How to value a brewery

Dan Norris Brewing business, Crowdfunding 2 Comments

On this blog we like to try to answer the biggest questions that brewery owners have, because when we started out we found it hard to find answers to these things. One of the biggest ones was how to value a brewery. We literally had no idea. And because equity crowdfunding wasn’t a thing in Australia, people had no access to valuations from other breweries, only rumours and public company sales, which are not particularly relevant to a new brewery. It was also something that none of us founders had done in the past and we didn’t really know where to start.

These days brewery valuations have become a bit of a contentious issue and there are a lot of ways you can go about valuing a brewery, so it makes it tricky.

I should say from the outset that this post is my personal opinion and in no way financial advice. It’s probably not a bad idea to get advice from a range of places on a topic as important as finding a valuation.

We have completed 10 investment raises for Black Hops since that first round in 2015 so we have definitely learned a few things that should be useful to others. So rather than giving you some sort of formula for valuing a brewery, this post will share some of our lessons and you can use that info to come up with one yourself.

What is equity? What are valuations useful for?

First up, just in case this isn’t clear, I thought I better address what equity is and what a valuation is used for. I personally think it’s always a good idea for founders to have an idea of what their business might be worth at any given time, and that’s irrespective of whether there is an imminent investment raise or sale. However if you do plan on getting some money to help you build the business, it’s going to be very important that you have a valuation in mind.

Breweries cost a lot of money to build. Our first one cost about $400,000. Our second one cost over $3m and more than twice that once we expanded it. The money generally comes from one of four places:

  • The founders put money in themselves. In our case we put in about half for the first brewery but weren’t in a position to put money in ever again after that point.
  • If you can get some sort of Government grant, that would be cool. We haven’t been fortunate enough to get these however but I know some other breweries have.
  • If you can get a debt loan through a bank or second tier financial institution, this can be useful too but in reality for newer businesses this is extremely difficult. I was in business for 13 years before I got a yes from a bank. Black Hops was lucky enough to get some debt finance when we opened BHII to help with the equipment purchases.
  • You can raise money in return for equity (ownership) in the business. This is normally done either privately, or through an equity crowdfunding campaign. Larger public companies do this via openly traded shares on the stock exchange. We have done private rounds as well as an equity crowdfunding round. Giving up equity is essentially selling part of the business, so that’s when you really need to have a good handle on a valuation.

With that in mind, here are some general things to think about.

It’s worth what someone will pay

When talking about Real Estate when I was younger, my dad used to always say ‘Something is worth what someone else will pay for it’. And this is generally considered to be how things like residential real estate are valued.

If a house is for sale for one million dollars and nine people inspect the house and decide that it’s way overpriced, then one person inspects the house and decides they are happy to pay one million dollars, then the house is worth one million dollars despite 90% of people disagreeing with the valuation.

A valuation is not about finding a consensus on a number, it’s about founders setting a number and then finding people who are happy to invest at that number.

Don’t get caught up in making sure everyone agrees with your valuation. Focus on finding the right people who believe in the future of your business as you present it.

Protect your equity

It’s easy for people to complain about a valuation being too high but at the end of the day they are probably the same people who will complain when you sell your business to one of the majors. You can’t have it both ways, wanting founders to not sell but also wanting them to give away as much equity as possible for the least amount of money.

The higher the valuation, the less of the business you have to give away, and founders should be trying to do everything they can to hold onto as much of their business as they can, for a whole range of reasons.

Firstly if you give up too much equity in a business, you will lose control of the business and find yourself in a position where you have no choice but to sell. You don’t want that.

Secondly if you give up too much of the business, you will struggle to raise money later on because you won’t want to spare any of the small amount of equity you have left. If you have a brewery that is growing, you can bank on having to do multiple investment raises, so don’t see your first raise as the only raise.

Finally founders have worked hard to get to where they are with their brewery, and that opportunity may not ever come again, so you want to hang onto as much of that business as you can. Ideally you wouldn’t ever give up any equity but for the reasons discussed above, it’s basically impossible to raise money any other way.

So as a general rule, be very careful with how much equity you give up and if in doubt, try to go for a higher valuation to enable you to give up less equity. The risk is not as many people invest but perhaps that’s a risk worth taking. The alternative is going too low and giving away massive chunks of the business for small amounts of money when you potentially could have waited till it’s more established and worth a lot more thereby giving up a lot less equity.

Doing an investment round IS selling your business, just not all of it. Make sure you get paid.

Brand is king

It’s really important to remember that in our industry, building a brand is extremely difficult. There are 700+ breweries in Australia and it’s almost impossible to stand out from the crowd. When you find investors to invest in your business, they are buying into your brand.

People get very caught up on multiples and benchmarking with valuations but past acquisitions have shown us that volume and revenue and profit mean very little when it comes to the breweries that have the most value.

A brewery with a dated average brand, wide distribution but no pull through and no growth might not be worth much more than the replacement value of its assets. But a brewery with a brand that people love that’s exploding in growth and always sells well at each distribution point could be worth hundreds of millions of dollars. There is literally no comparison between the two things.

