The Sanity of Math and the numbers to survival

[IanB]

All,
As it has been about 1 year since I registered my LLC company and started this insane journey, I wanted to put up the 'real' math numbers for the winery. I always found this information lacking while searching and planning for the winery. I also way-under estimated the costs and over-estimated the profit at the beginning.

So, here is the really cut and dry dirty numbers for a 300 case winery in the first 16 months of operation. If you want to change these numbers to make a living, you need to figure out how to do it with more efficiency or charge more.

300 cases @ 15 bucks a bottle wholesale price to the liquor store owners. That is 180 a case price. Retail will be around 22$ a bottle for the mead.

Revenue $47000 (looks good right!)

costs
Labels (2k), Bottles(4k), Cork(min) 6100$
Honey 4000$
Rental Space for winery 6000$ (500$ a mo)
Controlled Fermentation Equipment (4k) (I spent 6k in reality) (all second hand and Frankenstein creations nothing I got was from a commercial place, all ebay and all scrap yard finds)

So, do the Math
Revenue - Costs = Gross Margin
47,000 - 21100 = 26000

Still looking good right? 26k is a lot of money, but honestly, it is a 1st grade teacher salary.

But then there is income tax (I am negating all the other taxes for simplicity)
26k * (your personal income tax rate) 35% = 9100

Gross Margin - Taxes = Net Profit (take home pay)
26000 - 9100 = 16,900

16,900 dollars for 16 months worth of work, probably 1500 hours of blood sweat and tears worth of effort on my part and you had to have 23k dollars at the beginning to even start the business. If you want to do better, you need to have more sales (which equal more investment dollars to buy raw honey and packaging suppliers) and more time to create more wine. I didn't have another hour to invest, or another dollar to spend, so these were my numbers and I felt it would be useful to those guys starting out.

Have I regretted it...NEVER for a second.....(although I have regretted how 'big' we started. I should have not gone for such a large 300 case run with the budget we had originally, should have gone for 125-175 cases or there abouts)

 

[Yraith]

I make just a bit less than that on my disability..

What did you do from the start?

I am thinking of just doing some homebrews to sell at festivals.. Get my name out. I have a friend at a restaurant who can serve guests with it too..

Then I was planning in a couple years to get a storefront..

Why did you start at a winery? Is that a better market area than, say, a downtown?

 

[AToE]

I'm surprised that corks came out to 50% more than the bottles, I can see a lot of stuff like this adding up like crazy.

Yraith, I think you have a missunderstanding of the process. In order to legally sell mead AT ALL you have to start a winery. That is the legal definition of a business that makes mead, they file it under winery. IanB isn't selling this stuff direct to consumers, he's selling it to liquor stores for them to sell to consumers.

Here in Alberta we have special laws to help small meaderies, but you have to also be an apiarist to qualify for those benifits, and that's just up here.

EDIT: Also, can I ask why your income tax % is so high? Is that because of other incomes on top of this? (I have no idea how income tax works in the US but I'm guessing it's a similar sliding scale to what we have up here in Canada, the more you make the higher % of your income goes to tax).

 

[Yraith]

Okay, feel stupid now... I actually thought that he meant a real winery.

I have read all about becoming one.. Oh the hoops to go through here in West Virginia.

Some of my other questions are valid though.. Why did you do wholesale to liquor stores? Is there a better profit for your area?

Here, where I live, there isn't a liquor store.. West Virginia has given rights for one or two companies to sell liquor/wine. And right now that is Rite Aid.. Very strange in WV.

 

[Arcanum]

Also, can I ask why your income tax % is so high? Is that because of other incomes on top of this? (I have no idea how income tax works in the US but I'm guessing it's a similar sliding scale to what we have up here in Canada, the more you make the higher % of your income goes to tax).

At that salary, his actual income tax paid shouldn't be anywhere close to the full 35%, especially if he can factor costs in as deductible business expenses.

