By JB Shireman
In these days of rapid craft growth and seemingly endless competition from practically all other forms of alcoholic beverage, many brewery owners are rightfully asking themselves what the future may hold for them. Do they invest in building capacity and expand into new geographies or should they hold tight and put money against core markets? Do they consider selling all or part of the company now or do they keep to their succession plan? Should they pursue several of these items in tandem?
For those who feel a merger, a full or partial sale may be in their future, we offer the following advice.
Never sacrifice quality: Whether it be in the liquid you produce or in the people you hire, any potential buyer is going to want to see a sterling reputation for investing in quality and maintaining consistency. If you happen to court a financial buyer, the knowledge, ability and commitment of your management team will be top of mind.
Capital investments: Brewers love it when they are running near capacity and fully utilizing their assets. Their financials look great. Depending on the buyer and limitations you may place on the business post-transaction, however, this may actually devalue a buyer’s offer. In the case of a trade buyer, if you state that under no circumstances will your beer ever be produced anywhere but in the motherland, you will likely lose the interest of most. Let’s face it, “fizzy yellow” mudslinging remarks aside, most major trade brewers around the globe produce excellent, consistent beers of the highest quality. Most large brewers that we have encountered want to integrate some production from acquisitions under their roof. They also realize that very few of them are set up to produce esoteric, one-off brands efficiently.
In terms of a financial buyer, while attractive financial margins will be just that, once they turn the page to projected capex and realize they are staring at a $20 MM expansion in less than 12 months with commitments to open new states needed to support that volume, this will likely cause them to pause and could result in a lower offer multiple.
Choose your partners wisely: Few decisions can add or detract value for certain buyers like the wholesaler choices you make. Many trade buyers have predetermined criteria for wholesaler alignment in order to even look at an acquisition. What may be worth strong, double-digit multiples of EBITDA to one trade buyer may be worth nothing to another based on the misalignments of the wholesaler footprints and the associated franchise laws that may hinder the ability to move the brands post-acquisition. Having said this, it is unrealistic to make wholesaler appointments based on who you may or may not sell your brewery to one day.
A thorough contract with a pre-negotiated multiple to be paid to the wholesaler in case of termination is a good place to begin. However, many of these clauses will be trumped by current franchise law. Discuss this with your potential wholesaler before you appoint them. Do they have a track record of releasing brands once fair market compensation has been paid or do they hold brands hostage? This is a critically important discussion for not only how you do business and invest together today but, more importantly, what it may or may not allow you to do in the future as your business grows and evolves.
Think through geographic expansion: One thing thatall types of buyers value is open geography. For trade buyers, this allows them to open new territory in the manner they see fit in terms of timing, portfolio and all associated distributor financial negotiations. For family offices and private equity firms, this open territory represents financial upside against their investment. Growing your business rapidly through geographic expansion and leaving new markets unsupported in terms of sales and wholesaler management may actually detract in value, even though overall growth numbers are robust.
Keep your brand healthy, especially in core markets: If you hope to garner a premium price, strong growth trends are a must when considering a transaction. However, no trends will be more important than those in your backyard. With so many nano-breweries popping up, this has never been more difficult… or more important.
Invest in your brand equity: This may seem obvious, but by nature breweries are capital-intensive businesses. The minute most of those assets are bolted to the floor and beer flows through them, they begin to depreciate in value. Brand equity, however, should be an appreciating asset. This has real value to you and your wholesalers. If you’ve ever seen the balance sheet from a wholesaler in a strong franchise state you will see that the latter part of the last statement is very true. You may well have very strong sales trends but if you are achieving this through deep discounting that coincides with lost velocity per points of distribution, there is a strong possibility that your long-term brand value is eroding. Smart buyers will see this quickly and adjust their offer as a result.
Be open minded: If you explore a transaction, you have every right to attempt to put whatever terms and conditions you may want on the business for yourself, your co-workers, your recipes, your sourcing or any philanthropic endeavors in your community. Some of these will become “deal breakers” for you and that is okay. Just know that the more conditions you place on a transaction, the harder it will be to find a buyer that will accept them all and the more likely it is that a potential deal will fall apart. Protect the items that you feel are core requirements for the perpetuation of your company and its cultural preservation. At the same time, remain open to the fact that others may find synergies and new ways of operating that you had not considered. Just because they are different doesn’t make them wrong.
Hire expertise: Is this a self-serving statement? Sure it is. But it is also true. Considering whether or not to sell, merge or bring a partner into your business is one of the most important decisions you will ever make. Hire someone who knows this space intimately. There are many unique factors to consider, whether it be licensing and trademark issues or the impact of ever-morphing franchise laws. Find someone you trust and are comfortable with. Make sure they are patient and they really listen to you, your co-workers and your family. As you explore this process, you will likely experience a rollercoaster of emotions and be faced with decisions and questions that will, at times, feel very uncomfortable and may even be overwhelming. Stay focused on why you began this process in the first place and share these feelings and thoughts with your chosen banker. A great banker wants nothing more than for all parties to be happy with the results of a transaction as it unfolds and, more importantly, how it feels in the years ahead.