Before you buy, think Sell?
Wait, that’s confusing. Is this article about Buying or Selling a brewery? Even a craft brewery, a small batch distillery or a small winery is a business. You may love what you do, but eventually, the ownership will be transitioned. Either to your family, a buyer, or maybe even your employees. Let’s face it; owning a craft brewery is more than just a business it’s a lifestyle. In building your brewery, you are also creating a community that shares your passion for your beer. When your brewery is gone and after the last beer is finished that community will have lost something. Whether buying or building your brewery, before you buy, think about selling first!
It may seem strange to think about selling your business, even before the hops have been chosen or the first batch of beer has been brewed. When selling your business, there are two questions your buyer will ask.
- What is your Why? (Why are you doing this?)
- Is this a good investment for my money?
Before you sell (or decide to buy) here are some important statistics.
- Only 20% of businesses listed for sale, will ever be sold.
- There are 15 prospective buyers for every business available
- 50% of sales transactions fail during the “Due Diligence phase.”
What we learn from this is that no matter why you are selling, 15 buyers are looking for a business like yours to buy. The place where most sellers fail is in the “Due Diligence” phase of the sales process. In the case of craft breweries, it goes back to the two reasons people buy. Either the buyer did not share the passion for the community lifestyle, or the buyer did not see enough money in the future.
If you bought the business or built the business from scratch, the lifestyle buyer is probably a lot like you. When asking the lifestyle buyer why they are buying, it will be obvious when there’s a lifestyle match. If the buyer can’t get excited about what you are doing, move on. We know that 14 other buyers are out there somewhere, looking for a business like yours.
Is this a good investment?
All buyers will need to ask this question. Without a good answer, no bank or investor will help them with the money. Any investor will need to estimate future earning before they can say yes, which means that you should know the numbers as well as the buyer.
Let me share an imperfect “Down and Dirty” calculation that will get you in the “ballpark” for your valuation. (Note: Of course, before you sell to have your company evaluated by a professional.) The value you are looking for is the Business Value (BV). To find BV, use this formula:
· Business Value (BV) = EBITDA X <Craft Brewery Industry> Multiplier.
What is EBITDA? EBITDA = Earnings before Interest, Taxes, Depreciation, and Amortization. EBITDA is a way to make an “apple to apple” comparison of one business against another. For our Down & Dirty method use Net Income (after expenses and before taxes) for just the beer sold. (Note: for this article, we are only counting the brewery and no other assets or income streams.) Use this number for EBITDA.
What is the industry multiplier? At the time of this writing, breweries have a multiplier between 7 and 17. For our “down and dirty” example we can conservatively estimate a multiplier of 10.
Using these estimates if the EBITDA value = $50,000.00 / year and a multiplier of 10. Our formula looks like this,
· BV = EBITDA ($50,000) X Multiplier (10) = $50,000 X 10 = $500,000 = Business Value
In our example, the value of the business is $500,000. (Note: This does not include the value of assets like property equity, restaurants, computers, equipment, etc.) Any additional income streams (pub, restaurants or the sales of T-shirts, branded growler bottles, etc.) would have a separate assessment. Additional assets and liabilities are also added or subtracted from the whole business.
The final consideration is the buyer’s risk. The buyer may agree with the Industry multiplier or may decide to raise or lower the multiple for the final offer. When considering the purchase, the buyer will ask themselves questions like,
- If the owner was no longer around, would customers stop buying?
- Is the brewery in need of updates and repairs?
- (Note: The buyer knows that many owners give up on maintenance and upgrades once the decision is made to sell. The buyer also knows she/he will need to make those repairs and updates themselves. These repairs will raise risk and lower the multiplier, in the buyer’s mind.)
Using this combination of Business Value and an "Estimation of Risk" will determine the value the buyers sees in your business. Besides managing the day to day business, your business plan should include knowing that someday a buyer will be appraising the value of your business.
Statistically, there are always 15 potential buyers looking for what you are selling. Unfortunately, only 1 in 20 Listed businesses receives a sales offer. To be the 1 in 20 means planning the sale before you buy. In planning your sale, you will manage your brewery to match the buyer’s (and bankers) expectation of both lifestyle and income. The multiplier affects risk in the buyer’s mind. To increase the multiplier, the seller needs to demonstrate that the risk is low, and the likelihood of long-term profits is high.