Also, his $6000 in equipment should be a more-or-less one-time purchase; his next 300 cases should be rather cheaper for that reason.

 

[Medsen Fey]

I should have not gone for such a large 300 case run with the budget we had originally, should have gone for 125-175 cases or there abouts)

Wow Ian! Thanks for being willing to take us through your numbers. You may help a lot of us think things through in a way to increase the odds of success.

The only problem with starting smaller is the fixed costs (and the time committment) don't go down, so the per bottle cost becomes even higher. It takes about as much time to make a 15 gallon batch as it does to make a 1-gallon batch (a little more for bottling ) so larger volumes may be a more efficient way time-wise. Also, there are big economies of scale in this kind of business.

If you can produce the same size batch 4 time-a-year the cost per bottle drops quite a bit. Can you sell 1,200 case?

And yes, that does seem like a lot for corks. Shouldn't you be able to get 4,000 corks for about $2,000 (even for really good corks)?

 

[AToE]

I should have also said thanks for posting this. Pretty much every newb that finishes their first batch seems to start talking about starting a meadery one day (myself included... fun to dream) and these kinds of reality checks are good to have, and it's rare to see someone being so utterly open about their entire process and the hard numbers.

 

[chiguire]

Hey, Ian.

Thanks for the rundown. Start up cost and overhead numbers are hard to come by, so thanks for taking the time.

Good luck to you in your endeavors! My your wine and mead flow freely and be enjoyed by many.

 

[IanB]

The one great thing

the one great thing about the community here, is that it is all about sharing. I don't want that to stop. Public companies share all there financial at the level I just shared, there isn't any reason why we shouldn't either.

I think the transparency helps all of us.

As to the corks, sorry if it is misleading, corks actually only cost me 400 bucks or so the line above is meant to say that bottles and cork and labels all cost about 6100 for 300 cases. I find the amalgomated corks (chopped cork in the middle, solid cork discs on the ends) are good for mead. Mead likes little bit of oxygen, and 99% of our mead will be drunk within the first 18 months of bottling. For the few people who do want to cellar it, we may come up with a differant long-term closure for that.

The real cost is honey, and packaging, the point of the post was to show people how much $ it really costs when you actually start going with commercial sizes. Yes I will be able to re-use my equipment, but it is still money out the door.

Rent is where you can really save (doing it at home, or somewhere else where rent is cheap) and you can shave off a few dollars else-where.

As to the Tax rate, that is my personal rate because of my wife and me filing jointly. LLC and sole proprieter businesses are taxed at the personal rate of return. I do make a good living, but do I love it. No. So my new business is taxed at the same rate. Also being self employed for that portion of the social security tax.

The really scary part is that in my state with me and my wifes income and social security tax the business pays I will actually pay a 48% rate on these profits in the end. And I only own 89% of the company since I had to sell off some of it to fund the start-up. Another 11% of the profits I won't get.

In the end, I will be lucky to take home 13k worth of take-home pay and yes the efficiencies do go up as you make more, but even if I made and sold 1200 cases (goal of year 3) we would be taking home about 50k-70k depending on how fast we wanted to grow. A living that could finally employ me full-time.

 

[AToE]

Some of my other questions are valid though.. Why did you do wholesale to liquor stores? Is there a better profit for your area?

Looks like Ian missed this question, but I can take a stab at this as I do a lot of retail/purchasing work. There's a reason that very very few products are actually sold by the manufacturer - distribution. Sure, he could sell them himself, at fairs, farmers markets, and maybe some other events, but he's talking pretty big quantities here. Other than maybe a brewpub, there's no way he could sell those kinds of quantities by himself, he needs retailers.

Less profit per bottle, but he's better off making less per bottle and selling them all, than making more per bottle and only unloading a little of it.

