Inside the Beer Boom: Startup Breweries Tap CPAs’ Knowledge

Three years after the passage of a key law, the craft beer explosion has made its way to Virginia, leaving a trail of colorful names, exposed tanks and food trucks in its wake. Beer enthusiasts across the Commonwealth have more choices than ever in indulging their taste for IPAs, sours, lambics or anything else they want to try — and they can get it fresh from the source and support a local business at the same time.

Of course, the proliferation of craft breweries — which now number more than 100 across the state, according to the Virginia Tourism Corporation — is more than just a social outlet for Virginians. It’s a burgeoning business opportunity for entrepreneurs and a chance for CPAs to guide startup breweries through the crucial early years of operation.

Last weekend, more than 60 Virginia breweries got together to swap suds and celebrate each other at the Virginia Craft Brewers Festival at Devils Backbone Basecamp Brewpub in Roseland. Here’s how some of those breweries are handling the craft beer boom, and how CPAs have been involved in their growth.

Fresh product, local focus

Bryan Campbell, CPA, is always looking to get involved in the community. One of the VSCPA’s Top 5 Members Under 35 for 2015, the senior manager at Dixon Hughes Goodman (DHG) in Norfolk counts two local breweries, O’Connor Brewing Company and Smartmouth Brewing Company, among his clients. He also represents Devils Backbone and was a key driver in getting DHG to sign on as a sponsor of the Virginia Craft Brewers Festival.

Campbell is the founder of Innovate: Norfolk, a creative consortium composed of DHG professionals and other innovators from the region. That local focus dovetailed nicely with the “Buy fresh, buy local” movement that has extended to the craft beer industry. Unlike a properly aged wine or liquor, most beer tastes best when it’s relatively fresh — while they’re hardly a craft operation, it was Virginia-affiliated Anheuser-Busch that popularized the “born-on date” on bottles — creating a natural market for breweries to sell fresh beer straight from the source.

To Campbell, however, that’s not the main benefit. He prefers to focus on the fact that money spent at local breweries stays in the local economy, and on the sense of community that they create.

“Breweries are very involved in the community,” Campbell said. “It’s nice to get people out, participating, hanging out together, whether it’s charity events or street events. There’s craft beer there and people are coming, and there’s the social media aspect. I really like being a part of it.”

The brewery boom has also had ripple effects into other industries, meaning that even more money is going to local businesses.

“There are all of these peripheral businesses that are starting to crop up because of the brewery boom in Virginia,” said VSCPA member Debbie Moeller, CPA, a senior associate at Brown Edwards in Roanoke and finance director at Flying Mouse Brewery in Troutville. “The music scene is growing because people have live bands all the time. The food truck scene is growing because the breweries don’t sell food and people want to eat. And the bottle shops are cropping up, carrying some wine, but mostly craft beer. It’s amazing to see all the stuff that stemmed from this growth.”

Very little of that growth would have been possible without SB 604, better known as the tasting room law. Gov. Bob McDonnell signed that bill into law in 2012 after near-unanimous approval from the Virginia General Assembly, allowing breweries to sell beer by the glass at their brewing facilities, like Virginia wineries have been doing for years.

Virginia breweries existed before the law went into effect, of course, and many sold beer by the glass on premises. Before 2012, any brewery that wanted to sell beer by the glass had to open a restaurant to do so, leading to a small proliferation of brewpubs like the Devils Backbone facility.

“The only way to sell to a consumer was if you had a restaurant,” said Hayes Humphreys, chief operating officer at Devils Backbone, which also operates a production facility and tap room in Lexington. “Restaurants and breweries are really different animals. Brewers don’t know a lot about restaurants, and restauranteurs don’t want to make the capital investment necessary to support a brewery. Once the law changed, it opened the door for all these tiny breweries to open up.”

