If you invest in a local craft brewing business, will you get rich? The quick answer is ‘Very unlikely”.
In order for you to get rich from making an investment in a craft brewing business, a number of things need to happen:
- The craft brewing business must make a profit,
- The amount of profits earned must be large,
- Your right to receive a share of the profits must be large enough, AND
- You need to make a sizeable investment.
Let’s examine each of these factors.
The business must succeed. There are many ways to measure success, but a key metric is the business making more money than it spends so that the business can continue to do business. Lots of businesses fail and if the business that you invested in should fail, then you will not get rich.
The business must either have great profit margins – a wide spread between revenues and expenses - and/or it must have lots of sales. Typically, a craft brewer will earn a great profit margin on beer sold at tap, but it will make far less when beer is canned or bottled and sold through a distributor to a retail store. To make lots of profits, a craft brewer commonly has to sell outside the walls of its pub and grow a large distribution network so that its beer is consumed by a very large number of people.
Even if the craft brewing business is making lots of money, this doesn’t matter if you own a very small percentage of the business. When making a small dollar investment, ownership granted for the investment will usually be measured in fractions of one percent.
So, let’s do the math. As an example, let’s say that you invest $100 in a craft brewer and you receive 1/100,000 of the business. This places a value on the craft brewer of $10 million. And, let’s say that the craft brewer earns $1 million during the year. That’s great. However, your share of the profits will be only $10. That’s not a bad thing, but it will take 10 years of profits at this level just for you to recapture your investment.
Let’s change the example. You make the same investment of $100 and get the same amount of stock. However, in this example the craft brewer earns $10 million during the year. Now, your share of the profits is $100. You have received back your investment, but you haven’t made any money. You have no more money than you started with. If the craft brewer makes this same amount of money every year, you will begin to earn a return on your money:
- Year 1 - $100 distribution – 0% rate of return
- Year 2 - $100 distribution – 50% average annual rate of return (that is great!)
- Year 3 - $100 distribution – 67% average annual rate of return (this just gets better)
With the second example, you are making $100/year and getting a rate of return that puts your savings account to shame. But you are not rich. $100/year will buy several beers – an outcome that is desirable - but it will not buy you a new car or put a kid through college.
The usual investment in a craft brewing business will be small and the craft brewer will not be making great profits. As a result, you won’t get rich. That does not mean that investing in a craft brewing business is bad. You just need to set your expectations at a reasonable level.
Your investment in a craft brewing business may result in you receiving more than a simple right to share in the profits of the company. You may receive rewards, products, privileges or other benefits. When considering an investment in a craft brewer, you should determine if other benefits are available and what their value is to you. These benefits are unlikely to make you rich monetarily, but may greatly enhance your life.
Karl Dakin, Executive Director
Brewing Investors Guild