Just as a good brewmaster knows the right ingredients to make great beer, a business appraiser needs to know the key ingredients that factor into a brewery’s value. In BVR’s special report, What It’s Worth: Brewery Value, Courtney Sparks White, an attorney and valuation expert, highlights some of the main factors that drive value in craft breweries. Download an excerpt from the report.
Three key value drivers for craft breweries include:
- Cash flow;
- Capacity; and
- Key people/brewmaster;
Cash flow tops the list of key value drivers for craft breweries, enabling a brewery to operate, grow, invest, and realize its full potential. Cash flow is based on being able to segregate and segment profits and losses from the various beers that craft breweries provide by looking at the margins—how each variety of beer drops to the individual. If some of these types of beer are growing—for example, the sours and India Pale Ales (IPAs)—it may make sense to shift production toward those types of beers since the market is growing in that way. As to when, under the income approach to valuation, to utilize the discounted cash flow (DCF) or capitalized cash flow method, the capitalized cash flow method could make sense in a valuation for a brewery that is more stationary in terms of where it is from a margin perspective, or from a growth perspective, or depending on what jurisdiction it is operating in.
However, since the craft brewery industry is exploding, many craft breweries have insufficient historical cash flow and earnings data for the capitalized cash flow method to be used. For that reason, the discounted cash flow valuation method—appraising the attractiveness of an investment opportunity by estimating future free cash flow projections and discounting them to arrive at a present value estimate—is the method of valuation for many craft breweries.
It is easy to break down the inputs that go into the two key components of cash flow and risk when an appraiser talks to specific craft brew owners because they understand these two pieces. They know where their existing cash flow is, but they may not understand that, in order to grow their revenues—to grow cash flow—there is an associated risk. Further, they may not understand what those multiples might look like and what risk is associated with achieving those cash flows moving forward. Valuators can help craft brewers take into account the relationship between cash flow and risk in determining existing value, for example, if they are bringing in investors to look at an exit plan.
The risk analysis translates directly to actual value because appraisers look at the risk—especially when applying some sort of discounted cash flow analysis—in terms of establishing cash flows and the sustainability of cash flows. They look in particular at the specific company and industry risk and how these factors are driving the ability to meet the projected cash flows.
To learn more about the key factors to take into account when valuing a craft brewery, download a free excerpt of the special report.
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