It’s a cold afternoon as Michelle Ivey sits at her kitchen table and watches clouds sweeping rain over the Jersey Shore. Ivey’s mind is somewhere else, her thoughts drifting to the dry, scrubby hills of the Santiago Matatlán Valley. That region of Mexico has been a big part of her life for the last 12 years. Ivey’s put her business know-how and creative energy into having locals there produce the highest-caliber mezcal for her brand, Ilegal — a brand with its origin story rooted even farther south in the balmy air and volcano-shadowed streets of Guatemala’s capital city. Since then, live music, festive pop-ups, and a sense of bottled authenticity have made Ilegal a culture unto itself.
Yet after all the work, today is Ivey’s very last day as a co-owner.
In a sense, she just hit the craft distilling jackpot: Ivey and her partners sold Ilegal to Bacardi, a move referred to in industry parlance as closing with “a strategic buyer.”
For Ivey, this moment is bittersweet. She’s loved being part of the new mezcal story in America. Ilegal’s lore within that tale started when founder John Rexer opened Café No Sé in Antigua, eventually stocking the shelves of his drifters’ paradise with small-batch mezcals he smuggled over the border. Ilegal may have had the vibes of a Gabriel García Márquez book, but when Ivey joined two years after its bottles formally launched, she helped with a tangible marketing vision for going to the next level. She’s been part of Ilegal’s growth ever since, including the expansion of its cachet through Bar Ilegal, a touring music and mezcal cocktail party that simulated Café No Sé’s ambiance at bars around the nation.
Now, mezcal is having a moment for international drinking sensibilities, and the nuanced touches that enliven a glass of Ilegal are part of the phenomenon. Hence, the brand became a target for acquisition to the tune of $130 million.
According to experts, a lot can — and usually does — go wrong when brands and distilleries are trying to sell to a strategic buyer. Most would-be transactions don’t come to fruition, and for “the fit but few” that do, nothing is certain until the ink is finally dry. Ilegal represents one of those rare cases where everything went right and the sale was finalized. Another deal that recently closed involved 21 Seeds Infused Tequila, which was founded in 2019 by Kat Hantas along with her sister Nicole Hantas-Emanuel and friend Sarika Singh. After spending three years refining a trio of tequila flavors geared toward women with wine tasting backgrounds, the budding founders were able to successfully sell 21 Seeds to London-based Diageo for a reported £123 million.
But even in cases when a deal isn’t derailed, the process is never quick or easy. One of the main concerns Ivey had when negotiations started involved what would happen to the men and women of the Santiago Matatlán Valley who’d helped make Ilegal so distinctly memorable.
“Anything that is important to you regarding the brand’s operations and values, you absolutely have to negotiate that into the deal up front—– you can’t leave it for later discussions,” Ivey emphasizes. “For us, it was very important that we secured the production where it was for quite an extensive period of time beyond the post-transition period. Entire communities had been built up around our production facilities. That includes the number of heads of households who’d come there as employees. It was the only industry there for them. It would have been disastrous for those communities to just lose that business.”
Bacardi agreed to keep Ilegal’s production where it was. Ivey says getting that understanding into their terms was also about a hard-won taste and reputation.
“It was important to the continuity of the liquid, alone,” she mentions. “We wanted to make sure the style of production remained the same, because the methods are very important in mezcal.”
Outside of personal convictions, negotiating with a strategic buyer means running a minefield of financial, legal, and regulatory challenges — and failure to clear any one of those hurdles often results in obliterating a sale.
When to Sell? How to Sell?
If there is an “art of the deal,” then the Donald you actually want is Don Snyder. He knows every corner of the spirits industry, from working in leadership at Sazerac/Buffalo Trace and MGP/Seagram’s to launching a software company called Whiskey Systems that developed a powerful tool for craft distilleries. These days, Snyder works as a consultant who specializes in conducting valuations of spirit brands and distillation companies. He’s often contacted by owners who are wondering if it might be time to sell.
“The biggest piece of advice, when you’re looking at selling your business, is do you have an answer for how an investor is going to make a return on their money?” Snyder notes. “If you’re struggling, and losing money every year — and your case sales aren’t growing — then what is at the core of your business that a strategic buyer is going to see potential in for a return? Do you have one or two key brands that could fit into a larger portfolio — ones that are operating at a 50 percent margin and tend to grow in a new market? If so, great. That could be very attractive.”
Lowering his tone a little, Snyder cautions, “But if you’re stuck in a situation where there is no path to profitability, throwing a million dollars at it doesn’t get you anywhere. In that scenario, it’s probably not time to sell, it’s probably time to look at liquidating.”