Before the law went into effect, Virginia’s Alcoholic Beverage Control (ABC) regulations presented a major barrier to entry for small breweries. Under the “three-tier” system, dating back to the end of Prohibition, breweries are required to sell their beer through a distributor, which sells the beer to bars, restaurants and stores, taking its own cut in the process. Breweries are prohibited from owning a restaurant or a distributor, although exceptions exist for brewpubs. Humphreys estimates that Devils Backbone gets to keep a little more than half of the final sale price for packaged beer.

And that’s just one money leak in the supply chain for breweries. Factor in the costs associated with packaging and transportation, which don’t come into play when breweries can pull a tap and fill a glass or growler on-site, and it’s clear why the tasting room law was such a big deal for would-be brewers. Tasting rooms provide a cost-controlled revenue stream that allows breweries to start with less capital and reach profitability more quickly.

“That’s when the craft beer scene really started exploding in Virginia,” Moeller said. “It made it a much more viable option to be a small brewer at that point because you had an opportunity to make better startup revenue than the way it was set up before in Virginia. The fact that you can sell a pint of beer out of your tasting room without having to be a brewpub is huge.”

The previous generation

Of course, the recent boom doesn’t represent the totality of the beer industry in Virginia. While the aforementioned Anheuser-Busch is now part of Belgium-based Anheuser-Busch InBev, its Williamsburg plant has employed generations of Virginians. And even on the craft side, there are multiple well-established brewers in the Commonwealth that predate the tasting room law.

One of those is Legend Brewery, which has operated its brewery and brewpub in Southside Richmond since 1994.

“It was much more difficult back then,” said Dave Gott, Legend’s vice president of operations. “There wasn’t all the fervor. You didn’t have the friendly laws. You didn’t have local governments realizing what an incredible tax base it was. Instead of being helpful, they were not so helpful. We fought and clawed for everything we’ve achieved so far.

“It makes it a little difficult when your business plan is based on something that’s out of date and other people are able to come in and do it under a whole new set of rules.”

Legend is one of a few breweries that carved out a niche before the boom, including Devils Backbone, Charlottesville-based Starr Hill Brewery and Hampton-based St. George Brewing Company, which have handled the increased exposure in different ways. Some breweries have added tours and expanded food offerings. For Legend, it’s business as usual, including the focus on food at its brewpub with views of the James River and the Richmond skyline.

“The pub has benefitted, more so, than anything else,” Gott said. “I think the new law has made people more aware of microbreweries. But people still want to eat when they go out, and that’s beneficial for us.”

Legend was founded by Anheuser-Busch veteran Tom Martin, who handled the business expansion himself. The company uses an outside firm to handle its books and gets the most value from industry expertise and help in navigating the sea of regulations that still prove challenging for many brewers.

“Continuity is incredibly important in a situation like this,” Gott said. “Being able to train an accountant on ABC regulations and all the other things that we have to do is a task.”

Planning for growth

Devils Backbone, on the other hand, places more responsibility in the hands of its accountants. The company has one on-staff CPA, Jamie Milliski, who works with DHG and Campbell to realize the company’s business goals.

“We view our relationship with them as a partnership,” she said. “They’ve really added value beyond doing the barebones audit and checking the box, with some tax advisory services and offering some different ideas on tax credits and things to consider for our return.”

Milliski started at Devils Backbone in 2014 after working in KPMG’s audit practice in Richmond. But even before she came aboard, Humphreys recognized the value of having a business advisor to fill areas that were missing from his existing team’s skill set — as he put it, “As a general rule, brewers are terrible business people.”

Like Gott, Humphreys values stability on the business side very highly. That’s one reason he’s been so happy with his relationship with Campbell and DHG, and why he was so keen on hiring Milliski.

While business has been very strong — the Virginia Chamber of Commerce ranked Devils Backbone as the 17^th-fastest growing Virginia business — it’s been valuable to have an advisor who consistently takes the long view.

