SC&H Capital: "Employee Owned Companies Gaining Popularity Among Craft Breweries"

8/22/17

Named after a 19th Century utopian community, Modern Times Beer is repurposing the experiments of the utopia – from the names of their craft brews to creating a less exploitative world for its employees – by placing the brewery’s ownership in their employee’s hands. The San Diego based brewery is the latest craft brewery to become employee owned, and the first in the state of California. The fast growing brewer has joined the likes of New Belgium, Harpoon, and Left Hand Brewing by adopting an employee ownership structure. To make the transition from traditional corporate ownership, Modern Times retained a team of ESOP experts, including SC&H Capital, to support the Company’s recent ESOP transaction.

Modern Times opened its doors and beer lovers cracked opened their signature cans and hybrid styles in 2013. Now, they distribute their popular beer across six states from their San Diego based brewing facilities, and serve brews directly to their customers through tap rooms across Southern California. The brewery produced 40,500 barrels in 2016 (an 82% increase in production from 2015), positioning the company close to an industry-significant production level of 60,000 barrels per year.

Reaching this level of production places the brewery squarely on the radar of large multinational brewers as an attractive acquisition target. However, an increasing number of craft breweries have begun to adopt an Employee Stock Ownership Plan (ESOP) model as an alternative to selling to a third party. ESOPs allow craft brewers to address key issues of ownership succession and liquidity while remaining independent and continuing to grow their brand. This was the route Jacob McKean, founder, CEO, and majority owner of Modern Times, chose for his company and his employees.

“Employee ownership isn’t just a trend. It’s a viable corporate structure, and for many shareholders and companies it can be a smart move,” said Gregory Hogan, Director at SC&H Capital. “More and more craft breweries are transitioning to ESOPs. For Jacob McKean, it was important to him to keep his company independent and to look after and reward his employees.”

SC&H Capital worked closely with Jacob and Modern Times team to implement an ESOP transaction that the company anticipates will result in:

1. Improved Corporate Culture and Employee Retention – ESOPs allow employees to share in the financial success of the company, which creates a greater sense of ownership among the employees. It promotes collaboration and transparency through every level of the organization. Ownership encourages retention among employees and creates greater alignment to company goals.

2. Substantial Tax & Financial Benefits – ESOPs offer companies significant tax incentives. Subject to certain limitations, both principal and interest are tax deductible on the debt incurred by the ESOP plan sponsor to finance the acquisition of stock by the ESOP. The ability to deduct principal payments significantly enhances after tax cash flow of plan sponsors versus traditional financing scenarios.

3. Continued Independence – The craft brewing industry is divided on their viewpoints of selling to “Big Beer.” For some, it’s a sign of success; a major beer company recognized their brewery as a valuable investment. For others, it’s a sign of selling out and damaging the creativity and spirit of the craft beer industry. An ESOP benefits breweries looking to maintain their independence and puts ownership firmly in the hands of its employees.

McKean said of the transition, “[It’s] proof that a startup brewery can compete and win in the craft beer market without selling out, all the while taking outstanding care of our employees and rewarding our investors.”

“ESOPs are growing in popularity, for very legitimate reasons,” said Hogan. “Many craft breweries have seen the benefits and realize employee ownership can address, and answer, many of the challenges faced by growing companies.”

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