JJA&N CONsulting group

Big Sky Brewing Company

Consulting Report

Jonathan Bryson, Asher Horowitz, Jordan Sizemore, R. Neil Covington

4/15/2013

This document contains JJA&N’s reports and analyses on the client’s business and current situation. The information contained in this document is confidential and may only be viewed by the intended recipients.

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Section One: Objectives and Scope of Work PerformedBig Sky Brewing Company reached out to the consulting group, JJA&N, to get their advice in ways that they should expand their business and ways to finance their expansion. BSBC has a current need to expand because of their recent and expected continuous growth in sales. Their current supplier, PCB, is no longer able to meet BSBC’s production demand, requiring BSBC to look for another place to bottle their beers. BSBC has done preliminary research into outsourcing or insourcing additional operation. BSCBC will conduct its own analysis to either support or disprove BSBC’s belief.

The next step is to research financing sources for BSBC to be able to help them financially support its growth strategy. JJA&N will provide BSBC with information on how to develop its current business plan, which includes an Expansion Plan, so that it can help convey to potential investors the need for expansion, how it plans to expand, and how this company will be able to provide its investors with a return for their investment.

Prior to contacting JJA&N, BSBC applied for a USDA loan and was denied. The USDA will allow BSBC to reapply, but highly suggests that it conducts a more thorough analysis of the company and the expansion project, and develop a more compelling set of arguments for expansion and document them for the new application. However, this reapplying for the USDA loan is highly time sensitive and it was suggested that they reapply within the next week, prior to new census data being approved.

In the first meeting with each other, BSBC and JJA&N, recognized that the USDA loan would be a significant funding source; however, there was the risk that they would not secure the loan. For this reason, JJA&N strategically made the agreement above, to provide BSBC with recommendations on how to improve its plan and argument for expansion. This new developed plan will allow BSBC to reapply for the USDA loan with more substantial information and a greater argument for the need to expand, but it will also give BSBC a plan that can present to other potential investors.

To help further assist Big Sky Brewing Company, the consultants will research and qualify other sources of funding and tax breaks the will be able to look into. In the agreement, it was agreed upon that the total number of potential funding sources suggested would not be required to equal the additional funds needed for the company to expand the company.

Section Two: MethodologyWe had our initial meeting with the business owners and kept in contact with them throughout our research and reporting. We also used research on the web and found information on a number of websites especially when looking for other financing options. The company information was useful in explaining why it is necessary to expand to meet demand. We had a few questions on SBA loans and the feasibility of attaining these guaranteed loans, so we got in contact with Mr. Tom White, the SBA Lender Relations Specialist in Montana by phone. He was a big help answering our questions and was very approachable. With all these combined we were able to develop the report we had originally agreed to.

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Section Three: FindingsAs stated in our agreement we have done research on whether or not we think Big Sky Brewing Company should insource or outsource. We have included ways to further develop the company’s current business plan in hopes of getting approved for the USDA loan when reapplying. Also included is our research and findings of alternate financing options if denied the USDA loan.

EVALUATION OF OUTSOURCING VS INSOURCING:At this stage in its growth, it is critical that BSBC have already evaluated its alternatives for outsourcing vs insourcing and have made a final concrete decision on how to proceed. In order to establish confidence in a sourcing decision, we are evaluating the options to ensure that our recommendations align with BSBC’s plans.

Early in its development, any new microbrewery will likely find that outsourcing manufacturing is the right course of action. The costs of creating the manufacturing facility before a market share is established can be cost-prohibitive. Later, as a market share is established, demand has been observed, and continued growth is evident, the brewery reaches a point where outsourcing is no longer the best choice. We believe that BSBC has reached this growth induced turning point and that it is time for the switch to in-house production.

The most obvious benefits to outsourcing include reductions in operational complexity and liability, but it comes at a cost. Simply ordering a finished product from a manufacturer is certainly appealing as opposed to producing the product in-house. It saves hassles of inventory, production, and storage. However, outsourcing comes with a variety of costs. There are quality control risks in allowing a third party to manufacture food products. It can be more expensive in the long term, because the manufacturer doesn’t have the same level of vested interest in product quality but must also make a profit on the same product. Coordinating production between two companies is likely to have more errors and omissions than production in-house, and it requires additional management and planning activities. Furthermore, giving control of production to third parties can introduce avoidable hassles that can include minimum orders, specific order timing, increased accounts payable, intellectual property concerns, monitoring and managing outsourcing relations, logistics and shipping concerns, and more.

