A compliance checklist for beverage alcohol business acquisitions
- Jul 28, 2020 | Olivia Leigh
When it comes to the beverage alcohol industry, business acquisitions can be a significant compliance project. It’s difficult enough to establish your business in this highly regulated environment; the prospect of modifying every license, tax permit, bond, and secretary of state registration associated with your company can be overwhelming. Alas, companies evolve and frequently acquire competitors over time, and someone has to take on the task of remaining compliant during these transitions.
There are three basic types of acquisition projects within the beverage alcohol business: brand acquisition, business investment, and business acquisition.
This blog helps explain the differences between these project types and their compliance challenges. Preparation is always key for changes, so we’ll provide a general checklist for each scenario. The team at Avalara for Beverage Alcohol has navigated hundreds of these transitions over the years and we’re here to help.
In a brand acquisition, only the brand (intellectual property) and existing inventory (real property) are acquired. This is simply the purchase of a product line, for example, rather than an entire business that may include other assets like buildings, shipping licenses, etc.
Any associated Certificates of Label Approval (COLAs), brand label and product registrations, and distributor appointments become the responsibility of the buyer to transfer. Depending on the situation, the seller may or may not dissolve their company as part of the acquisition process. Regardless, it will be the duty of the buyer to reregister the products under their licensing to fully complete the acquisition.
There are several considerations to ensure a smooth transition during a brand acquisition:
- Obtain current Alcohol and Tobacco Tax and Trade Bureau (TTB) COLAs and formula approvals for all products
- Have all Brand Ownership and Rights Transfer letters signed as part of the closing process, especially if the seller intends to exit the business entirely post-sale
- Collect detailed product information for each SKU (including volume, ABV, etc.) to import details into a system like Avalara for Beverage Alcohol to facilitate registrations
- Secure distributor contract termination or release letters where changes need to be made
It’s common for beverage alcohol businesses to take on additional capital investment for a variety of reasons that are consistent with other industries. When this happens, a new investor injects capital and resources into the existing company while the licensed entity remains the same.
From an outside perspective, the business is unchanged. Operations remain uninterrupted, and none of the brands, inventory, licenses, or facilities change hands. But much like a duck gliding across a pond, there is some serious work happening just below the smooth surface.
Two primary factors determine how complex an ownership update will be: the percentage of total ownership that changed hands for the licensed entity and how complex the investor’s ownership structure is. If your business adds a sole proprietor investor with a total change of 1% overall, that’s not a major issue in most jurisdictions. If your business has a new 33% partner in the form of an LLC owned by two corporations and a trust, you might consider getting some backup.
Compliance requirements vary from state to state and may include a new license application, updated paperwork, an email notification, or nothing at all. Some states are satisfied with a simple update while others require investor information down to a fraction of a percentage. Planning ahead is your best bet in this scenario.
It’s best practice to make sure any prospective investor knows they may have to provide a wide array of personally identifying information (PII) like home address, date of birth, criminal history, spouse’s social security number, even a copy of their family trust if it’s part of the investing entity.
For a smooth transition when adjusting ownership, gather the following items to send to the proper agencies in each state:
- Sale agreement
- Updated corporate organizational documents
- PII for all investing principals and officers, managers, and partners as applicable
A business acquisition, or change in proprietor, is much more complex than the other two changes already discussed. When a business is acquired, the seller transfers ownership of brands, inventory, real property (facilities), and operating licenses in their entirety to the buyer.
In this case, the licensed legal entity does change. For example, Avalara Wine, Inc. might decide to sell everything to Orange Beverages, LLC. This means all compliance assets (licenses, tax permits, bonds, etc.) will need to be transferred, if allowed by the agency, or the purchaser will need to absorb products under their own licenses, followed by the closure of the original seller assets.
Changes in proprietorship bring up unique challenges. Timing is key as TTB permits typically must be updated first in order to acquire a corresponding Alcoholic Beverage Control (ABC) license, both of which are required for new shipping license applications. If these are not done in the proper order, the licensed entity will not match and shipping licenses will not be renewed.
Once the business assets are fully absorbed by the buyer, seller compliance assets must be completely closed out post-transfer to ensure there are no loose ends. It’s up to the seller and buyer to navigate existing relationships and contracts with distributors and wholesalers, as well as any outstanding tax obligations.
It’s important to note that the seller’s officers and managers may not be available to sign documents beyond the initial sale. This is significant because their signatures and authorizations are the most expedient way to close out old licenses and permits when the time comes.
Before jumping into a business acquisition, consider these important questions:
- Does the buyer have proper authority to maintain business operations while the transfer is in progress?
- Does the buyer have a full and complete scope of the licenses, tax permits, and bonds held by the seller?
- What is the preferred strategy for the Change in Proprietorship? Who is responsible for each piece?
- Who is ultimately responsible for the final dissolution of the seller entity’s distributor contacts, alternating proprietor agreements, etc.?
Finding compliance support
Any type of acquisition or investment is complicated in the beverage alcohol industry, but especially so in a complete business acquisition or change in proprietor. Enlisting assistance from Avalara can help you navigate the process with fewer roadblocks and costly mistakes. Avalara can evaluate the scope of your situation, create a checklist of required items, help manage timelines, and file required documents.
Want more information? Contact us now to talk about how we can help you make a smooth transition.