By Cameron Karlen
Over the last 25 years, craft breweries have disrupted the beer market and have experienced exponential growth, taking market share, cooler space and consumer attention away from their macrobrew counterparts.
In response, macrobreweries have devoted substantial dollars to acquiring their craft competitors.
Are you a craft brewery owner who is the acquisition target of a big beer brand? Perhaps now is the time to begin thinking about what your brewery may be worth.
Like foam in the glass of a novice pourer, breweries in the United States have experienced an unprecedented rise.
The sheer number of breweries in existence — which includes regional and nonregional breweries, microbreweries and brewpubs — has increased from 601 in 1994 to 7,450 in 2018, a compounded annual growth rate of 10.6%.
However, the U.S. beer market is a mature industry, with total beer volume sales dropping in 2018 by 0.8%. In response, microbreweries have successfully used product innovation and premium product offerings to try to increase their market share.
Millennials— who are less price-sensitive than other demographics — have been a valuable demographic for craft breweries who embody characteristics that appeal to millennials, including:
- Better ingredients
- More alcohol
- A wider variety of products
- Constant innovation
The strategy has been successful; craft dollar shares increased from 6.9% in 2009 to 24.1% in 2018.
In response, macrobreweries have aggressively been merging with and purchasing microbreweries.
Anheuser-Busch, the world’s largest brewing company, is the quintessential case study to prove this trend. Ten years ago, Anheuser-Busch did not own a single brand that would meet the definition of a craft brewery.
In the past eight years, Anheuser-Busch has purchased 11 brands that were previously considered craft:
- Goose Island, 2011
- Blue Point, 2014
- Elysian Brewing, 2015
- Golden Rule Brewing, 2015
- Four Peaks Brewery, 2015
- Breckenridge Brewery, 2015
- Devils Backbone Brewing, 2016
- Karbach Brewing, 2016
- Wicked Weed Brewing, 2017
- Platform Beer, 2019
While there is no guarantee that industry consolidation will continue at the same pace, the status quo isn’t an option for big beer brands like Anheuser-Busch as they continue to lose market share to craft breweries.
Even if your brewery hasn’t yet been solicited as an acquisition target, now is a great time to begin thinking about value.
How to value your microbrewery
The first step in thinking about value is to have an appraisal performed on your brewery. The appraiser will likely apply the following three approaches to value the equity of your business:
- The income approach bases value on the present worth of future economic benefits. For companies where future operating results are expected to be unlike historical results, as in rapidly growing craft breweries, a forecast is developed, and the resulting cash flows are individually discounted back to present value using a discounted cash flow analysis. The summation of the discounted annual cash flows indicates the current fair market value of the invested capital of the business enterprise.
- The market approach bases value on guideline public companies or precedent transaction multiples. The multiples are applied to the subject company’s selected earnings period (historical or projected), resulting in an indication of fair market value of the company’s invested capital.
- The asset-based approach bases value on the combined fair market value of each asset owned by a company, less the fair value of its liabilities.
In addition to the three approaches, there are several considerations which could significantly impact your brewery’s value.
- Cash flow: It’s the heartbeat of every business, but often times it’s overlooked in quickly growing industries. Especially during the craft beer craze, it’s easier and sometimes more attractive to monitor top line growth rather than cash flow. However, sales growth consumes cash, as it requires an investment in working capital (accounts receivable and inventory) and additions to personnel. It is vital for brewery owners to focus on cash positive, profitable sales growth, rather than having a “growth at any cost” mindset. A cash-flow-positive brewery will likely sell at a higher multiple.
- Size and capacity: It’s well documented that smaller breweries typically trade for smaller multiples. The ability to garner a larger multiple depends in part on the brewery’s ability to attain future growth. A capacity-constrained brewery will require significant investment by the buyer, which may drastically reduce the brewery’s multiple and cash paid at closing. Conversely, a brewery that currently has capacity will provide a buyer with the infrastructure to grow sales without a significant upfront investment in fixed assets. Remember, value is future-oriented; the past can serve as a guide, but it’s what happens after closing that matters to the buyer. If you are not planning an exit for several years, increasing capacity now will give your brewery a runway to increase sales, which may increase earnings and the multiple paid on earnings at sale.
- Key person risk: All else being equal, a decentralized business typically trades for a higher multiple than a business where the knowledge and power to make decisions lie solely with the ownership group. It is vital for a brewery to have a well-trained successor to the brewmaster, as well as a competent and trustworthy management team, all of whom will continue to operate the business following a sale. If there is nothing left to the business after you leave, what is there for a buyer to buy? If your brewmaster is not currently part of the ownership group, consider incentivizing your head brewer through an equity stake. A knowledgeable and devoted brewmaster is key to product innovation and quality beer.
- Product: In the end, it’s the quality of your beer that wins market share and keeps customers coming back. Producing a high-quality beer, having the ability and willingness to innovate, implementing an effective marketing strategy to increase consumer brand recognition and expanding geographic reach are a few of the ways in which your brewery can increase its visibility in the market, thereby increasing value to the shareholders.
While the above considerations are not a comprehensive list, they should at least provide direction in maximizing the value of your brewery.
Other reasons to determine your value
Beyond interest from large beer companies, there are other reasons you might need to know the value of your brewery:
- Divorce: Need to know value for separation of assets
- Tax/government regulations: Value for assessing tax on transaction
- Gifting or estate settlement: If transfer ownership, need to record and understand value of gift or upon transfer at death
- Shareholder disputes: Value for buyout
- Financial reporting: Need value to record on GAAP financials
- Compensation: Value of stock options, warrants, or ESOP
- Litigation/contract disputes: For example, value of lost profits
- Planning: Help shareholders understand value for transition planning
How Wipfli can help
It’s important to know exactly what your brewery is worth. Like the creation of a great tasting beer, the valuation and sale of a brewery requires the right tools and knowledge.
Our valuation specialists at Wipfli have that knowledge to help you. Visit our web page to learn more.
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