Valuing Craft Breweries
October 8, 2019
Over the past decade, the craft beer industry has transformed into one of the fastest growing segments of alcoholic beverage sales in the United States. Through this time period, thousands of new brewers have entered the market due to a shift in consumer preferences toward the high quality, fine ingredients, and wide variety of flavors that craft breweries deliver. As founders and shareholders of craft breweries seek liquidity, they may begin exploring a potential sale of their business, selling an ownership stake to an Employee Stock Ownership Plan (ESOP), or selling shares to individual investors. Throughout this process, one question is sure to arise – what is my craft brewery worth?
A business appraisal of a craft brewery will consider each of the major valuation methodologies – the income approach, market approach, and asset approach. As with the majority of private company valuations, EBITDA and cash flow are very meaningful drivers of enterprise value in the craft brewing space; however, there are other valuation factors that are unique to a craft beer brewery and should be considered by an appraiser.
Capital Investment and Capacity
Capital investment and capacity go hand-in-hand and play a significant role in the valuation of a brewery. Breweries require a large amount of capital intensity that depends on the production goals of each individual brewery. Brewing equipment may include fermenters, boil kettles, mash tuns, sanitizing equipment, and more that can add up to millions of dollars. While these are fixed purchases at inception of the business, they do require continuous service and maintenance, and can eventually be replaced with larger equipment down the road. Due to high competition, capital investment has increased over the past five years for breweries to constantly expand production capacity.
When valuing brewing companies, an appraiser needs to analyze:
- Management’s growth plans
- Cash flow projections
- Whether or not there is sufficient production capacity to achieve expected growth
- Capital investments that are necessary for expansion as some brewers may require financing for expansion.
As a follow on to the key areas that need to be analyzed, it is important to further define the importance of projecting the potential need for facility expansions. While equipment and manual labor is key in brewing beer, real estate is equally as important. After a brewery maxes out its production capacity, it needs to strategize what the next move may be – either adding on to its current facility, moving to larger space, or opening up a new facility. If the brewery plans to expand geographically to a new region, the costs associated with the start-up of a new location must be considered in the projections that are used in the valuation.
Another significant factor when valuing breweries is understanding the brewery’s key employees. In particular, the role of the brew master is imperative, as this person is responsible for improving and creating unique beer recipes, making variations to brewing processes or ingredients, and keeping up with constantly evolving consumer preferences. Some questions an appraiser should consider are:
- Does the brew master also operate as the owner?
- Does the brew master make key decisions for the business?
- Is there an employment agreement in place?
- Does the company have a succession plan if the brew master leaves the business?
These are all factors that impact value. As the brewery grows in size, it needs staff and key employees to be sustainable in order to consistently produce beer over time. There is a variance between the employee who solely focuses on the operations and brews the beer and the one who drives the business and does the decision making. It is crucial that valuation professionals ask these questions and make site visits (that luckily include actually tasting the beers), to allow them to fully understand the business and assess the level of risk inherently involved.
While appraisers should make site visits, ask questions, and taste the actual product being delivered, they also need to do their due diligence on brewing operations, timeline, the market, and demand from consumers. For example, India pale ales, commonly referred to as “IPAs”, are increasing in popularity, along with blonde and golden ales and sour beers. Seasonal beers have also become more popular amongst beer drinkers including fruit and citrus flavors during spring and summer months and darker colored beers in fall and winter months with higher alcohol content and flavors that include pumpkin, cinnamon, and nutmeg. Valuation advisors should consider what products are currently produced and what product lines are expected to be developed compared to market consumer trends. Evaluating the brewery’s goals and capacity is critical in knowing whether or not they have the capital available to allow them to do this. Additionally, consumer preferences for cans vs. bottles are always changing, and a brewery’s ability to provide both can be a differentiating factor.
With the influx of new market participants, competition is fierce. Competitors seek to differentiate themselves on quality, taste, branding, and price. Branding for breweries is vital as consumers have a lot of choices to choose from when standing in the beer aisle of any store. For those who don’t have a specific beer already in mind, packaging, including color, image, logo, and message, is key in making the beer stand out from the rest. Understanding why your brewery matters is equally as important. This may just be the most compelling aspect of the company.
An appraiser should analyze a brewery’s distributor relationships to evaluate risk in the wholesale segment of the business. Three-tier supply chain laws in the alcoholic beverages industry require distinct levels between alcohol producers, distributors, and retailers; however, brewpubs are excluded and are able to sell directly to consumers. Several other statewide reforms have enabled breweries and wineries to ship their own products to retailers and sell through online platforms.
Accessing distribution channels can be a challenge for breweries, and any unfavorable changes in the relationships between a brewery and its distributors or in the pricing requirements could have a material adverse impact on the company’s business. Many breweries have agreements in place with distributors that are important for an appraiser to analyze when valuing a craft beer brewery. The duration of the agreement, exclusivity provision, terms and pricing, and termination policies, should all be considered when evaluating the distributor relationship. A craft brewery may have a great product with unique packaging, but they require a strong distribution channel in order for the beer to reach the consumer.
Craft breweries are subject to heavy federal and state regulations that relate to production, distribution, advertising, alcoholic content, taxes, and licensing fees. The Craft Beverage Modernization and Tax Reform Act was legislated in December 2017 to lower the federal excise tax for breweries; however, it is expected to expire in December 2019, which could have an impact on a brewery’s value. When appraisers are conducting their due diligence and executing the valuation, they need to make sure the brewery’s forecasts account for these types of changes.
As expansion and consolidation in the craft beer brewing industry is expected to continue, brewers can plan to drink up in preparation for their next business move. Demand for craft beer is forecasted to continue to grow over the next five years at a rate much higher than other segments of the market, presenting an opportunity for craft brewers to benefit from continued increases in consumer awareness and craft beer popularity.
As experienced valuation advisors, SC&H Capital would encourage craft brewery business owners to consider getting a professional valuation to maximize stockholder value and effectively realize liquidity. We have extensive experience helping craft brewers determine the best strategy to execute on whether that be an M&A transaction or creation of an Employee Stock Ownership Plan (ESOP). We encourage you to Contact Us if you would like to further understand what the valuation and future succession planning process looks like for your specific operation.