and one 20-bbl fermenter. A year later they replaced the 20-bbl brew system with a 30-bbl system, followed by another expansion a year and a half later to 50 barrels. Today they use an 80-100-bbl brew system, but the 50-bbl is still online for special brewing projects and research-and-development beers. In 2015, Ninkasi brewed 105,000 barrels.
“We continually planned for growth and capacity, catching up the entire first seven years of being open,” says Jamie. “In a way it’s easy to build out in this way, as you always need something, so it becomes more about the funding and the logistics.
We continually made beer while switching out new systems and adding capacity and infrastructure. One of our greatest strengths was our ability to work around the construction we were doing.
Now we are growing based on the projections our wholesale partners give us annually in sales. We have lots of extra infrastructure now and can grow capacity when it is warranted.”
Step 4: Building relationships with vendors and the local community
Starting a microbrewery and brewing great beer is not a solo endeavor. It is a constantly coordinated, ongoing set of relationships with customers, government officials, craftspeople, and your internal people.
“The number one piece of advice I give new brewery clients that are in startup stages is to engage your main business vendors early on in the process and find the right people to serve your needs,” says Jason Jordan. “You need trusted advisors that are proven in the beverage industry and have a decent portfolio of brewery clients. This would be the architect, business lawyer, intellectual property attorney, banker, insurance broker, real estate agent, label maker, hop grower, malt supplier, tank fabricator, and accountant.”
Relationships and keeping an ear to the ground are key not only to establishing your brewery, but in how and when you grow. Jason Carriere, owner of Falling Sky Fermentation Supply Shop and co-founder of Falling Sky Brewing, has gone through many twists and turns since Falling Sky opened its first Eugene, Oregon brewpub location in 2012. Since then they’ve opened a second location, a pourhouse that focuses on food production. A third location, a pub and pizzeria, is scheduled to open on the University of Oregon campus in 2016.
“I’d been running the homebrew shop for a while,” says Jason. “I’d already seen several of my best employees move on to become brewers around town, so I thought I’d look seriously at making that expansion ourselves, keep the team together, make it so homebrewers who worked at the shop could have a way internally to go pro.”
In their first year of production, Falling Sky produced 800 barrels, and they produced 1,300 in 2015—and that’s while getting underway on construction for their third location, moving the homebrew shop, and expanding their current brewhouse. In 2011, Falling Sky employed 20-25 people in the restaurant, brewery, and homebrew shop, and in 2015 that had grown to 45-55 employees.
Jason believes strongly in “knowing who your customers are and what they want,” balanced with skill and consistent craftsmanship instead of novelty. “I’m not a big believer in recipes, or special combinations of hops no one has thought of,” he explains. “Breweries don’t really win customers with one beer, but they can lose customers with one beer.”
When it comes to growth, Jason advises a thorough understanding of the brewery’s production numbers and financials, balanced with an on-the-ground understanding of daily operations.
That then informs your instincts and intuition. And all this must be tied together with ongoing communications with staff, business partners, vendors, and other key people affecting your business.
“You wouldn’t want to expand if your brewery is at 60 percent capacity and you have empty tanks sitting around,” Jason says. “You also have to have your pulse in the community and the industry to know whether or not you’re saturating certain things, or if you hear about people wanting your beer but not getting it. But it’s all about how we’re going to expand. Just because someone in a market wants your beer, doesn’t mean it’s part of your strategy.”
You also have to be aware of opportunities that arise, though, even if it’s unexpected—and that brings intuition, opportunity, and relationships back in play.
“We had no five-year plan to open a third restaurant, but when we got approached by the University of Oregon, we listened,” says Jason. “It was one of those things where we didn’t really want to expand, but it was far enough in the future that we could plan it through without a rush. Our second location was more rushed. We were busting at the seams at the brewpub, especially with the kitchen, so the deli expansion was more to let the pub do more of what it needed to do again. The second location had the bigger kitchen, cold storage, etc., to handle making fries and ketchup. It was a combination of good opportunity and vision.”
