Side Hustle Sit Down: Physician on FIRE

Today’s guest needs no introduction. He is a board certified anesthesiologist and accomplished blogger. He has introduced the concept of FIRE (financial independence, retire early) to myself and countless others. His site has been viewed almost 4 million times, and I suspect that the next 4 million is on its way.

PoF logo

Today the Physician on FIRE is taking a break from the OR and his blog to discuss another one of his side hustles: investing in breweries.

Brewing beer and anesthesiology are very different careers. One involves carefully mixing ingredients followed by long periods of boredom in the hopes that your customers will eventually be comfortably numb to the pains of their lives. The other one involves brewing beer.

Investing in illiquid assets like restaurants and breweries are one of the 7 deadly sins of physician finances. What made you decide to invest in this asset class?

On one hand, there are a number of investments that are too risky or too costly to make much sense for a physician to put a lot of time, energy, or money into. On the other hand, there is the concept of “play money,” a small slice of your portfolio that you can afford to lose, so why not have a little fun with it?

It’s wise to limit play money to a small amount of your overall investment portfolio, say 5% to maybe 10% at the most. I’ve invested in two microbreweries in small towns of less than 5,000 people. One was an equity deal; the other is a loan. Both came with great perks, like free beer!

If you can help create even a handful of jobs in a town that small, the impact is real. Small craft breweries can also be great community gathering points. Most are family friendly and offer what I think is a more enticing alternative to meeting up for coffee.

What advice would you give someone looking to invest in a brewery? How do you get your foot in the door?

The opportunities I’ve had came about in different ways. In one of them, the brewery was the brainchild of an acquaintance of mine. I heard about it through the grapevine and reached out to him. He shared the business plan with me along with the fact that they were looking for investors that would like to be involved with the brewery. It all looked good enough to me and I wrote a check.

The other came about via a friend who works with the local economic development corporation. If you’ve got one of these (or something similar) in your area, you’ve got someone with a finger on the pulse of planned and pending small business startups, including breweries, wineries, distilleries, etc…

If you’re interested specifically in breweries, membership in your nearest homebrewing club will connect you with many wannabe professional brewers, and you’ll have ample opportunity to sample their wares to see if they’ve got the skills to make good beer, a very important pre-requisite to starting up a brewery.

It’s also common for new breweries to raise funds via crowdfunding sites like Kickstarter. Keep an eye on those — you probably won’t be given an opportunity for anything but a token investment via the crowdfunding platform, but you could use it to get in touch directly with the entrepreneur who launched it to inquire about the need for a more substantial investment.

Investing in a brewery isn’t like buying 100 shares of VTSAX. How did you negotiate the terms of your investment? Did those terms include a way to cash out?

The equity deal was put together by two career executives who had recently retired from the business world. I was excited to be a part of this brewery, which was opening in the small town in which I worked and lived at the time. I didn’t ask a lot of questions, but things were pretty well spelled out in the business plan, including the option to sell your shares when desired, which would first be offered to the other initial investors.

The debt deal was one I wasn’t particularly excited about, as I wrote about in an article I labeled Making a Bad $10,000 Investment On Purpose. To sweeten the deal, I negotiated a free-beer-for-life clause, or at least for the life of the brewery. That’s worth 15.5 Gallons of craft beer in perpetuity, even though the loan will most likely be paid off after a few years.

I’ve referred to these investments as “angel investments,” although I invested earlier in the process than a typical angel investor. These were more in the Four Fs stage — founders, family, friends and fools. I learned that term from a Venture Corner course (15% off with code POF15). Time will tell, but I think I was more friend than fool.

What red flags would send you running from a deal?

First off, you want to invest with someone who knows how to produce quality beer on a large scale consistently (or has plans to hire someone who does). I think ten years ago, a homebrewer could scale up and “wing it,” but with the ubiquitous nature of solid breweries all around, if a startup brewery’s beers aren’t up to snuff from the get-go, it may not survive long enough to work out the kinks.

I live in a rural area, and I’ve got four breweries within 15 miles of my house; people will vote with their feet.

Not long ago, I declined an opportunity to invest in a startup. I knew the brewmaster and had enjoyed some amazing beers he had brewed at a different brewery. After being forced out of the first brewery as a minority owner, he wants to be in charge of this next one with ownership of >50%. The problem is, he doesn’t have the money to put up more than 5%.