Founders who value their brands should make sure they reflect that in the valuation they choose. When we did our first crowdfunding campaign, we had just wrapped up a financial year where we only turned over $1.4million dollars. We valued the business at over $18m which is a pretty extreme revenue multiple if you look at it that way. But it wasn’t about revenue. This is the words we used in that campaign:

We are in a space where history has shown that building a brand that people love, and a business that nails all of the important components (brand, product, story, venue, people etc), has the potential to result in companies with extremely high revenues, valuations, external investments and exits. From day 1 we have believed we are on this path.

The valuation raised a few eyebrows at the time but in hindsight it was probably too low as opposed to being too high (more on that later).

Startup vs established business

The next thing I’d be thinking about is what sort of brewery do you have on your hands. People tend to divide them up into 2 categories:

  1. A local brewpub supporting the local area,
  2. A larger manufacturer with ambitions to scale.

However in a lot of cases (including ours), we grew from the first one to the second one.

So the first thing I would say is it would be a good idea to work out what kind of brewery you hope to build. If you plan on building a local small brew pub then you would value it accordingly. However if you plan on growing into a larger brand, and you are quite small now, then you are in startup territory. This changes things… a lot.

Investing in a startup is not the same thing as investing in a normal business. It’s high risk and potentially high reward.

Investors who invest in startups aren’t as concerned about valuations as other investors. What they are concerned about is picking winners. If the next number one craft brand raises money today, it’s not super relevant if they raise at $1m or $5m or $20m, if they ultimately end up selling for $500m. All would be a significant win. Finding the next number 1 brand is their biggest concern, not getting a great value deal.

Startups are valued based on their potential of future value, not any kind of current revenue or profit figure. Those would make no sense for a startup, because what they are aiming at achieving won’t show up in these numbers for a very long time. So investing in a startup means making a decision around what you think the future looks like for the company.

To work that out you need to look at the founders ambitions for the company, current traction (if possible) and the team to decide if you think they can pull it off.

So if you have a great team, and you have an ambitious vision that you think you can pull off, then you should be valuing your brewery accordingly and ignoring any kind of multiples. Look at what it could potentially be worth one day and the likelihood of you getting there, and come up with something that represents that future and is offset by the risk of not getting there. We’ve seen multiple breweries in Australia sell for hundreds of millions of dollars so it’s not out of the realms of possibility that there will be more in the future and those are just starting now.

Volume, revenue or profit multiples don’t make sense

There is a lot of talk about multiples when it comes to valuations. Multiple is basically a rule where you take an accounting number such as EBITDA (Operating Profit), or Revenue, or in the beer scene something like volume is also used, and then you multiply it by a set number to come up with a valuation. I don’t think they are very useful for valuing breweries.

Profit multiples

Profit multiples are useful for an established profitable business that isn’t growing anymore and doesn’t have a strong brand advantage. It’s basically just a black and white cash machine. There is not much future potential and less future risk. It’s worth a few years worth of its profit. For all other businesses, this makes no sense because the future looks very different to the present and so much of the value is tied up in the brand value which is near impossible to define.

There is a very good chance your brewery is nothing like that, so if that’s the case then a profit multiple doesn’t make any sense.

Revenue multiples

Many campaigns that I’ve seen make a case for using a revenue multiple to determine the value, some even list the multiples used by other breweries to show that theirs is particularly good value. I’ve also heard people criticise campaigns because their revenue multiple was too high.

Take Brewdog for example. A $100m valuation for their Australian business is right up there. But it has nothing to do with revenue. They have barely started wholesaling beer in Australia so why would you look at their revenue (the bulk of which I assume will ultimately come from wholesale), to determine a value. They are valuing it based on the strength of their brand and their potential future here. No one at Brewdog is sitting there looking at the accounting for a business in its infancy and making up a revenue multiple.

If your business is high growth like ours, then revenue now means very little. Our $1.4m financial year leading up to our last campaign 3 years ago is about one tenth of our current revenue. We were aiming to build a large manufacturing site and grow the business, that’s what the plan was, looking at current revenues really wouldn’t tell us much about the potential value given we hadn’t even built the brewery yet to make the beer!

I would encourage founders to stay away from revenue multiples unless they are quite a few years in with solid revenues and no future plans to change things too much.

Volume multiples

Volume is talked about in brewing a lot, and I think it’s often misleading. Having capacity of 1 million litres doesn’t mean much, nor does even making 1 million litres. What matters is how much you sell and how much you sell it for. If you have a cheap brand and sell beer cheaply, then what good is litrage?

If you have a strong brand and you are selling beer for a reasonable price then there is no comparison between what you are doing and someone selling millions of litres at a loss. Plus when companies buy craft beer breweries they are rarely buying the ability to make or even sell litres. They are buying relevant products and brands that they struggle to build themselves.

So while people obsess over what ‘multiple’ a company exited for, in reality what matters is the strength of their brand. If you have a strong brand, and you can see a bright future for the brand, you don’t want to be using the volume as a way to value the business.