Trying to sell this many bottles would be another full time job on top of his near full-time meadery and other full time (presumably) job, and there's only one Ian to go around! So basically, other than extremely tiny meaderies (hobby level), and extremely huge ones, no one can actually afford to sell direct to customers - and realistically even a huge meadery wouldn't try to make direct sales a main part of their business plan.

 

[mmclean]

To break even, even with a cottage type business is no small feat.

You do not own a LLC, you are only a manager and only owe taxes on what you take from the company. This is why it is taxed as personal income.

Just let the business grow with tax free dollars. One of the perks over a Corp.

 

[djslort]

I am thinking of just doing some homebrews to sell at festivals.. Get my name out. I have a friend at a restaurant who can serve guests with it too..

Trying to sell alcohol without the proper licensing is a very bad idea, unless you want to spend time as a guest of the "revenuers".

Ian;

Of the $21k start up, how much was spent on legal stuff (bonds, lawers, paper work). I realize these numbers are going to be different, in your state, but just curious.

 

[icedmetal]

Let me add my thanks here as well. As someone who has put a lot of thought into getting serious in the mead making business, this sort of reality check is spot on, and really helps to put things into perspective. So, thanks!

One question though, in paragraph form! I've often noticed that when I'm doing something on a small scale, or just getting into it, it's a lot of fun. Take poker for example. When I started playing poker, I couldn't wait until the next game, totally loved it. So I read a bunch of books, and learned all about proper poker play, how to read tells, etc etc. The deeper I got into the hobby, the more it felt like a job, and the less fun I was having. End result: I no longer play poker.

So my question is, has starting a meadery turned you off at all to making mead?

 

[Tannin Boy]

the one great thing about the community here, is that it is all about sharing. I don't want that to stop. Public companies share all there financial at the level I just shared, there isn't any reason why we shouldn't either.

I think the transparency helps all of us.

It has been an enjoyable journey that you have shared with us, Thank You!
I would suspect your best efforts are yet to come and I as well as others will live vicariously through your future success.

I have been in business for over 23 years to date? Yet I have enjoyed reading about your struggles and success's more than living my own. Here is to a better 2011, keep at it and always remember that those that have succeeded were just to stubborn to give up even after repeated failures.

TB
P.S. Change that word under your name ( fool ) It doesn't belong there..

 

[tuumi]

Thank you for the careful analysis of your project. This is very valuable information for those of us just starting out. We realize the first few years are going to be tight but we both have jobs that we will have to keep. Teaching will give me time in the summer to tend bees to keep the cost of honey down.

I have a lot to learn about the business side of this so I see a trip to the library in my future.

Just a quick question before I go to bed. Can the tax liability be eliminated if all profits are reinvested into the business? If expenses cancel profits we don't have to worry about income tax right? I think I know the answer to that and it seems like a dumb question as I'm typing it. I'm just trying to create a road map for the business to see if this can work long term.

 

[huntfishtrap]

Very interesting, I've never even thought of going pro though. I've already spent three years building a business and loosing it in 3 months. I like this hobby, I think it would loose it's luster if I had to make it pay. My GF already has the habit of comparing my expenses to the cost of a bottle on the shelf. She just doesn't get it. I'm glad there are people like Ian though. I like drinking locally made beverages.

 

[Chevette Girl]

IanB,

Thanks so much for the reality check, it answers a lot of the "what if's" that rattle around in the head of everyone who ever thinks about exchanging or augmenting their 9-5 day job for something different, maybe involving their hobbies... and it's a good ballpark estimate to save for startup if we're not yet deterred!

A lot of my friends keep urging me to go pro (well, the way they put it is "sell your stuff" but there's no way I'm bootlegging) but it's not a step I'm ready to take yet, I barely have enough room for my amateur attempts as it is and there's no way I'd tolerate having people traipsing through my work area if I were selling the stuff so I'd definitely either have to move to somewhere with a much bigger mortgage and cordon off 1/4 of the house, or rent space somewhere...

