It is almost inevitable that, at some point in time, craft-brewery owners will face the question: should we sell to big beer or preserve our independence and reward our employees? We all know about the stigma of selling out to big beer, but does that mean an Employee Stock Ownership Plan (ESOP) is the right ownership-transition strategy for every craft brewery? The answer is a resounding NO. Although ESOPs can be an effective strategy, they are not right for every situation. Here are seven pitfalls to carefully consider if you are contemplating an ESOP for your brewery.
Pitfall #1: Volatile Revenues and Earnings
ESOPs are typically paid for with cash on the balance sheet and/or loans from banks and other financing sources. As a result, ESOPs work best in businesses that have stable cash flows and the ability to meet debt-service requirements.
Breweries with unstable and unpredictable income streams should be very careful when implementing an ESOP. Your bank will require you to meet certain loan covenants to avoid defaulting on the loan. Failure to comply with these loan covenants can result in a technical default and/or an inability to meet debt-service payments, either of which may result in a series of actions by the lender that are less than desirable. The economy is uncertain, and the craft-beer industry is dynamic. Regardless, implementing an ESOP in a craft brewery with a volatile or poor financial performance track record is never a good idea.