“We have a very entrepreneurial, startup mindset, and accounting doesn’t rank that highly early on. It’s ‘Oh, there’s cash in the bank? Let’s do something with it,’” Humphreys said. “Having somebody to come in and look at what we’re doing and make recommendations on things we could do, how to get our controls in better shape, look at items we need to look at, was very important.”

Campbell added: “One of the keys with growth, especially with Devils Backbone and their growth path, is being proactive as much as you can, as you grow and your distribution network grows and you start moving into other states and start dealing with issues that doing business in multiple states can present.”

That’s related to, but separate from, the pure accounting issues that breweries must deal with. Different beers take different amounts of time to produce, leading to cost accounting challenges. Further complicating matters is the need to separate the brewpub and manufacturing operations.

“There’s not a lot of public knowledge out there about accounting for craft breweries,” Milliski said. “Samuel Adams is really the only one out there that’s publicly traded, and they’re a lot bigger. Their issues are a lot bigger than what we needed. Since Bryan had a lot of experience with craft breweries, he was able to help us a lot.”

And although brewery regulations have lightened up since 2012, there are still plenty of tax issues to keep accountants busy. Chief among them are the fees charged by the U.S. Alcohol and Tobacco Tax and Trade Bureau (TTB) and state tax issues related to expansion and distribution.

“There are different reporting requirements around that,” Campbell said. “Nexus is important to consider. Sales tax can become important to what you’re selling in the tasting room versus what you’re selling to a distributor. Payroll taxes are important. Income tax planning and having an understanding of potential incentives and tax credits are critical to growth plans.”

Joining (and building) a community

And that’s a big reason why CPAs can be such an asset to nascent breweries — that kind of advice allows brewers to focus on creating and marketing a strong product. One tried-and-true way of doing that is to leverage the social and community aspects of the business through social media marketing.

“For a startup business, it’s so much easier to connect with people on social media,” Humphreys said. “And people really trust what their buddy says. It’s really tough to advertise at craft beer drinkers. They tend to be really well informed. It’s not about what you say in a magazine. It’s about what their buddy says.”

That community aspect is a big part of the appeal for Campbell, who has tapped O’Connor and Smartmouth to host DHG events. To him, beer can link generations and bring communities together. The social aspects of gathering in a community space and supporting a local business create an impact that goes beyond the balance sheet.

“The impact that craft beer has on the community is really important,” he said. “I love the idea of craft beer being there to bring people together. Breweries are great venues to host events which bring the community together, whether it be a networking social, a nonprofit fundraiser, a corporate board meeting or even a wedding.”

“I’m an Irish kid, and back in Ireland, the pubs were always there,” said O’Connor Brewing Company founder Kevin O’Connor. “Families would go there to hang out with brothers and sisters and kids would sit around and play. That’s my whole idea with creating the tasting room — it gives a space where people can come and hang out.”

And the chance to work with a client in a community-driven, socially oriented industry can energize accountants.

“From our perspective as an office and region and firm, it’s important for us to be involved with exciting, growing companies and industries,” Campbell said. “Our employees appreciate it and they get excited, participate and attend events and want to be on audit teams when they hear that we’ve got some craft brewery clients.”

So it’s a symbiotic relationship between breweries and their accountants, whether in-house or outsourced. Whether a brewer is content to stay small or has ambitions to build a multi-state behemoth, CPAs are a crucial part of the path to profitability. Breweries and accounting firms have commonalities aside from just a professional relationship — innovation and creating a positive consumer and community experience are key drivers in both industries.

“Our business is getting bigger and more complex,” Humphreys said. “A year and a half ago, it was totally cool just to look at bank statements. We had 60 people who worked for us, and if we could make payroll and put out beer, we were fine. We were cruising and didn’t need much planning. Now, with the growth rate that we’re on, we’re taking on more debt and we’re expecting to take on more debt, more equity, in the future.”

“The industry is a very relationship-driven industry,” Campbell said. “I appreciate the relationship that I have with Jamie and Hayes and all the clients. We bounce ideas off each other, ask questions. We’re interested in building and growing the relationships together.”