As craft beer–industry shock waves go, it was a big one: Last December, Canadian equipment manufacturers Newlands Systems and Diversified Metal Engineering (DME) went out of business. These longtime manufacturers—merged together about 2 years ago under venture-capital company Clearspring Capital Partners—went into receivership after failing to make loan payments to the Royal Bank of Canada. The estimated amount owed to the bank and other creditors was almost $30 million.
The sudden closure left a couple of hundred employees out of work. It also left about 120 shocked craft brewers (both large and small) without equipment they had partially or fully paid for already, and those same craft brewers were left with little recourse. No warning signs were apparent, and brewers had little reason to worry then that DME would not deliver.
“We had been buying equipment from DME for more than five years,” says Rob Burns, founder of Boston’s Night Shift Brewing. “Nearly everything in the brewery was built by them. So, we had little reason to think things weren’t okay.”
The demise of these and other equipment makers—including Metalcraft Fabrication, SysTech Stainless Works, and Global Manufacturing—has raised a timely question for brewers in need of equipment: “How do I keep this from happening to me?”
At the risk of sounding self-promotional, one quick answer is: Fund your equipment through a company such as Brewery Finance. If you do that and your vendor goes belly up, we get burned, not you. And to avoid such flames for our sake and yours, we conduct due diligence to make sure we both stay happily in business.
But if financing equipment is not in your business plan, here are a few ways you as a brewery owner or operator can perform your own due diligence on potential manufacturing partners.
Basic Steps
Here are some steps we take—and you can, too—to reduce your equipment-buying risks, whether you’re working with a new vendor or one you’ve worked with before.
When considering work with a vendor, our first move is to scour public records to answer key questions: How long has this supplier been in business? Does the company have good credit?
We then look to see if the company conducts itself like a legitimate supplier. Does the company attend trade shows and participate in the industry? Is it spending money on advertising and promotion in the places we’d expect to see them? Does it have a good reputation within the brewing community? Answers to that last question can be gleaned on brewer forums, in industry groups such as Crafting a Strategy, and through your local brewers guild. (As with all online forums, keep in mind the “two sides to every story” adage and bring your own salt, just in case.)
We then pull credit reports from resources such as Dunn & Bradstreet or Experian Business Credit. These provide information on who owns the business, the number of employees, annual revenues, and whether or not the vendor pays its suppliers in a timely fashion. These reports can be very revealing.
Next Steps
And if we’re still not totally comfortable? We have the company complete a vendor application and submit it to us along with recent bank statements, so we can see the personal credit of the owner and their cash flow. If a vendor has an average bank balance of $5,000 and requires a $50,000 down payment on an equipment order, it’s likely your down payment is going to payroll, rent, and taxes—not raw materials and the fabrication of your equipment order.
Here’s another helpful step to take before plunking down your dollars (either with a new vendor or one you’ve done business with in the past): visit the vendor. The investment of a couple days and a few hundred dollars in travel expenses to meet a vendor’s staff and see its operation is money wisely spent. Such visits don’t have to be awkward, either. Much like you love showing off your brewery, a rock-solid vendor is happy to show you what goes into your future equipment. (And if you can’t geek out on gear for a day, you might be in the wrong industry.)
Plus, vendor visits and research on a supplier’s modus operandi can provide additional insights. Crafting a Strategy Founder Sam Holloway sees trouble ahead for manufacturers of only larger brewhouses and tanks.
“They may miss out,” he says, “on the changing consumer trends of less scale, more variety, and smaller equipment and batch sizes. The days of 30-barrel and above systems are numbered.”
With craft beer’s changes, caution is more important than ever.
“The Romans experienced market conditions similar to brewery buyers of today,” says Thad Fisco, founder of Portland Kettle Works (PKW). “The Latin phrase caveat emptor literally means let the buyer beware. So the new or expanding brewery buyer should absolutely demand—and thoroughly check—references from both clients and vendors to the manufacturer before depositing funds.”
“A strong manufacturer,” Fisco notes, “will welcome your due diligence and provide a robust list of breweries as references for their company. Anything less than that is a potential red flag.”
Russell Love, president of micro- canning inventor Cask Global Canning Solutions, says he’s seeing more wary customers on the heels of the Newlands/DME situation.
“They’re certainly asking more questions about our company history before they commit,” Love says. “But we’ve been a private and family-owned business since 1905, and that gives people peace of mind. They understand that our first concern is our customers, and we’re not a private equity–backed company with a primary goal of making the largest return on investment.”
Love suggests getting details on an equipment vendor’s longevity, ownership, and management before making a purchase.
“That information,” he notes, “can be a revealing indicator of the stability of a business. Businesses change hands from time to time, and a new management and ownership can provide dramatically different results.” This is especially important if you’ve purchased from a manufacturer before. Make sure nothing has changed significantly since the last time you did business.
Fisco has other tips for jittery brewers. “Ask your bank,” he says, “to verify the quality of your prospective vendor’s relationship with their primary bank. And ask if the landlord can provide a positive credit reference for your vendor.”
He also suggests getting references from a potential vendor’s own suppliers. “Ask for two primary stainless supplier credit contacts,” he says, “and verify that payments are made on time to these suppliers, according to their payment terms.”
He also suggests a certificate of origin to verify where your equipment actually comes from. “Many suppliers,” he says, “conceal their association with Chinese manufacturers behind German- or American-sounding names and marketing slogans. It is critical that you find out where your equipment is manufactured.”
A letter of credit is another safety measure for buyers. Such letters require some expense (typically a few hundred dollars) and time. They can also require down-payment money (and sometimes more) in a bank-secured account or taking out a loan from the bank that handles the letter of credit.
“But you can’t be too careful these days,” Fisco says. “A letter of credit is a fail-safe step to ensure you get either your equipment or your money back in the case of a vendor meltdown.”
For Burns at Night Shift, the cost for that meltdown scenario is significant. “We are getting some of the tanks we paid for,” he says, “but not the new brewhouse. That money is lost.”