Comparatively, insourcing involves substantial benefits but comes at a greater initial cost. The main costs of insourcing are capital expenditures for equipment and facilities, greater complexity of the organization, and the risk of not being able to adapt to changes in the market as quickly. However, these costs are often overshadowed by a great deal of benefits. In a customer-oriented food service operation, the ability to consistently and continuously monitor quality control standards is a significant factor. Product ingredients and suppliers can be carefully evaluated and tested for quality. All in-house production can be monitored and adjusted with any level of precision that the management chooses is appropriate. The production facility can be built all at once, or gradually expanded and upgraded based on the needs of the company.

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Other benefits to insourcing are not immediately evident. An in-house brewing facility can add another dimension to its customer following by offering tours and tastings. Beer customers are often very loyal, and a brewery that offers tours and tastings is sure to find even greater customer retention. In the event that a brewery is built that has a capacity beyond the market demand that BSBC is experiencing, BSBC will always have the option of acting as an outsource contractor to brew for other companies. This would mean more continuous operation if the maximum capacity is not reached by BSBC demand alone, improved cash flows, and a larger presence in the microbrewery industry. In addition to these factors, it has already been demonstrated by other microbreweries such as Alaskan, Deschutes, New Belgium, Boulevard, SLO, and Bayern, that in-house brewing and bottling is feasible and reasonable. The fact that all of BSBC’s nearby major craft-brewing competitors already bottle their own beers means that it is feasible and reasonable, and success of these breweries combined with the BSBC growth trend suggests that BSBC is not in danger of expanding too quickly by insourcing previously outsourced production.

While there are increased initial costs in converting outsourced manufacturing to an insourced activity, it is our impression that BSBC has already surpassed the market share point at which this conversion is reasonable and warranted. A quick summary of some pros and cons are included below for your convenience:

Pros of Insourcing:

Easy adjustment of production to meet demand Improved monitoring of quality control standards Expand or improve facility quickly or gradually, match market demand Avoid constraints and contracts of a third party Competitors have already demonstrated its feasibility and profitability Catch up with production rates of competitors Opportunity to accept brewing contracts if production capabilities are not maximized Enhance customer loyalty with brewery tours and tastings

Cons of Insourcing:

Additional capital requirements Hassles of facility upgrades Risk of too much production capacity Increased inventory management and storage requirements

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Business Plan DevelopmentRefer to appendix B for an outline of a well-rounded business plan. Based on the information you have given us and our analysis of your situation, the main sections which were lacking in your original business plan were:

Those involving your team (Personnel, Background of Entrepreneurs, Management Team Background, and Roles and Responsibilities of Members of the Organization)

o VI-D, VI-E, X-D, X-E (appendix B) Your market analysis (Competitive/Industry Analysis)

o V (appendix B) And probably most important - Evidence that the expansion is necessary (Evidence of

Expansion Needs)o IV (appendix B)

Remember, the most important section of your business plan is the executive summary. If that first section does not catch the interest of your audience they are unlikely to read the rest of the plan.

When completing these and all other sections of your plans it may be helpful to include tables, charts, and diagrams to illustrate some of the main points of the document.

Advice on how to complete these sections is given below. Each subsection is listed and explained, and general tips about your particular plan are given at the end of each section.

Team Personnel:

o The various positions within your organization and a general overview of what each is responsible for

o New positions your organization will require once it executes its expansion Background of Entrepreneurs:

o The founders of your businesso Each founder’s formal education background as well as any relevant experiences,

certifications, licenses, etc. they may have Management Team Background:

o Names of the various managers within your organization and the positions/responsibilities held by each

o Each manager’s formal education background as well as any relevant experiences, certifications, licenses, etc. they have which make them qualified for their positions

o How the management of your business is suited to carry out your proposed expansiono Any new management positions your organization will require once it executed its

expansion (if any)

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o The names of those you plan on bringing into management positions after the proposed expansion (if any), and their formal education backgrounds, relevant experiences, certifications, licenses, etc. which qualify them for their new positions

Roles and Responsibilities of Members of the Organization:o The responsibilities of the various employees in your organization and the responsibilities of

any employees you plan on adding after the expansiono The roles and responsibilities of each member of your organization who holds a

management position, and the roles and responsibilities of any managers you intend to hire/promote after the expansion

These sections are included to illustrate how well the business is prepared in the sense that it has the right people (or knows what people it needs) to accomplish its goals. It is important that this is completed before trying to get financial aid from debtors or investors since a good plan is worthless without the right people in place to implement it.