I attended a potential investor’s meeting, reviewed the business plan, and attempted an email exchange with the people putting together the deal (where my concerns were not addressed). As far as I could tell, the investors were being asked to buy the brewmaster a brewery.

Compared to the other equity deal I have with a brewery, my ownership share per dollar invested with this one would only be half (or just under half). I’ll cheerfully buy the guy’s beers and wish him great success, but I passed on the opportunity to fund his brewery.

What lessons have you learned from your microbrew experience that will change how you invest in the future?

I don’t think there’s any amount of due diligence one can do to ensure success in this space, especially as it becomes more crowded. I think the most important determinant is the feeling you get after a face-to-face meeting with the person or persons involved in the business. Ask a few questions and you’ll soon have a feeling whether or not they’ve got a viable plan, the ability to adapt to adversity, and are truly dedicated to success.

If you are shown projections that seem outlandish, timelines that seem overly ambitious, or get a sense that someone’s about to get in way over his or her head, wish him or her the best of luck, but find a better use for your play money.

I’ve also learned that investments like these are indeed investments in community. You can help someone achieve a dream. If you don’t get a great sense from the initial meeting but want to see it happen anyway, perhaps you are in a position to provide not only startup money, but also some business or brewing expertise.

You routinely share the returns of the PoF Portfolio. Aside from years of free beer, what would you say your rate of return has been on these investments?

It’s too early to tell. The brewery in which I have ownership (4% to be exact) is in its eighth year and is around the 90th percentile of Michigan breweries in terms of production. In the early years, we investors continued to pump money in to keep operations going and capacity growing, but for several years, we’ve been receiving cash dividends (in addition to the liquid dividends).

By the time the loans are paid off and the brewery building and all the equipment is 100% owned by the investors, I wouldn’t be surprised if the valuation of the business is at least 5x to 10x the initial investment.

The brewery that I loaned money to is just over a year old — I’m expecting to see some numbers soon, but all impressions are that things have been going swimmingly.

The tax tail should never wag the dog. With that being said, many states offer tax breaks to brewers and the 2018 Tax Reform created a new pass through income deduction for small business owners. How will these impact your current investments? Will they change how or where you structure future investments?

Great question, SHS. The debt deal won’t be affected, but it had not occurred to me that the dividend from the brewery in which I have ownership might be a form of pass-through income.

The annual dividend is measured in hundreds, not thousands, but nevertheless, it’s worth exploring further. I’ll be sure to check with my CPA on that.

Can we expect Backdoor Roth IPA, Tax Saison or 401Kölsch at the PoF brewery?

Ha! Maybe if I have a brewery of my own someday.

  • Refinanced Red
  • Stealth IRA Stout
  • Millionaire Mild
  • Arbitrage Amber
  • Deduction Dunkel
  • Leveraged Lager

I could do this all day.

The White Coat Investor, yourself and Passive Income MD have forged a blogging behemoth while maintaining your own unique writing style. Name a beer that best fits each member of the WCI network.

Well that’s a tough one. The White Coat Investor has the biggest site with the most impact. Barleywines come to mind, but on the other hand, Dr. Dahle does not partake in the suds, so I am going to have to go with an NA beer for him. O’Douls it is.

Passive Income MD lives out in the Golden State and has a taste for the finer things. I’ll assign Dr. Kim the upscale treat from Stone Brewing: Cali-Belgique.

I guess I have to come up with a brew for myself, as well. I’ve been a fan of India Pale Ales since I discovered Bell’s Two Hearted Ale over 20 years ago, but I should take this opportunity to put in a plug for a brewery I own a small piece of. The #11 could also be considered a nod to my “Christopher Guest Post Series” that goes to eleven. From Cheboygan Brewing Company: #11 IPA.

You’ve discussed your plans to leave medicine entirely. Complete this sentence: In 10 years I will identify myself as ______________.

A. a physician

B. a  professional blogger

C. a brewmaster

D. too busy enjoying retirement to worry about labels.

D seems like the most logical choice. I’ve found that any time I make plans more than a few years in advance, it’s little more than a wild guess as to where I’ll be or what I’ll be doing. The only labels I plan to concern myself with are those on the bottles and cans at happy hour.

