According to the Brewers Association, the current value of the U.S. craft beer market is an estimated $27.6 billion, compared with the $114.2 billion value of the entire U.S. beer market. However, while overall beer sales volume was down 0.8% in 2018, the craft brewery market increased at 3.9%. In 2018, craft beers reached 13.2% of the total U.S. beer market by volume, up from 12.7% in 2017.
For many years, the craft brewery industry has been growing at a steady rate, and more and more craft breweries are asking for help in appraising their businesses. Whether you’re looking to sell your brewery, start planning for your succession or simply to expand, you will need to know what your operation is worth. When a business valuation expert is completing a valuation for your craft brewery, he or she will want to know and evaluate the main factors that drive value for craft breweries, which include:
- Cash flow
- Human capital
Cash flow is the primary value driver for any craft brewery because it enables a brewery to not only operate, but to expand. Simply put, cash flow is the net amount of cash and cash-equivalents being transferred into and out of your brewery.
The business valuation expert’s job is to identify where your current cash flow comes from, as well as the beers and market segments you are targeting to drive and increase your cash flow. Your business valuation expert will use this information to complete a financial forecast – an estimate of future financial outcomes for your brewery. A positive projected cash flow (i.e., your brewery receives more money than it spends) will allow you to operate, expand and invest without requiring additional borrowing or investment.
The most successful breweries maximize their cash flow by examining the profits and losses associated with each individual beer. If there is a market demand for a certain type of beer – for example, New England IPAs – and the margins are positive, it may be wise to shift production away from less popular beers toward New England IPAs to capitalize on their profitability.
Cash flow and capacity go hand in hand – you can only sell as much beer as you can make, and you can only make as much beer as your equipment and storage capabilities allow.
In advance of your valuation, you’ll want to make sure you are very familiar with the inputs and outputs of your capacity. The business valuation expert will need to know exactly how much and how often you can brew, based on your specific equipment and storage capabilities. By being able to provide in-depth information on your brewery’s capacity – for example, knowing the exact measurements of the equipment you use to brew and store your beer – you can provide your business valuation expert with a thorough understanding of projected cash flow.
Another element that ties in to capacity is life cycle. Your business valuation expert will evaluate the life cycle of each individual type of beer that you brew, including a beer’s approximate timeline from production to sale. After all, you have to move a batch to produce a new batch, and how quickly a beer can move through the process can affect your brewery value.
Business valuation experts will consider not only your brewery’s history and numbers on paper, but also your human capital – the composition and culture of the team members running the whole operation. Business is managed, beer is produced and drinks are all sold by people – and the skills, roles and structure of your team can significantly influence your brewery’s value.
Just as no two beers are the same, no two breweries are the same in terms of their leadership models. Breweries have many different stories of who started the business, who owns the operation now and who actually brews the beer – sometimes they are all the same person, and other times those roles are represented by separate individuals.
There are also many different leadership compositions. Are you a brewmaster who owns their business and has a lean staff? Or a brewery with multiple co-owners and a separate brewmaster who focuses solely on the product? Has your team breakdown evolved over time? Who is the “face” of your brewery, and is there a plan in place in the event key personnel leave the business?
Your business valuation expert may ask to distribute surveys, conduct interviews and/or make site visits to learn these answers. A few other questions that your business valuation expert may ask you as the brewery owner include:
- Who is the individual(s) driving this business? What expertise do they have?
- Who makes decisions about the business? Who actually brews the beer? Are they the same person, or two separate individuals?
- If the brewmaster is not an owner, what is their involvement in driving business decisions?
- Does the brewery have a succession plan in the case of a non-owner brewmaster leaving the business?
- Who are the other key members of the business, and how do they impact business and production? What is their relationship to the owner(s)?
By providing detailed information on your human capital, you are helping the business valuation expert to better assess your brewery’s risk, as well as your ability to produce and sell a consistent product over time.
Don’t forget that the beer itself is a key value driver of a brewery. The quality and selection of your beers are both important factors that your business valuation expert will take into consideration.
Another component that the business valuation expert will consider is your understanding of current market trends regarding different types of beer. IPAs, golden ales and sour beers are all on the rise. Are they included in your mix of beers? Do you have any beers that have not been selling well? The business valuation expert will account for all of these factors in determining your cash flow and risk projections via financial forecasting.
Finally, what does your product placement look like in the market? Do consumers recognize your brand among your competitors on the shelf? Are you adapting your product according to ever-changing consumer preference?
Clearly, the topic of valuation is complex, and many business valuation experts view it as more of an art than a science. While receiving a valuation is a very subjective process by nature, you can still influence the value you receive by providing your business valuation expert with a thorough look into your brewery’s cash flow, capacity, human capital and product.
Is your craft brewery looking for help with a business valuation? Contact our Craft Beverage group and schedule a consultation today!
About The Author
Matt is a Principal with Brown Schultz Sheridan & Fritz (BSSF) and a key member of the Firm’s Tax Department. He received his Bachelor of Science degree in Accounting from Pennsylvania State University. Matt has over 15 years of public accounting experience. He leads the Craft Beverage Group at BSSF, specializes in Research & Development (R&D) Tax Credit consulting and serves a variety of industries including craft beverage, insurance, construction, real estate, manufacturing and financial services.