Craft Spirits. Funding Landscape Adam Hardie Head of Food & Drink at Johnston Carmichael

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1 Craft Spirits Funding Landscape 2017 Adam Hardie Head of Food & Drink at Johnston Carmichael September 2017

2 Introduction to Johnston Carmichael Largest Scottish accountancy firm, with 56 Partners, 700 staff and 425 food & drink clients. We have doubled the size of our business in the last 9 years. We have completed 39 transactions of 350m in the last 12 months. We have UK & International capability as a member firm of PKF International We are immersed in the food and drink industry, understand the issues, have specialist expertise and can assist your business growth.

3 Selection of the firm s drinks clients

4 Craft Spirits Funding Landscape Today s Agenda The Craft Spirits Landscape Grant, Debt or Equity? Alternative Funding What Investors are Looking For The Fundraising Process

5 Craft Spirits Landscape

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7 Craft Spirits funding landscape What are we seeing? Supportive UK Government - good tax incentives for investing in businesses and by businesses i.e. SEIS, EIS and R&D Tax Credits Entrepreneurs Relief at 10% = Relatively benign Capital Gains Tax environment for sale of business Scot Gov very supportive. SF&D. Scottish Enterprise Investor Ready assistance with business planning costs and other costs. Max out on Free Money! Grants FPMC, Scottish Edge and SE. Banks like invoice financing, asset backed lending and cashflow lending. Enterprise Finance Guarantee (EFG) scheme Business Angels - large numbers of individuals and networks, seeking Enterprise Investment Scheme (EIS tax relief) Scottish Distillers attracting overseas investment Alternative Funding Explosion, Crowdfunding & Peer-to-Peer Lending

8 Grant, Debt or Equity Funding? Take the Right Kind of Money at the Right Time

9 The funding options R&D Start-up Early growth Accelerated growth Sustaining growth Maturity growth Grants Public sector Sales R&D tax credits Equity Equity FFF Business Angels Crowd funding Business Angels BGF Venture Capital Venture Capital Debt Debt Other loans SLF Bank loans Bank loans Trade buyer / IPO

10 Alternative Funding

11 Not all crowdfunding is the same! DEBT EQUITY REWARD INVOICE FINANCE CONSUMER LENDING 909m BUSINESS LENDING 881m PROPERTY LENDING 609m 325m 332m 54m Source NESTA 2015

12 Online finance raised in UK Source NESTA 2015

13 300% Increase in Online Borrowers Source NESTA 2015

14 Crowd Lending Explosion 34m+ of crowd lending to 620 Scottish SME s in last 12 months!

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16 What does LendingCrowd offer? Amortising term loan (monthly capital & interest repayments) More suitable for profitable, cash generative businesses Benefits to SME business 1. Flexible financing and security, with no early repayment fees. 2. Access to decision makers friendly and experienced Credit Team that understands your business. 3. Quick decisions - loan decision in 24/48 hours no wasting time. 4. Completion and funding normally within 1 week.

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18 Pickering s Gin case study THE CHALLENGE Award-winning brand Pickering s Gin required 350,000 to expand the business Purchase raw materials, new equipment and employ new staff THE SOLUTION LendingCrowd stepped in when banks dragged their heels Offered a quick response, personalised service, understanding of the business Structured an appropriate loan over 5 years THE OUTCOME 10 days from application to drawdown of 350,000 loan Follow-on loan of 150,000 once targets hit Pickering s successfully deploying the funds to grow the business

19 We live in a changing society as today 9 out of 10 millennials will change their brand of purchase if it has a social purpose. SOURCE CIM

20 GINEROSITY THE WORLD S FIRST SOCIAL ENTERPRISE GIN

21 What Investors are Looking for

22 What investors are looking for 1. Produce high quality spirit 2. People who are embed in the spirits industry 3. People who understand how to reach and sell to customers 4. People who have done it before 5. People with strong values 6. People who embrace diversity and are flexible to change 7. People who will build a business that can scale 8. Understand how much funding is required. 9. What the funding is for and what are the milestones? 10. Likely future funding requirement and how do they get their money back

23 The Fundraising Process

24 The fundraising process Stage 1 Stage 3 Stage 4 Stage 2 Stage 5 Business plan & financial forecasts List of funders to approach Gather due diligence documents Initial approaches to parties Initial offers received Assessing then Negotiate Offers Agree Heads of Terms with funders Due diligence - commercial, financial, legal Investment agreement and other legal documents Negotiation on terms of investment including price Final drafts of legal documents agreed Completion of funding Typically, 3 to 6 months

25 What to avoid when raising finance 1. Don t leave the fundraising process until the last minute 2. Don t over-egg the financial projections 3. Don t say our market is worth 800m and we will capture 10% 4. Don t say I want 1m for 1% of my business 5. Don t overstate the your product or lose sight of the customer

26 The downside of fundraising Dilution of your equity Less or loss of control Commercial and Personal restrictions Investments is typically exit focused? (Double edged sword) Onerous terms Security personal and business Fees - direct and indirect

27 The fundraising process Summary of key points 1. Have a clear proposition of what you are going to do and then how you reach and sell to your customers 2. Start this fund raising process early! 3. Ensure a strong set of financial projections - business plan challenged by advisers - monthly financial model with detailed assumptions return for the investor - understand where your funding gap is 4. How much equity will you retain in light of the valuation? 5. Consider what terms in the Investor Agreement are reasonable and what ones can be negotiated in your favour 6. Approach your own bank first, then other banks (or consider Crowd Lending) then equity funders 7. Consider tax implications of investment i.e. EIS, loans versus equity, structure of vehicle i.e. partnership v limited company 8. Keep running the business fundraising is a full time role

28 Adam Hardie Head of Food and Drink Johnston Carmichael Tel: Keep in Touch