But that doesn’t mean it was easy. “It was scary, I’m not gonna lie,” says Jason. “When we first did the deli, it looked like a very bad idea for a few months. But it turned around.”
Jason and his team are not prone to regrets or second-guessing. Not that everything has always been easy or rosy, but he credits solid planning and teamwork with being able to make key moves without looking back and wondering.
For Falling Sky, that includes a strategic decision to focus on location sales instead of wider distribution. “I’m not a big second-guesser. When I make a decision, it’s because I feel confident about that decision, and I’ve thought through the consequences and I’ve come to terms with the consequences of choosing one option over another,” says Jason. “I’m confident in our decision to focus on selling beer over our bar versus the shelf wars and SKU wars.”
Step 5: Funding a brewery
Sure, at its heart beer is made from water, malt, yeast, and hops—but there’s an invisible yet crucial fifth ingredient: money.
Raising capital for any business startup can be a difficult process, and breweries are no exception. In his various roles in the financial industry, Patrick McCarthy has most recently worked as Vice President Commercial Relationship Manager with Bank of the Cascades, which has 35 companies from the craft beverage industry as customers. Over the years institutions he’s worked with have directly banked six breweries, a cidery, and a kombucha producer, and Patrick has also advised dozens of startup breweries, from reviewing business plans to helping prospective brewers network with key people.
Patrick sees his role not just as analyzing a business plan or crunching numbers. “You want to be helpful and move the whole business along,” he says. “If a business comes into the bank that’s wonderful, but at the least you’ve made some friends.”
Here is Patrick’s overall advice for startups to make sure they’re not only brewing quality beer, but keeping solid books:
Banks are not consistent sources of startup capital
A new brewery is probably not going to a bank for a startup loan (banks usually come into play for capital to fund growth once a brewery is more established). Friends and family are the most common backers, and many startups bootstrap. Some cities, such as Portland, OR, also have what Patrick calls “beer angels,” private individuals who understand the beer business and invest in select breweries and cideries.
Loans from the Small Business Administration (SBA) can also be a good avenue, but “bank to bank the SBA program is used differently,” says Patrick. “Some bankers have a great deal of interest, knowledge, and depth, and can be a champion for a startup brewery via an SBA loan. But a lot of banks look at breweries as restaurants and avoid them, or want to see them in business three to four years before they invest.”
When Patrick looks at a startup, here are some of the things he looks for to inform his sense of the brewery’s chance of success:
- Do they know how to make good beer? Have they made good beer elsewhere? Won awards?
- What is their brewing experience? If someone’s been a garage brewer for five years, that’s different from someone who’s been brewing at an established brewery for the past 15 years.
- Do they have good credit? If not, why not?
- How much skin do they have in the game financially? Will they be able to handle delays? Do they have access to contingency capital?
There’s no one model—or one business plan—for breweries
Each brewery will have its own unique model and plan. Before opening a brewery, prospective brewers have to figure out the right business model for their plans, location, interests, startup resources, and long-term vision.
Typical models include taphouses, production breweries, and full brewpubs. There’s also a new phenomenon called an “alternating proprietorship,” says Patrick, where brewers brew part-time on someone else’s system.
Within any model, there are things breweries can focus on to stand out and increase revenue. “Some brewers emphasize food in part because the food dollar can translate into more dollars profit for beer,” says Patrick. “Managing your own distribution is ideal. There are overhead tradeoffs, but I’m seeing it more and more.” Exports are becoming another component, he observes, with international markets such as Japan becoming thirstier and thirstier for American craft beer.
“Everyone’s trying to find what they can afford, what works,” he explains. “Merely making good beer isn’t enough anymore. There’s way too much good beer out there to stand out immediately.”
Cash must be available to cover costs and offset delays
On an industry-wide basis, for small to medium-sized breweries, the ratio between sales and fixed assets is typically for every $6 of sales, a brewery has $1 of fixed assets.
A startup brewery’s biggest costs tend to be the brewing system (e.g., $130,000–$175,000 for a new seven-barrel system) and tenant improvements to property (which in Patrick’s experience in Oregon, including Portland markets, has typically ranged $200,000–$350,000).