One final non beer-related question. If you could go back in time to your first day of medical school, what one piece of advice would you give yourself?

You’re surrounded by people as smart or smarter than you. You will not be able to coast and cram like you did before. Those all-night study sessions you’re about to start pulling are on you. Study daily and nightly if you want to keep up with the rest of the class. But don’t forget have fun on the weekends when you can; you’re only young once.

Thanks, Physician on FIRE!

I’d like to thank Physician on FIRE for taking time to discuss one of his side hustles. If you’ve been living under a rock for the past few years and haven’t read his blog, here are a few of his posts that are personal favorites.

A Tale of 4 Physicians: The Impact of Lifestyle – An instant classic. It also reaffirms my frugal nature and my Boglehead insistence to live below my means.

Don’t Retire To Something, Retire On Something – I’m not sold on retiring early as long as I continue to find personal reward in my work. This was the first PoF post that made me reconsider how I perceived early retirement.

50 Ways I’d Like To Spend my Time in Early Retirement – If the last post opened the door to early retirement, this one kicked it wide open. Time is a precious commodity, and this post made me want to make the most of it.

Are you thinking about investing in a brewery? Here’s a few articles to check out:

The Motley Fool: How to Invest in the Beer Industry

Forbes: Hoping to Avoid Venture Capital, A Startup Brewer Crowdfunds a Loan

Smart Asset – The Economics of Craft Beer

ProBrewer.com – Investment Opportunities Page

What do you think? Does investing in a brewery sound like your kind of side hustle? Has Physician on FIRE inspired you to retire early?  Are you as flabbergasted as I am that he agreed to do this interview?  Share your thoughts and comments below.

 

Want to learn about other physicians’ side hustles?  Check out these other Side Hustle Sit Downs:

Teleradiology – Millionaire Doc

Nursing Home Director – Doc G of DiverseFI

Financial Makeover Coach – Dr Cory Fawcett

Can’t get enough Side Hustle Scrubs?  Follow me on Twitter, Facebook or Pinterest and never miss another post!

 

11 comments

  1. This type of investment/angel investing certainly does belong in the play money portion of a portfolio and I agree with POF that it should be no more than 1-5% total from all sources.

    The liquid dividends from this deal was a great negotiation point to get thrown in. Goes to show that when you are in a position of financial power and they need you more than the other way around you can ask for more things to sweeten the deal

    Like

  2. Thanks for the interview, SHS. That was a fun one.

    I’ve been on Pro Brewer before, browsing the used equipment for sale. I didn’t realize they had an “investors wanted” page, also. It looks like anyone with money could find numerous opportunities to get involved in any number of breweries.

    Cheers!
    -PoF

    Like

    1. Thanks PoF! This has definitely been a highlight in my short blogging life. I can only assume you had been partaking in some Cheboygan #11’s when you agreed to this interview.

      The Pro Brewer investment opportunity page may be a good starting point, but I’d definitely want to taste the goods before investing.

      The microbrew industry has exploded in the past decade. With such intoxicating returns, it must be difficult to keep a level head.

      For an investor with a taste for entrepreneurship and hops, this seems like a good way to invest your play money.

      Like

  3. This was a very enjoyable interview!

    I love pretty close to Stone Brewery. So I can attest that the Cali-Belgique is great. That’s what I would choose.

    If PoF ever opened up a brewery, I would take either the Arbitrage Amber or the Deduction Dunkel on tap. A Macintosh blade tap, of course!

    Like

    1. If PoF ever opens a brewery I would gladly help come up with the names of the beers in exchange for a few pints.

      As an ER doc who makes a lot of money off drunk people doing stupid things, I wonder if investing in a brewery is a form of self-referral.

      Liked by 1 person

      1. I would probably pick something that paid homage to working in the ED – “Airway, Breathing, Carbonation”

        Perhaps a nod to shiftworkers – “It’s 8:15 AM somewhere”

        I’m a sucker for tequila and I’ve been working on a zero calorie distillation that will help prevent dad bod – I call it “No Weigh, José”

        Liked by 1 person

      2. Lol! Would you market the “No Weigh, José” tequila to the same target audience that drinks Michelob Ultra?

        Like

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