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Brewing up some bad news Featured

10:05am EDT July 22, 2002

In 1997, Crooked River Brewing Co. appeared to be on its way to success. It had a specialty brew featured at Jacobs' Field. There were high-profile corporate sponsorships with the Cleveland Cavaliers and the Medic Drug Grand Prix. And the ink was barely dry on new deals with local beer distributors to carry Crooked River's products to a larger regional customer base.

Then the brewery bumped into the most basic of business problems: cash flow.

It had burned through $750,000 in start-up capital in 18 months-just like the business plan said. But nobody was standing in line to put more money into the brewery, and Crooked River wasn't yet selling enough beer at a high enough price to get along without additional funding.

On Aug. 24, Crooked River was bailed out of Chapter 11 bankruptcy at the last second, when C. David Snyder - flush with cash from the recent sale of Realogic, his own high-flying systems integration firm - made a half-million dollar investment. Here's why the brewery got within spitting distance of liquidation.

Crooked River sold its first beer in the summer of 1994. It seemed like a good time to open such a business; microbrewed beer was earning unprecedented shelf space in the grocery stores, but the fine art of brewing had not yet found its way into every struggling restaurant, tavern and horse track.

But from the start, investors were wary, as they are of any industry that grows a little bit too quickly and is based on the fickle taste buds of the American public. It doesn't matter that Crooked River began with recipes that were accepted and praised by the most discriminating beer tasters.

Explains founder Stephen Danckers, "Gung ho enthusiasm and technique will only get you so far. At some point you need to make a profit. [We] didn't have business experience and know-how. It was always a search for money. Sometimes you'd just forget about it, but it was always there. Finally, it just caught up with us."

In 1994, no bank would touch the deal Danckers was floating around town. Undaunted, he raised $750,000 through a limited partnership-of which he was the general partner-to get Crooked River rolling.

That money was used to buy equipment and expected to last approximately a year and a half.

By 1996, when the seed money ran out, Crooked River was nearing profitability and Danckers wanted to expand. National City Bank extended a $60,000 line of credit-enough to lease a new bottling line and add beer vats, but not enough to feed operations until the company found outlets to sell its new capacity.

The credit line was secured against Crooked River's equipment.

During this expansion phase, Crooked River employed its own small sales force to sell beer to grocery stores, bars and restaurants.

Lacking cash to expand that sales force, Danckers signed deals with six area beer distributors. Sales volume increased almost immediately, hitting 6,000 barrels of beer (equivalent to 84,000 cases) in 1997.

But the new delivery method had its own problems. The marketplace wouldn't swallow a price increase high enough to absorb the sales cost that distributors added, so Crooked River actually earned less per barrel. Says Danckers, "The distributor sucked a big chunk out of our return."

Worse, Danckers noticed that while sales around Northeast Ohio were increasing, Greater Cleveland area sales were slowly sinking. Danckers attributes the downward spiral to the way beer has always been sold-one bar at a time by salespeople who form close relationships with the people who actually pour the drinks.

Distributors, who make their money on the national brands, were too busy to talk up Crooked River. "It used to be that the Crooked River guys would come in and say, 'Here's your beer. What else do you need from us?'," Danckers says. "Those drivers were salespeople for us. We didn't have that anymore."

Finally, there wasn't enough money to continue the brewery's corporate sponsorship obligations-close to $200,000 a year. So even as the distribution failed to spread the Crooked River name, the brewery itself ran out of money to do the same job.

From mid-1997 through early 1998, Danckers was rejected by banks, private investors and venture capitalists in his effort to secure operating capital.

Finally, in early 1998, three individuals joined together and gave Danckers $100,000-Dominic Visconsi Jr., owner of Visconsi Development Corp., James T. Hickey, principal of the Arras Group Inc., and Samuel Hartwell, owner of management consulting firm Newmarket Partners LLC. A second loan - for $10,000 - came from Dr. William Bohl, principal of OCO Leasing Associates, which supplied and leased the brewery's new bottling line.