“It’s expensive to alter a commercial space that doesn’t have drains, certain water lines, the required electrical, ventilation, etc.,” he explains. “Many also put in a back bar, seating, etc.” Costs vary by scope, location, and market.
“Problems with licensing or permitting with the city that cause delay of opening can be extremely expensive,” says Patrick. “Every day they can’t pour their own beer is catastrophic financially. That’s the biggest risk I’ve seen in startup stages: timing.”
Delays are a reality in startup breweries. Brew system fabrication and delivery can take longer than the agreed timetable. Regulatory or permit approvals can drag on for months. Construction can hit unexpected snags. Make sure your financial reserves can handle delays and extra costs.
“Seasonality matters too,” explains Patrick. “You want to have the doors open when beer-drinking season gets started. Winter months are usually the slowest for a brewery. You want to be open by April or May. Ideally, that’s not always in your control due to startup delays, but starting with April to May you want to operate during those busier months.”
Treat your accounting with as much respect as your brewing
“I’ve passed on a brewer that didn’t respect the accounting process,” says Patrick. “The brewers are focused on their first love, which is making delicious beer. Accounting isn’t necessarily the top and foremost in everyone’s mind, but in this situation, it was irresponsibly ignored. You can’t let the accounting take a distant back seat.”
Just as quality control is essential for good beer, you have to make sure the books are balanced and the financials are being tracked well. “Accounting keeps you out of trouble,” says Patrick. “It helps you plan, helps you get return, and ultimately helps you generate revenue.”
Metrics: Know your numbers
Okay, so understanding your financials is important, but what do you need to track in order to understand the financial health of your brewery?
Here are the numbers, metrics, and other indicators Patrick says brewers should monitor:
- Breweries should typically break even or generate a small profit by the first six to 12 months of operation. “They’re at least breaking even, but they’re not paying themselves much yet.”
- Between 12-18 months, there should be a 10-15 percent bottom-line profitability. “If I’m used to seeing all models being profitable two years out by at least 10-15 percent,” says Patrick, “then if you’re not, I need to understand why or how you’re going to get there.”
- Beyond that, examine year-round profitability on a quarterly basis, with a focus on being profitable annually, and at least breaking even quarterly.
- If food is part of the business, are food costs (food-cost-percent and food labor) being contained at 20-25 percent of food revenues?
- Are you at capacity or will you be at capacity soon? What do you need for equipment for the next six months to keep up with demand?
- What is your financial liquidity, especially at the end of each quarter and at the beginning of the fourth quarter, given that winter is often a slower season?
- What is your leverage, the ratio between total liabilities and net worth? “There’s no magic number,” says Patrick, “but the greater the leverage the greater the risk in the business model. If someone is exceeding three-to-one, two-to-one, I have to take a harder look at it. Sometimes that can be a fleeting ratio and adjusts. If the leverage is pushed out, I need to understand why. Is it losses? Is it mismanagement?”
- Is it time to scale? If the balance sheet is showing that you have $7-8 sales for every $1 assets (and $6 sales for every $1 assets is typical), Patrick says it’s time to examine scaling.
As you find your stride in a profitable bottom line, you’ll also examine increasing efficiency. For example, as production volume increases, breweries typically purchase a grain silo. “They can buy in bulk, easily cut grain expense by two-thirds,” says Patrick. “Grain silos tend to pencil out quickly. It’s an exciting step up.”
The same thinking applies across the brewery. “At some point when you get larger, you’ve got more money to squeeze that remaining five percent profit out of your beer.”
Step 6: Obtaining insurance before opening a brewery
Breweries need various insurance, just like any other business. A brewery with a large employee roster and a fleet of self-distribution vehicles will have different needs from a three-person production-only startup. Find an insurance agent you can trust who preferably has experience working with breweries or wineries.
No, insurance is not as sexy as deciding which new “it” hop is going to be the feature of your new IPA, but if a brewery doesn’t keep current on their insurance needs, says Jason Jordan at Propel Insurance, then they are asking for trouble.
