Sourced vs. Distilled-On-Site Spirits and Supply Contracts
Not every bottle a craft distillery sells was distilled in its own stills. Some distilleries make everything from grain to glass. Others blend, finish, proof and bottle spirits purchased from other producers, either while their own stock matures or as a permanent part of the lineup. Many do some of both. When a distillery is sold, sourced spirits and supply contracts deserve careful attention, because they affect where future product will come from, what the labels may say and how dependable earnings are likely to be.
This article is general information for buyers and sellers of existing, operating craft distilleries. It is not legal advice. Labeling rules, contract terms and state requirements vary, and buyers should have contracts and label claims reviewed by qualified attorneys.
Why Product Origin Matters to a Buyer
- Continuity: a product made from sourced spirits depends on a supplier continuing to sell comparable spirits on acceptable terms
- Cost: sourced spirits and house-made spirits carry different cost structures, which can affect earnings
- Brand story: how a product is marketed may depend on where it was made, and claims should match the facts
- Transition: a distillery moving from sourced to house-made spirits may have aging stock that is not yet ready
Mapping Each Product
A useful first step is a product-by-product map showing which spirits are distilled on site, which are sourced, which are blends and how much of each is in inventory. Buyers can then compare that map with sales by product to see how much revenue depends on outside supply. Our article on aging spirits inventory explains how inventory records support this review.
Reviewing Supply Contracts
- Term, renewal and termination provisions
- Pricing terms and how prices can change
- Minimum purchase or take-or-pay commitments
- Specifications and quality standards
- Confidentiality provisions about the source
- Assignment and change-of-control terms, which may require the supplier’s consent
Contracts for grain, barrels, bottles and other packaging deserve similar review. Supply relationships should not be assumed to transfer or to continue on the same terms after a sale.
Labels and Marketing Claims
Label approvals and marketing language should accurately reflect how products are made. If a buyer plans to change sourcing, it may also need to change labels and seek new approvals. These questions belong with qualified counsel. See our article on distillery brand and trademarks.
Regulatory Considerations
Purchasing, receiving and bottling spirits from other producers involves its own regulatory requirements and records. Buyers should confirm that the buyer will hold the permits needed to continue those activities. See our article on distillery permits and licenses.
How Sourcing Affects Value
Revenue that depends on a short-term or easily terminated supply contract may be viewed with more caution than revenue from products the distillery controls. On the other hand, a distillery with a long track record of house-made spirits may still depend heavily on one person’s knowledge. Our guide to craft distillery valuation discusses how buyers weigh these factors.
What to Request in Due Diligence
- Product-by-product origin map and recipes or blend specifications
- All supply contracts, amendments and purchase history
- Correspondence with suppliers about renewals or pricing
- Label approvals for each product
Our craft distillery due diligence checklist covers the broader review.
How Lenders View Sourcing
Lenders may ask how the buyer will maintain supply after closing and whether key contracts can continue. Clear documentation helps them assess the durability of cash flow.
US Professional Funding helps buyers finance the acquisition of existing, operating craft distilleries, whether their products are distilled on site, sourced or both. Learn more about our craft distillery acquisition financing.
