By Chris Hermann and Bernie Kipp:

Type of Transaction – Asset Purchase versus Stock Purchase. Very important if the acquiring entity wants an immediate continuing operations privilege. Specifically If a PE firm  purchases the assets of the target company  (including the operating name, equipment, IP, inventory and the current brewery  building) and intends to do business post-closing through a new legal entity, TTB will consider that a Change in Proprietorship and 27 CFR 25.72 applies. That means about a 90-100 day delay in order to get the approval from TTB and during that time the new entity cannot commence operations on its own until the new notice is approved by TTB.

If on the other hand, the PE firm purchases the stock of the target company  and operates the business going forward using the existing legal entity, as is, with the only change being the new stockholders and potentially new personnel, then 27 CFR 25.71 and .74 apply and there is no discontinuance of operations because the entity holding the approved permit/notice continues in business.  The company will have to file an amended application within 30 days of the stock purchase. Any new company officials will also have to be vetted and information on the new shareholder(s) and a list of current officers and directors must be provided, but the approximate 90-100 day delay between applying for a new basic permit to produce wine or spirits or registration of a  brewery is avoided.  A new bond will also be required. Main issue:  Does the acquiring firm want/need to be able to produce and sell wine/beer/spirits under the auspices of the acquired company/facility immediately upon closing?  If so then there are several structural issues to consider.

Type of entity – If the entity acquiring the business is a Limited Liability Company very specific personal information regarding background, residences, employment, and source of funds will have to be provided by members (potentially all of them) of the LLC regardless of the level of ownership. TTB’s position is that it requires all members be listed in the Owner Officer table and complete an OOI questions (Place of birth, date of birth, SSN, Criminal history (arrests, convictions) source of funds, etc. ) At a minimum, a list of all members must be provided.  With corporations, the vetting process is limited to Officers, Directors, and holders of 10% or more of outstanding stock. This is important to potential investors that don’t want to go through the vetting process. Main issues are: Have any of the principals in the company ever been arrested for any violation of federal or state law? If so have they been convicted of a felony or a misdemeanor involving taxation of alcohol or tobacco ? and Are the funds invested in the company from known legitimate sources that can be documented?

Potential Tied House issues – Potential issue if the PE firm or any of its principals already own any interest in retail businesses that sell alcohol.  That is very much an issue both at the federal and state level, especially if the PE firm’s  interest is used to influence the purchases of the retailers. (This is the heart of the 3 Tier system). The key regulations are Tied House and Exclusive Outlet sections of the business practices laws. Some states will not allow any common ownership (no matter how diluted)  of a producer and a retailer at the same time while other’s may allow it as long as there is no undue influence on the retailer’s purchasing decisions. It’s mainly a “top down” statute which means there is more concern of a producer controlling a retailer than the other way around. The federal statute is very specific about a Brewer/Winery/Distillery owning or controlling partial interest in a retailer, especially if that interest affects the purchasing patterns of the retailer. Main issues are:  Does the PE for or any of its members own hold interests in restaurants, bars, retail stores or shops that hold state licenses to sell on or off premises, alcohol beverages.

Current standing of Target company – The PE firm should request confirmation as part of its due diligence of the target company that:

The Target Company:

  • Is in possession of approved federal and state licenses from the TTB and state regulatory agency
  • Is in possession of approved  Bonds
  • Is current on its excise tax obligations as of time of purchase
  • Is current in its filing of required and has timely filed all required reports for last three years.
  • Is eligible for any tax credits taken  as small producer for last three years and has filed required notices to establish eligibility.
  • Is in possession of copies of filed excise tax returns, Brewer’s Reports of Operations, exportation documents, and supporting cellar records for brewery operations that occurred in 2012, 2013, and 2014.
  • Is in possession of Certificates of Label approval and Statements of Process approved by TTB which related to products currently produced and sold by the target company.