One mistake Snyder often notices when he’s contacted by a distiller longing to take the leap is they have way too many SKUs. For him, a brand that sells 10,000 cases a year but does that through 50 or 60 different products in its bottle lineup will probably struggle to catch the eye of a strategic buyer. Snyder thinks any distillery with more than 20 products should do a deep dive into what is actually profit-driving versus what’s ultimately a distraction. Strategic buyers, he points out, will usually notice issues with “SKU rationalization.”
Another piece of advice Snyder shares with would-be sellers is the importance of establishing relationships. A number of national and international brands have accelerator programs to help craft distilleries scale up through specialized advice and investment opportunities. This can sometimes create an affiliation between small owners and big brands.
“A direct sale into a larger strategic buyer’s portfolio is very rare,” Snyder admits. “They’re looking for sales along the lines of 30,000 to 50,000 nine-liter cases-a-year. That would put — at least in the craft distilling world — someone in the top ten percent in the country. But there are opportunities for incubation. Diageo has an incubation arm called Distilled Ventures. Constellation has one called Constellation Ventures. So, maybe you’re not at 50,000 cases yet, but you have solid business fundamentals and they see that, this could be a path to get you the capital you need and perhaps eventually find a home with that strategic buyer.”
Ilegal Mezcal did in fact have a relationship with Bacardi for a number of years before the sales proposal.
“Bacardi served on our board, and acted as an advisor, and were a financial investor,” Ivey explains. “We had still operated independently throughout that time, and Ilegal never utilized Bacardi’s sales force or any of the corporate structure. But we were very familiar with each other once we went into negotiations.”
What Detonates Deals
Alva Mather and Anne Cox-Johnson are two of the most experienced attorneys in the nation when it comes to the spirits industry. They work for McDermott Will & Emery, which, for 40 years, has been handling acquisitions for everything from small distillery founders to global drink corporations. The firm knows that dealing with highly regulated alcohol producers is very different from almost any other kind of company. Mather and Cox-Johnson are two of its specialists. Their message about drawing interest from a strategic buyer is straightforward: Adhere to sound, fundamental practices in every element of one’s business, and do that every step of the way. If an owner does not, as Cox-Johnson puts it, “keep a clean house,” corporations will ultimately pass in favor of a distillery that does.
While that sounds theoretically simple, the attorneys have noticed it’s often not the position prospective sellers find themselves in. That doesn’t necessarily mean such distillers are careless operators, but it can mean they’re grappling with myriad pressures that come from starting a brand from scratch. New owners tend to be focused on distilling products people love, quickly building a community around their concept, and finding marketing and advertising strategies that work. Mather points out that when an owner’s mental bandwidth is tested like that, certain elements of compliance might “fly under the radar.”
Yet compliance is extremely important to most large companies that purchase outside brands for their portfolios.
“The issues can be things as simple as does the TTB [Alcohol and Tobacco Tax and Trade Bureau] and the state have the most accurate, up-to-date information about your ownership structure?” Mather observes. “I have a lot of clients who take on new investors in their distillery along the way, or maybe engage in some corporate restructuring for tax purposes, and it doesn’t always occur to them that those types of changes trigger a disclosure obligation, both at the federal level and state level. And those failures make it really messy for a strategic buyer to come in.”
One danger zone for sellers involves whether they have properly secured all of the intellectual property around their brand. When strategic buyers are contemplating a deal, they want answers about IP right away.
“Do you own your brand? Do you have it registered properly? And do you own your formulas?” Cox-Johnson recites. “The number of times that we find issues with people not owning their formulas; or they developed their formula with a friend –— somebody they got along with but maybe not anymore — and now that person believes they themselves own the formula, it happens a lot. There are other things you might be able to work through, but if you don’t own your IP, you don’t have anything to sell. It’s just one of those things you can’t neglect. It can blow up your deal, one hundred percent.”
After successfully selling Ilegal Mezcal, Ivey agrees with Mather and Cox-Johnson about watching internal business controls.
“We did have some surprises, but those were more from our own structure,” Ivey reflects. “You have to make sure that you’ve crossed all your own t’s and dotted all of your own i’s. We had even uncovered that we had a couple of trademark and intellectual property things that we had improperly transferred. A lot of this comes out through the diligence process.”
In Ivey’s case, every hitch that was identified in the process was manageable. Now, as she contemplates the next brand she might create, she’s looking back with pride on everything she and her team at Ilegal accomplished over the years.
“The most fun thing about it was introducing everybody to this amazing, beautiful liquid and educating people on it, because, when we started, mezcal was a tiny little baby category in the U.S which people knew very little about,” she remembers. “I know we helped change that.”
