In what’s referred to as “contract distilling,” a person hires an existing distillery to make products for them. The person might provide a recipe, container specifications, and the TTB-approved label while the distillery does all the rest for a fee. For alcoholic beverage producers who want to make new products, but don’t have the permits or the capacity, outsourcing to another facility can be the perfect solution. Contract distilling can also be great way for novices to ease into the distilling business, since the zoning, equipment, and manufacturing procedures are all taken care of by the contractor.
However, contract distilling does have its downsides. The profit margins are smaller, and unlike operating your own distillery, you don’t have any control of the contractor’s operations or production schedule. To get the most out of contract distilling, it’s important to do your due diligence. Before selecting a partner, consider the following:
Licensing – This isn’t usually an issue with established distilleries expanding their capacity, but your company may need to obtain a license with your state liquor agency (even though the contracted distillery is the one manufacturing spirits). If your company will be handling the distribution, you may also need a federal wholesaler permit from the TTB and additional licenses from the state. Whether you’re an investor with a great idea for whiskey or an established distillery that wants to dabble in a new type of spirit, you should speak with a lawyer before speaking with distilleries to contract with. That brings us to our next item…
The Contract – When you partner with another distillery to create your products, you should evaluate the contract to make sure all of your bases are covered, and negotiate where necessary. Some things to account for include intellectual property, record keeping and reporting, TTB application handling, and tax responsibilities.
Evaluation – When vetting potential distilleries, some questions to keep in mind include:
• How flexible are their production scaling capabilities?
• Do they have distribution partnerships you can leverage?
• Are they fully licensed with the TTB, FDA, and state/local authorities?
In the end, try to learn as much as you can about the potential distillery, ensure both parties have their paperwork in order, and protect your interests via contract. That way, you’ll be in the best position to enjoy the benefits of contract distilling.
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