Some of the key information to add to these sections would include your intentions to hire a controller in the near future, the extensive experience and formal education of each of your managers, and evidence of the extreme commitment these managers have shown to Big Sky Brewing Company in the past. This last point is important because great managers are of no value to a company if they leave. You should also put additional emphasis on Keven Keeter’s past work with the expansion and bottling line installation in a different brewery and his involvement in the operations of that bottling line. This type of experience will look very favorable to debtors and investors and will make them more confident in your company’s ability to successfully complete and utilize your proposed project. Additionally you should highlight the skills and network which Chad Hania brings to your business since they will likely prove to be the most important aspect in the continued growth of your sales.

It may also prove beneficial for you to include details about how this project will allow Big Sky Brewing Company to increase the number of workers it employs and how those workers will earn well above the average income in the state. This information may help you when securing grants or loan support from various government agencies.

Market Opportunity/Competitive Analysis Future Outlook and Trends:

This includes economic, technological, legal, and political trends on the international, national, and local levels

Include total industry sales for the last 5 years

Analysis of Competition: New firms in the industry in the last 3 years New products in the industry Nearest competitors How you are/intend to become better than your competitors Analysis of competitors sales

o Are they growing, shrinking, or staying the same?

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Strengths and weaknesses of competitors Analyze competitor strategies

Market Segmentation: Profile of customers How customer profile differs from that of your major competitors

Industry and Market Forecast: Anticipated industry growth

Pricing Methodology:

These sections are important in supporting your claims that the proposed expansion can be profitable. As such this information should be written in a way that ties into your Evidence of Expansion Needs section (explained below).

Explain in these sections the size of the micro-brewing industry and the beer industry as a whole as well as their projected growths. Also make sure to cover all of your competition which includes the major national breweries and the main regional, import, and micro-breweries which compete for your market share. It may also be helpful to briefly explain the differences between these types of brewers since some of the people reading your plan may not be familiar with them.

I would make sure to touch on the recent consolidation in the micro-brewing industry and the trends involving contract brewing since this is important when explaining your current situation. Furthermore I would make sure to explain how sales levels and expectations have been changing in regards to distributors, retailers, and consumers of the beers you produce and differentiate between on-premise and off-premise consumers. Each of these aspects will be important in validating the strategies of your company.

Evidence of necessary expansion Hard Results:

Project Valueo Net Present Valueo Internal Rate of Returno Payback Methodo Profitability Index

Breakeven Point Analysis Soft Results:

Operational Gains Benefits Added to Customers

This is one of the most important sections in your particular plan. You want to be extremely persuasive in you explanation of why this expansion is necessary and how it can benefit all stakeholders.

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You will want to illustrate the extreme growth rates your business has experienced over the last few years and explain how your proposed project will allow these numbers to continue to grow. You should also make sure to show how your company’s growth and reputation may suffer if this expansion is not completed.

I would include detailed information about the following aspects of your business in this section:

Orders you had to turn down due to limited capacity Give specific examples such as the lack of capacity to supply Costco’s 100,000 case order Frequency and severity of unmet demand

Product variety and quality improvements you would gain from expansion Cash-flow benefits gained from in-sourcing How in-sourcing effects your bottom line

Economies of scale gained through in-sourcing Costs associated with communicated and coordinating with contract brewer

Value added to the company through self reliance How your business focus has changed from keg to bottle sales How current retailers provide sufficient demand for expansion Operational benefits from moving to in-sourcing

Reduced lead time Smaller batches Bottling frequency increase

Reasons why current contract brewery cannot or will not meet demand How much growth the expansion would support How land purchase would prepare the business for future expansions How expansion will help support surrounding businesses

This information must be supported by an analysis of your businesses past and expected financials, and the projects value should be calculated using the methods specified in the “Hard Results” subsection.