And Medsen, who says a 15 gal batch takes no more time than a 1 gallon batch, this is true only if you're making a traditional mead, not a mel, you aren't including preparing fresh fruit in your time estimations, so say the hours and hours I have spent most summers chopping pears and crabapples, or picking red currants and wild grapes last year, or black currants and black raspberries the year before that... For those of you who do have done professional or large-scale melomels, is it that different when you're working on a really large scale? Or do you manage to industrialize it so you don't have to handle each berry personally?

 

[akueck]

Very fun to see the numbers behind it all. Thanks for posting it up! I'm encouraged to see that the start-up costs aren't too high (I've heard a brewpub takes on the order of $250,000 to open the doors). How much of the total start-up expenses were for capital vs. consumables vs. non-recurring costs like filing fees? Do you get a tax break for depreciation of equipment? (I'm not sure how LLC rules work.)

I've had the same thoughts about losing the fun of brewing if you make it a job. In fact it's exactly what I say when someone says "why don't you open a brewery/meadery/etc?" Perhaps someday, but I'd probably keep a "day job" to pay the bills and run a small-production facility that just happens to sell what I can't drink myself. If the balance swings over the years, so be it.

CG- if (grape) wineries are any example, individual attention to berries is reserved for the really expensive stuff (think $100/bottle and up). Usually the whole lot of grapes gets dumped into a destemmer/crusher and if some leaves, dirt, or squirrels go in with them, that's just bonus material. Take Heart of Darkness for example (the Ken Schramm/B Nektar collaboration): hand picked, hand processed fruit from a single orchard and it comes out to $100 for a half-bottle. All the extra time handling the fruit goes right into the bottom line, as it should. Even less extreme examples cause large multiples in costs and prices. Blend grapes from all over the state: $X. One county only: $2X. One appellation: $4X. One vineyard: $8X. One barrel: $20X. (numbers just an example, but not too terribly far off from reality.) Thus two-buck chuck is $2 and my reserve wine (limited to certain barrels) from a respectable (but not too self-important) winery in say Stag's Leap district in Napa is in the $40-50 range. More attention to the particulars takes more effort, costs more, and therefore is priced higher.

Edit: Thoughts about the distributors and wholesale/retail. In the US, many states do not allow a winery or brewery (the producer) to sell bottles directly to a consumer. You MUST sell to a distributor, who then sells to a retailer, who then sells to the customer. This is the Three-Tier System (producer, distributor, retailer) which you may have heard about, originally intended to "protect" consumers and producers by providing a "neutral" middle party but now perverted into a supply chain dominated by the major players in the industry and stifling small producers (and backed by billions of dollars of lobbying money). Check out sites like Free the Grapes for more info. In short, depending on the state, it's illegal to sell your own product. You have to pay someone else to sell it for you, if the other companies on their route allow them to carry your product and the store managers agree to place it on the shelf. Ugly, ugly, ugly. The "documentary" Beer Wars goes into this to some degree, and is available on Netflix if you want to watch.

/3-tier rant. Grrr!

 

[Medsen Fey]

You do not own a LLC, you are only a manager and only owe taxes on what you take from the company. This is why it is taxed as personal income.

Just let the business grow with tax free dollars. One of the perks over a Corp.

If an LLC produces income, you must pay tax on it through your personal return whether you take the money out or not. If you have a C-corporation, it must pay taxes on its income, and then you get taxed on any dividends paid on your personal income tax. The advantage to S-corps and LLCs is that you only get taxed once, and at your personal tax rate. There is no non-taxed income.

The only way around taxes is having less income. If you spend the cash coming in (assuming you are using cash basis) on more honey, bottles, supplies and whatnot, then your income may be lower (with subsequent lower taxes). Perhaps this is what you were meaning?

I find the amalgomated corks (chopped cork in the middle, solid cork discs on the ends) are good for mead. Mead likes little bit of oxygen, and 99% of our mead will be drunk within the first 18 months of bottling. For the few people who do want to cellar it, we may come up with a differant long-term closure for that.