If in doubt go higher

Coming up with a valuation can be daunting. We have done 10 investment rounds and every time we feel like we are pushing it with the valuation. Even when we did our first investment round, we valued the business at $800,000 and we felt that was pushing it.

Our early rounds at $3.5m and $18m and $22m and $38m all seemed high at the time and all seem very low now. In hindsight we gave up more equity than we needed to. We obviously had to balance it out with the fact that we did need money at every step of the way and those were the valuations that got our investors in. In hindsight it probably would have been OK for some of these rounds to not hit the high level of funding and we went a bit higher with the valuation and gave up less equity.

It is however nice to know that people who invested early in Black Hops, have seen other rounds at much higher valuations and that’s important as well.

But really the downside of raising the valuation a bit is just that you may not hit your funding target and perhaps that’s a risk worth taking to preserve a bit of equity in the business for the future.
Timing is everything

If your brewery is anything like ours, you will be raising money in very different situations. For example we raised money when we had done a few home brews and we were 3 guys who had never owned a brewery before, 2 of us had never worked in a brewery before and 2 of us had never even run a business before. It’s a special kind of investor who invests at that stage (thanks Sam and Simpo). They are taking an enormous risk and that level of risk is not palatable to most people.

In fact we had people turn us down at that stage at a $800k valuation, who later happily invested at $38m. They were investing in something very different by the time that round came around.

We did an investment round that was closed a month before Covid hit, and had multiple investors either pulling out or holding off on sending money in. Then a year later we raised money at a 60% higher valuation and the round was 60% oversubscribed in under a week, I had to turn investors down and that was only open to current investors.

Timing is everything so it’s important to not get too carried away comparing one time to another time. It’s worth what someone is prepared to pay at the time.

You won’t know if it’s right until later

One big lesson we’ve learned from a lot of investment rounds, is you never know whether the valuation was right until after the round. People may think the valuation is high but if you close the round really quickly then in hindsight you valued the company too low.

Or maybe you don’t fill the round but a year down the track your business has doubled and you’ve delivered everything you said and more, that number is going to feel pretty low.

A valuation at the time of an investment raise for a fast growing company is not a scientific formula, it’s a guess about the future. The investor’s job is to work out if they agree with the founders about their guess about what the future looks like. In time it will be obvious whether or not they were understanding it or overstating it, or they were about right. But at the time, it’s just a guess.

Be careful with benchmarking

I see it as a common inclusion in crowdfunding investment rounds to include valuations from other companies. I think people are doing this a little bit too much. These companies are guessing what their company is worth at any given time and almost always down the track they are shown to either be too high or too low.

Plus you can’t compare brands. A lot of these things are intangible. If a company has a much higher valuation than you and you are presenting that as value for your own investment round, it shows weakness about your vision.

I don’t mind the idea of looking at other rounds and looking at crowdfunding sites or exits or the stock market to work out what companies are valued at. But not so much to find a number for your own business, more to just get a feel for where the market is at. Like you do when you buy a house, no two houses are the same but they are all sold in a market so it doesn’t hurt to go to a few auctions to get a feel for the market.

Some of these comparisons are straight up misleading. Comparing a revenue multiple to a company who has barely started making revenues and is valuing themselves based on a super strong brand, in my view is not comparing apples to apples and is misleading.

A founder’s job is to present a vision

When you’re selling equity in a company, your job is to present a vision of the future that is compelling and achievable given your industry, your brand, your team and your traction (if any). If your vision is to become one of Australia’s favorite craft beer brands then that should come with a very decent valuation, because if you are right then your company is going to be worth a lot of money.

If your vision is to make a small local profitable brewpub and share the spoils with people who supported you, then the valuation should reflect that.

To the right investor, a higher valuation is going to be better in many ways because it shows that the founders believe in their vision. Investors want to back teams that are ambitious about the future and if you come to the market with a small valuation, it shows you aren’t that confident about where the company is going to be in the years ahead.

I think founders should not hold back on their valuations, especially if they are legitimately backing themselves and their team to deliver an incredible future for their company. It shows that you believe in the value of what you have, and that’s what investors want to see.

Conclusion

I know there’s a risk that you’ve read this article hoping for a formula to use to value your brewery and perhaps feel like you didn’t get that. But I hope you got something different, a founders perspective on how to value your business, because in the end it’s up to the founder to value the business and nobody else. If you have any questions, feel free to ask below in the comments or ask away in our Facebook Ambassadors Group.

If you are interested in investing, we have an email group just for you, jump onto blackhops.com.au/invest to join.

  • Ian Smith says:

    Informative writing. The scary bit about starting a business is that 1st step out into the unknown. Risking your money, and being the “solution to every problem” guy. There is a bigger risk ( complication) by doing this as a partnership, but also more relief in dilution of dilemmas. There are a ton of negative stories on partnerships, so it is nice to see one that is going somewhere.
    Your dad was right – the value is what the marketplace will pay. If you want to keep it, keep it. If you want to sell it, sell it. If others do not like that you sell it, then they build one just like it and keep it.
    Don’t forget to stop and smell the roses on your journey.

    Ian.

  • Dan Norris says:

    Cheers mate