Charts are a good visual representation of quality information which should be included in a business plan. They are very effective when trying to show growth and different percentages. Lenders would appreciate putting information in charts for them to more easily and adequately analyze when making the lending decision. We have included some of the company’s charts and graphs that would be good to include in the business plan in the appendix (A).

Other Financing OptionsIf for some reason, Big Sky Brewing Company is not approved for the USDA loan we have done some research on other possible financing solutions. With these other financing options, Big Sky Brewing company will still need to do major improvements on their business plan to be approved for the loans. We spoke on the phone with Tom White, the Montana SBA Lender Relations Specialist who advised us that in order to get approved for any loan, a solid business plan would need to be developed. Refer to our recommendations on how to improve current business plan.

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SBA Loan 7(a)One option would be to obtain the 7(a) loan through the SBA. Most of the information on this loan can be found on the SBA’s website (http://www.sba.gov/category/navigation-structure/loans-grants). The 7(a) loan is the most common loan through the SBA. This loan would not be directly from the SBA, but rather it starts with a local lender going through SBA guidelines. All SBA loan applications are reviewed twice. According to Mr. White, cash flows are the main thing reviewed by the SBA itself before guaranteeing a loan. We believe Big Sky Brewing Company’s financial records would prove to have adequate cash flows. The second review is by the actual lender who reviews the entire business plan and accompanying documents. This is where the company will need to do some work. According to the description of this loan, it is offered to small businesses with the requirement that funds go towards “establishing a new business or to assist in the acquisition, operation, or expansion of an existing business.” The maximum amount of this loan is $5 million and there is no minimum. Fixed and variable interest rates are negotiable with a maximum of 2.75%. Below we have outlined things that will need to be prepared before applying for this loan:

1. Fill out SBA loan application (http://www.sba.gov/sites/default/files/SBA%20FORM%204_0.pdf)2. Prepare your personal background and financial statement (two other forms necessary

http://www.sba.gov/sites/default/files/tools_sbf_finasst912.pdf and http://www.sba.gov/sites/default/files/SBA%20413_0.pdf)

3. Gather business financial statements: Profit and loss statement and projected financial statements

4. Ownership and affiliations5. Have your business certificate/license6. Include records of loans you have already applied for (in this case include the denial of your

USDA loan)7. Income tax returns: signed personal as well as the business federal income taxes for past 3 years8. Include personal résumés of the principles9. Provide brief overview of history and of the business and explain why the loan is necessary. This

may be a good place to include projected financials of pre expansion and post expansion.10. Have your business lease to include

SBA CDC/504 Loan ProgramAnother loan offered through the SBA which Big Sky Brewing Company could attempt to obtain is the CDC/504. We did the research and found that the company does qualify for this loan. This loan can be used for “the purchase of land, including existing buildings, the purchase of improvements, or the construction of new facilities or modernizing, renovating, or converting existing facilities.” The maximum amount of this loan for small manufacturers is $4 million, which also certainly covers the $2 million currently being requested. One requirement of this loan is that one job per $100,000 guaranteed by the SBA must be created or retained. Generally, the project assets being financed are used as collateral for this loan. It also requires personal guarantees of all principal owners. Maturity terms are either 10 or 20 years. Interest rates are pegged to an increment above the current market rate for 5-year and 10-year

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US Treasury issues. Fees total about 3% of the total requested and are able to be financed with the loan. The process for applying for this loan is the same as the 7(a).

Loan through BankAnother option as funding would be to go through a bank. We looked in to Wells Fargo (https://www.wellsfargo.com/biz/loans_lines/future_opportunities) for example and got some information on their Small Business Administration Loans to give you an idea of what the company would be looking at with this type of loan. Wells Fargo’s Small Business Administration Loans offer longer terms on loans to fund working capital, business start-up, business acquisition, and real estate. This loan is secured and backed by the SBA. Fixed as well as variable interest rates are available depending on which works best for the company. The amount of this loan can be anywhere between $50,000 and $5.2 million. This loan is secured meaning Wells Fargo will take a secured interest in business assets. Again we have outlined how to apply for this loan as well”

1. Collect business information (Business name, address, phone number, fax number, Tax ID number/SSN, establishment date, ownership type, number of owners, annual revenue, bank account numbers and balances, business structure)

2. Collect owner information (name, home address, home phone number, SSN, citizenship, annual household income)

3. Have contact information available (primary contact of owner including phone number and email address)

4. Choose application method: By phone 1-800-545-0670 or in person at a Wells Fargo location.

Grants and Tax CreditsIn addition to the loans researched for Big Sky Brewing Company there are grants and tax credits the company qualify to apply for. These qualifications come from the economic development that that business creates for Missoula, Montana and the surrounding areas. Below are some of the funding programs available to Big Sky Brewing Company.