The twin-top corks are good. I have used them and they will work for a mead very nicely. They will allow a mead to age fine for several years (I've got some that are right at 4 years). You shouldn't need to worry about a longer lasting closure unless somebody wants to cellar it for a decade or more.

I hope things continue to go well, and that you hit the 1,200 case mark and more!

 

[IanB]

Wow....

Ok, overwhelmed a little bit by the words of encouragement and the response.

Q: Why liqour stores & restuarants vs direct selling
A: I am but one man. I can only work 2 full time jobs when I have a family. Selling wine is another full time job. Time investment is just WAY to much. (you will understand if you try to start a winery/meadery). Also almost equally important is the fact that you want to bring the product where the people already are. It is difficult to find and hunt deer in a forest, but sit next to the watering hole and you get a chance every 5 minutes.

Q:LLC and income tax.
A:You only get taxed on money you take 'out' of the business as income. If you never take money out, you are only charged alcoholic excise tax (minimal charge of 30 cents a gallon) when you sell your wine. However, why run a business that doesn't bring in any money to your pocket. You can expense a lot of stuff, but expense to much, and it's called tax evasion. Remember those mobsters in the 30's you get the idea.

Qf the 21k how much was legal fee's and bonds and lawyers
A: Never talked to a lawyer once, I become my own 'expert' by reading all the laws online, talking with the local alc. commision, and the TTB. You do pay about 300$ a year in 'bond' fee's. The bond secures the governments potential taxes if your place burns down. They always want there cut.

Q: Is it still fun after going commercial.
A: It is not as fun, it is more draining on me and my family, but it is exhilarating to think that i made a wine people will want to buy and drink. I think it is just in my blood to run my own show. That is what keeps me going, not the 'fun' anymore.

Q: Is the tax liability eliminated if you re-invest all the profits.
A: Yes it is, except the excise taxes, but trust me, you will want some of the mula. No one works for a year and a half or two years and doesn't want the $ coming out of the venture.

Q:How do you work with fruit on such a large scale.
A: It is a bitch. I needed 300 lbs of raspberries. They came from Maine (had to drive there) they were frozen in large bricks and I had to wait for them to thaw, then smash them with a 3lb hammer to break them appart, then stuff them into strainer bags, then push the bags through a 6" opening. 15 hrs and 27 bags later the berries were in the container. No matter what, when dealing with fruit (usually frozen) it is a hard slog.

Q:How much was capital vs consumables vs one-time fee's.
A:All the one-time fee's seam to be smaller, 100 here, 50 there. Capital equipment was 6k for me in the end, and we still don't have a labeler (ebay buy was broken!!). In mead making, consumables or cost of goods sold is the big cost. Packaging and honey was 10k. That is a lot of the 21k spent. It is difficult to reduce these costs. We get (36) 5 gallon pails of honey at 113$ a 5 gallon bucket. And we get bottles at .90c a bottle (could go down to .75c, but I liked this style to much) and we get labels for 60 cents a label front and back. Labels can go down, but only when you print 4k or 5k or 10k, we only are printing 3k. the cost per label goes down, but the total order amount goes up. 2200 dollars to print 5k labels, or 1300 dollars to print 3k labels. We went with 3k labels.

One last thing on Income Taxes. It is computed like this for me:

Federal Income Tax Rate (28%) + Social security Tax rate (7.5%) + Business responsibility of the Social Security Tax rate (7.5%) + State Income Tax Rate (5%) = 48% (ish)

Oh yeah, and if you buy anything in your state with your money, the sales tax is 6.25% so total money in pocket after taxes and you buy something with your money = 55.25%

And one final thing. With deductions for mortgage and other child related deductions my effective tax rate is somewhere around 22% (thank god for buying a house! Sort of ?>!)


That is it for the Q&A, let's keep the discussion going. This has taken off!
IB