Then in April, the four were joined by Beachwood venture capitalist Mitch Frankel-owner of Frankel Investment Co.-and together formed Black Forest Investment Partners. The investment group saw potential in Crooked River's future, but only if they took control of its operations. They struck a deal with Danckers, which assigned the brewery's debts from those individuals to Black Forest. As part of the bargain, Frankel was appointed president and all of the brewery's former management staff-except Danckers-were ousted.

Explains Frankel, "[Danckers] went looking for asset-based financing on the equipment, but with the business in a growth phase and with losses, no bank wanted to loan money. They saw it as a venture capitalist's responsibility, someone willing to risk their own money."

But there was also a deeper external problem that an injection of fresh capital couldn't solve. Crooked River's money woes couldn't have come at a worse time-and neither could its entry into the microbrewing industry. After close to a decade of expansion, in which craft brews grew to account for 2 percent of the Northeast Ohio beer market, the microbrewing industry was poised for a shakeout.

Says Frankel, "With the overbuilding of the microbrewing industry, lots of brewers have come and gone. It's made the prices for used equipment drop. That doesn't give a bank great comfort to loan on the equipment. They're scared to be stuck with it and have to liquidate it."

Among the recent local casualties are Ashtabula's Lift Bridge Brewing and Cleveland Heights' Firehouse Brewery.

Black Forest's deal also came with its own caveat. The group invested an additional $90,000 for operating capital on the condition that Crooked River continue to seek additional financing. If none was found, the company would file for Chapter 11 bankruptcy and reorganize.

The reason, Frankel says, is that his group didn't want to make an investment for the sole purpose of paying back debt. That would have left Crooked River still floundering in its fundamental cash flow problems.

What the investment group wanted, Frankel says, was to get some relief from creditors and inject enough capital to get Crooked River back on its feet.

The reorganization plan called for a $500,000 investment - $400,000 to satisfy creditors and $100,000 in operating capital. The rest hinged on new management turning around Crooked River's lagging sales.

One of Frankel's first efforts was to pull the corporate sponsorships. That left the Medic Grand Prix scrambling for a new local beer partner, something Danckers says race management is still fuming about. The Cavaliers were also angry, holding Crooked River to the remaining $18,000 commitment on its sponsorship contract.

Frankel also hired four new salespeople to rebuild the fractured business relationships between the brewery and its customers. "They're going to try to fix the relationships by going to the retailers, the bars and the restaurants," says Frankel. "They'll also ride along with the distributors. We were naively relying on the distributors to push our name. Distributors deliver, but we can't expect them to put displays in stores for us. They're worried about the national brands they're representing."

But in August, it appeared that even the $500,000 investment wouldn't be enough to keep Crooked River's doors open, when the reorga nization plan started to fall apart. First was a revelation that the company's sales have continued to dwindle.

Then, one of the brewery's largest creditors - OCO Leasing Associates (owned by Bohl, one of Black Forest's partners) - rejected the initial reorganization plan, unsatisfied with how little of its $313,000 debt would be repaid under the terms of the deal.

Frankel estimates the brewery continues to lose between $20,000 and $30,000 a month, and there currently are no signs of any turnaround. "That sales drop has been a killer," he says. "The brewery's just losing a lot more than we anticipated."

Frankel was gearing up for a liquidation - which he said would be inevitable without another infusion of $150,000 to $300,000. Over the weekend of Aug. 22, with the Aug. 24 liquidation deadline fast approaching, he struck a deal with Snyder.

That arrangement calls for the creation of a new company - Crooked River LLC, which includes the same investors as Black Forest, except that Snyder replaces Dominic Visconsi Jr. The other principals - Frankel, James Hickey, Sam Hartwell and William Bohl - will invest $40,000 apiece. Snyder will invest $540,000. The first $400,000 of the total will be used to discharge debts under the terms approved on Aug. 24 in bankruptcy court.

The remaining $300,000 will be used as operating capital to revive the brewer's ailing sales. That amount - plus the repayment terms - satisfied Bohl, whose OCO Leasing had rejected the original reorganization plan.

Snyder says he has enjoyed Crooked River beer, and he became interested in investing after hearing the company's main problem was cash flow.

"It was a classic small-business problem," he says. "They were undercapitalized. I just sold Realogic and have some funds I can invest."