Primary Sector Workforce Training Grant Source: Department of Commerce with the Department Grant Review Committee

As a result of expanding Big Sky Brewing Company will need to hire and train new employees who will operate the new machineries and all new demands that will come as a result of expansion. Through the Primary Sector Workforce Training Grant the company will receive funding from the Department of Commerce to aid in financially supporting the training of this new workforce.

The amount of funding is based on if the employee is a full-time (35+ hours/week) or part-time worker (25-34 hours/week). Each new full-time job can receive a maximum of $5,000 and $2,500 for each new part-time job. The grant requires that for every $3 of grants provided $1 must be provided from BSBC.

Another requirement is that the company is able to demonstrate a significant positive economic impact to the region and state beyond the job creation. From our meeting with BSBC and the number of

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business that will economically benefit, this is a requirement that the company can convey in the application process.

Purpose: Funding for job training

Requirement:

• Full time: 35 hours, year round ; part time: 25-34 hours/ year round

• demonstrate a significant positive economic impact to the region and state beyond the job creation involved

• Applicants must provide $1 of match for every $3 dollars of grant funds

Amount: $5,000 max for each new full-time job and $2,500 for each new part time job.

Economic Development Agency (c/o NW Trade Adjustment Assistance Center) Purpose: business expansion activities

The Economic Development Agency is organization to contact and apply for the programs. These programs are specifically for businesses that are seeking funding for their business expansion activities. BSBC exceeds the agency’s requirement that business has been operating for at least two years.

This program is a 1:1 matching program. This means that for each $1 of funding the Agency contributes BSBC must contribute to the expansion as well. JJA&N does not foresee this 1:1 matching program being a hindrance to the company. For additional information JJA&N can connect BSBC with Patrick Meuleman the Client Development Manager or MW Trade Adjustment Assistance Center. Mr. Meuelman will be the person to assist BCSB in completing the application.

Requirement/ Areas of focus:

• The business has been in business for at least two years

• Each company works directly with the NWTAA Center to complete the application.

• The grant must be matched by the company 1:1.

Contact Person:

Patrick Meuleman

Client Development Manager- NW Trade Adjustment Assistance Center

patrick@nwtaac.org

208-343-6855

www.nwtaac.org

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DEQ Montana Department of Environmental Quality Purpose: Encourage traditional businesses to adopt more energy efficient systems to conserve energy

Requirement: Some of the systems in place in the building need to have energy efficiency as some of its goals

Benefit to BSBC:

• Additional funds

• Public Relations Standpoint = greater brand recognition leading to sales

• Lower expenses by operating more efficiently

Contact:

Kathy Montgomery

Public Education Specialist- Montana Department of Environmental Quality

Kmontgomery@mt.gov

406-841-5243

The Montana Department of Environmental Quality (DEQ) is another source of receiving funding for the expansion of the business and additional business operations that will be created as a result of the expansion. The DEQ provides funding as a way to encourage traditional businesses to adopt more energy efficient systems to conserve energy. These efficiencies may come from reducing the amount of electricity used in the facilities, recycling wastes, or becoming LEED certified.

Recognizing the use of energy efficient systems may not have been of importance to BSBC pertaining to expansion, however exploring these options offer various benefits to the company. One includes being able to receive additional funds from organizations, such as DEQ, that seek to promote environmental sustainability within the region. More efficient systems also help to decrease the company’s expenses because fewer resources (financial, human, natural, time, etc.) are being allocated to complete tasks. As a result the profit margin increases and more funds can be used for loan repayment. Third, recognizing the importance of sustainability and efficiency helps the company with it public image. This can serve as a way for BSBC to differentiate itself from its competitors and to also increase its public relations. From a functionality perspective, this will help in acquiring new sales accounts. Businesses are beginning to put a greater emphasis on have more environmental sustainable practices and are seeking for their partners and suppliers to adopt these practices also. By being an early adopter of these systems BSBS will help to assure clients that they can meet their requirements and do some in a timely manner.

