Three Factors Driving Value (and Risk) in Craft Breweries
The Craft Beer industry is one of the fastest growing alcoholic beverage segments in the United States. According to IBISWorld the industry has experienced annualized revenue growth of 19.0% in the five years leading up to 2014, reaching an estimated $4.2 billion in 2014. Industry market research predicts that over the next five years the industry will grow by an annualized rate of 7.4%, reaching $6.0 billion by 2019. American consumers who might have traditionally preferred a light lager from a national brand are increasingly demanding pale ales, porters, saisons, and wheats – beers largely produced by local craft breweries. Consumers are attracted to industry’s products for their attention to detail, wide range of beer styles and overall freshness.
When determining the value of a craft brewery, the basic valuation approaches are the same as those we typically use for valuing operating companies, though the analysis should put additional weight on industry-specific factors including:
- – Distribution Strategy
- – Ownership Type
- – Business Results by Style of Beer
The distribution strategy is a key business driver. Whether selling in the taproom, self-distributing, or utilizing a third party distributor nationally or internationally, it is prudent to bear in mind the complex and evolving laws governing these strategies which may affect the company’s risk profile. Additionally, any plans for growth must consider where and to whom the beer will be sold. The proposed Craft Beverage Modernization and Tax Act may have positive implications for craft brewers who are distributing their products.
Small businesses are often owned and operated by the same people; however, it is common in the craft brewing industry to have investors who back a brewer. These structures highlight what is typically called “key-man” risk.
What would happen to the company if the brew master or a key relationship manager were to become ill or voluntarily withdraw from the business? This factor affects the risk of the business.
Business Results by Style of Beer
There are many types of beer available for brewing (and drinking) and choosing which beers to focus on is a major business decision for the craft brewery.
Beer styles are all over the map and consumers’ tastes are constantly evolving. The types of beers brewed have wide sweeping impacts on the business. Ingredients have varying costs and different styles are popular with different consumers at different times.
Currently, for example, there is a hop shortage which is increasing the cost of certain hop varieties. This represents a problem when the IPA, a beer known for its “hoppiness” represents 27.4% of the total craft beer consumption in the States.
Understanding which beers are most popular or most profitable is a big part of the financial analysis portion of the business valuation.
Quist Valuation works with businesses in a variety of industries. We see many similarities across diverse businesses. However, we also know that risks value drivers can be unique to specialized industries like the craft brewing industry. We attend dozens of specialized training events and webinars to ensure that our team knows the factors that drive your business valuation.
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