Note: Insurance and bond requirements vary by state, locality, and type of brewery, so make sure you’re talking with your insurance agent for what’s right for your operation and where you’re planning on starting a brewery.
The biggest concern is the lease contract with the landlord, says Jordan. “That can be boilerplate or have a myriad of different insurance coverage and limit requirements to comply with.”
Here are other areas of coverage Jordan says a brewery might need, which will vary depending on the operation:
- Business income and extra expense coverage
- Backup of sewer and drains
- Equipment breakdown coverage (depending on the age of their brew system)
- Property insurance on all equipment and business property
- Key man insurance via a buy-sell agreement (if the brewery has multiple partners)
- Market valuation coverage (for offerings such as a barrel aging program)
- Product recall coverage “is sometimes a concern”
- Crime coverage for theft of money and securities
- Commercial auto insurance is key if expanding into or starting to self-distribute product
Workers Comp is mandatory if employees are on the payroll, which also necessitates Employment Practices Liability Insurance (known as EPL insurance or EPLI) to cover hiring and firing practices
A brewery’s most common claims tend to relate to workers comp injuries, such as employees straining a muscle or hurting their back lifting heavy items, says Jordan. Lost product from a power outage or mechanical breakdown of a glycol chiller is another common problem, as are backups of sewers and drains (causing damage to the space and interruption of business, equating to lost revenue.
Luckily, once you are up and running with your insurance, “the needs don’t change a lot from a brewery or brewpub that produces 500 barrels a year to 25,000 barrels a year,” says Jordan. “The biggest concern is keeping up with values on equipment for new purchases and expansions to make sure the brewery is adequately insured at the time of a loss. Brewery owners are notorious for brewing good beer and not for keeping up to speed on calling their agent to make changes.”
Step 7: Keeping regulations in mind when starting a brewery
Of course, there are the laws and regulations—and brewing is a highly regulated industry. Your brewery will need approvals and compliance with relevant local, state, and federal authorities, such as your state’s alcohol oversight organization and the federal Alcohol and Tobacco Tax and Trade Bureau, or TTB.
In Oregon, for example, the Oregon Liquor Control Commission (OLCC) mandates a producer carry a $300,000 limit for liquor liability. At the federal level, the TTB requires all new breweries that want to offer beer for sale to submit a Brewer’s Notice. The TTB has a Brewers Qualification webpage outlining what you’ll need to do when starting a brewery to have the proper federal approvals.
“No matter how much you think you know […] you will have more to learn,” says Jamie Floyd, co-founder of Ninkasi Brewing. “It changes and evolves and you have to know the people who are making the changes and you have to be ready to change as a company. If the FDA decides we need to put nutritional info on our bottles you have to do it. It’s the law. You will have to figure it out and pay for it.”
Jamie also recommends getting to know your legislators at all levels of government, and working with trade groups that try to update and influence state and federal policies related to the regulation and taxation of beer. The growth of the industry is also leading to regulations being modified state to state, says Patrick, “if not to encourage craft beverages then to make it a more viable business model.”
In the meantime, compliance is not necessarily easy or fast. “Some of it is more the tediousness of the paperwork. Make one small change, file everything over again,” says Jason Carriere, co-founder of Falling Sky Brewing. “TTB is known for a lack of timely responses. We submitted our application for the third expansion nearly two months ago, and we’re not even supposed to call and check status for ninety days. Then when you do call, you sit on hold for two hours to find out where your application is in someone’s stack.”
Breweries also need the Brewer’s Notice. “That’s a brewery’s permission from the federal government to brew commercially,” says Jason. “It involves taxes, a bond you have to pay that serves as insurance for paying beer taxes. You complete an environmental impact statement for water and environment. It’s permission to make an alcoholic beverage and pay the taxes on it in the US.”
While starting a brewery requires lots of dedication, capital, vision, and red-tape navigation, it is also a booming industry and brewers who have a solid plan and stay their course have a solid chance of success. “The numbers are proving themselves: Craft beverages are here to say,” says Patrick. “There’s bound to be a slowdown eventually, but there’s one to two breweries a day opening across the country. People want it, and if people want it, people will supply it.”
And that someone could be you.