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Section 4: Recommendations/AlternativesAfter reviewing our findings and compiling all research required for this report we have few and limited recommendations:

1. We recommend you insource bottling through expansion of current facilities to be able to meet growing demand

2. We recommend reapplying for the USDA loan3. Before reapplying we recommend reevaluating the current business plan and improving

what is already there as well as adding sections to make for a more complete plan which better outlines the business

4. If denied again for the USDA loan we recommend looking further in to one of the proposed alternatives, specifically a SBA guaranteed loan as well as some of the others we have researched and found feasible

Section 5: Sources /References"Fund Everyday Operations ." Wells Fargo. Wells Fargo, 2013. Web. 15 Apr. 2013.

<https://www.wellsfargo.com/biz/loans_lines/fund_operations>.

The U.S. Small Business Administration. Small Business Administration, 2013. Web. 15 Apr. 2013. <http://www.sba.gov/>.

White, Tom. Telephone interview. 15 Apr. 2013.

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A. Craft Beer Sales (Bottles)

Annual Growth in Craft Beer Market

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Top craft breweries ranked by share of Segment (2000)-Association of Brewers

Retail prices per 6-pack

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Key characteristics of BSBC’s major craft brewing competitors

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B.

BUSINESS PLAN OUTLINE

II. Table of Contents

III. Introductory Page

Name and Address of Business

Name of Principals

Nature of Business (Products or Services)

Statement of Financing Needed

Statement of Confidentiality /Non-disclosure

IV. Executive Summary (2-3 pages summarizing the complete Business Plan)

V. Evidence of Expansion Needs (Not included in the example plan provided since it was a startup) (Not in many plans but very important for your particular situation)

VI. Competitive/Industry Analysis

Future Outlook and Trends

Analysis of Competition

Market Segmentation

Industry and Market Forecast

Pricing Methodology

VII. Description of Venture

Products/Services to be provided

Size of Business

Office Equipment

Personnel

Background of Entrepreneurs

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VIII. Production Plan

(This section is not included in the example business plan provided since it is not for a manufacturing company)

Manufacturing Process (including use of outside firms and sub-contractors)

Physical Plant

Machinery and equipment

Names of Suppliers (Inbound Logistics)

IX. Operations Plan

Description of Company’s Operations

Flow of Orders for goods/services/Distribution Channels

Technology to be Utilized

X. Marketing Plan

Pricing

Distribution

Promotion, Advertising and Media including Website

Product Sales Assumptions and Forecasts

Controls

XI. Organizational Plan

Form of Legal Ownership

Identification of Partners or Principal Shareholders

Authority of Principals

Management Team Background

Roles and Responsibilities of Members of the Organization

XII. Assessment of Risk

Evaluate Weaknesses of Business/Major Risks

New Technologies

Contingency Plans

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XIII. Financial Plan

Financial Documents (3 years) Income Statements Balance Sheets Statement of Cash Flows

Analysis of Financials (Above two sections not included in example plan since it was a startup)

Assumptions for Future Financials (Revenue and Expenses) (3 years)

Pro Forma Income Statements (3 years)

Cash Flow Projections (1 year)

Pro Forma Balance Sheet (1 year)

XIV. Appendix (Contains all Back-up Documentation, Exhibits, etc.)

Letters and documentation of research

Market Research Data

Leases and Contracts

Price Lists from Contractors/Suppliers

Brochures and advertising materials

Detailed lists of equipment owned or to be purchased

Blueprints and plans

Maps and photos of location

Magazine or other articles

TIPS FOR DEVELOPING THE PLAN• Present production levels• Present levels of direct production costs and indirect (overhead) costs• Gross profit margin, overall and for each product line• Possible production efficiency increases• Production capacity limits of existing physical plant

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• Production capacity of expanded plant • Production capacity limits of existing equipment• Production capacity of new equipment • Prices per product line• Purchasing and inventory management procedures• Anticipated modifications or improvements to existing products• New products under development or anticipated

*Adapted from: Hisrich, Peters, & Shepherd. Entrepreneurship: 8th Edition.