Taking on a strategic partner from a bigger drinks company

What a strategic partner brings

A financial investor brings money and expects a return. A strategic partner, such as a larger brewer, a spirits company or a beverage distributor, brings money plus parts of its business. That can mean:

• Distribution across several states through an existing sales team and distributor network.
• Buying power on malt, hops, cans, bottles and cartons.
• Brewing or packaging capacity you could not afford to build.
• Experience with label registration, state corporations and excise compliance across markets.

For an Indian craft brewery, the second state is often the hardest step. Each state has its own excise rules, label approvals and route to market. A partner that already sells in ten states can shorten that path by years.

What they usually want in return

Big companies rarely buy a minority stake for the dividends. They buy a position in a growing category, a brand that reaches drinkers they cannot and often an option to buy more later. The common shape is a minority stake now, a board seat or two and rights that let them take a majority stake after a set period or once targets are met.

Read every right they ask for as a question about control. Veto rights over the budget, new beers, pricing or a new outlet mean you no longer decide those things alone. Information rights, such as monthly accounts within 15 days, are reasonable. A veto over your head brewer's recipe changes is a different matter.

Protect the brand and the recipes

Your brand is usually the thing they want most. Make sure it belongs to the company, not to a founder personally. The trademark should be registered in the company's name for the right classes before talks begin. The same goes for your beer recipes, logos, label artwork and social accounts.

Then decide what happens to them in each outcome. If the partner buys you out, they get the brand. If the partnership breaks down, does the brand stay with you? Can the partner launch a competing craft brand using what it learned in your board meetings? A non-compete and a confidentiality clause, drafted by a lawyer who works on drinks deals, answer those questions.

Read the exit clauses first

Founders tend to read the valuation and skim the exits. Do it the other way round. The clauses that matter most in five years are these:

• Call option: the partner's right to buy more shares later, plus the formula that sets the price.
• Put option: your right to sell your remaining shares to them.
• Drag-along: whether a majority can force you to sell with them.
• Tag-along: your right to sell on the same terms if they sell.
• Right of first refusal: who gets to buy before an outside buyer can.

A valuation formula based on a multiple of revenue or earnings in a future year can be fair or brutal depending on who controls the costs in that year. Model it with your accountant at several outcomes.

Diligence runs both ways

They will examine your accounts, licences and contracts. Examine them back. Talk to founders of other brands the company has invested in, especially ones where it did not go well. Ask what happened to the founder, the team and the beer after the partner took control.

Check the promises against reality. If the pitch is distribution in Maharashtra and Karnataka, ask how many outlets their sales team covers there and how a small brand gets attention next to their flagship lager. Put the commitments you care about, such as a distribution plan or capacity reserved for your beer, into the agreement rather than the slide deck.

Indian rules sit on top of the deal

A change in shareholding or directors may need to be reported to, or approved by, your state excise department. Rules vary by state and change. If the partner is a foreign company, foreign investment rules apply as well. Build the time for these approvals into the deal timeline, because a signed agreement that cannot complete leaves both sides stuck.

Your board will also change shape. A partner with two seats on a five person board changes how meetings run, what gets reported and how fast decisions happen. Our guide to setting up a board and advisers covers how to run one well.

Decide your red lines before the first meeting

Strategic deals move fast once a big company is interested. Founders concede things in the room they would never have agreed on paper. Write your red lines down first. They might include keeping the head brewer's say over recipes, keeping the taproom independent or refusing a call option before year five. Share them with your lawyer and your co-founders.

Understanding how a deal changes the numbers and the control of a small brewery is part of running one. Your first step: write one page listing what you will never give up and what you would trade for distribution, then test it against the first term sheet you receive.

Common questions

What is the difference between a strategic and a financial investor?

A financial investor provides money for a return. A strategic investor, such as a larger drinks company, also provides distribution, buying power or capacity and usually wants more control or a path to ownership.

Should my brewery trademark be in my name or the company's?

In most cases the company's, registered before any investment talks. Investors will want to know the company owns the brand outright. Take advice from a trademark lawyer.

Does a change in shareholders need excise approval in India?

It can, depending on the state and the licence. Rules vary and change, so check the current notification or ask a licensing consultant before you sign.