We spend a lot of time talking (and talking, and talking) about revenue trends and earnings trends and successfully selling or exiting from a small business. A lot of people are going to successfully exit their business. They’ll do it on their own terms and get a reasonable return for their efforts. But how do you really knock it out of the park? Read more
Every once in a while we work on an engagement and find ourselves scratching our head over the business model, asking “so wait, who’s the customer here?” And then just today Kottke dropped a great entry on this exact topic. (Btw, if you aren’t reading Jason’s work, you are missing one of the happiest little corners of the internet. Loyal reader for over a decade now!)
In anycase, Jason quotes this fantastic snippet about Ticketmaster:
[blockquote]Ticketmaster sells more tickets than anybody else and they’re the biggest company in the ticket selling game. That gives them certain financial resources that smaller companies don’t have. TM has used this to their advantage by moving the industry toward very aggressive ticketing deals between ticketing companies and their venue clients. This comes in the form of giving more of the service charge per ticket back to the venue (rebates), and in cash to the venue in the form of a signing bonus or advance against future rebates. Venues are businesses too and, thus, they like “free” money in general (signing bonuses), as well as money now (advances) versus the same money later (rebates).[/blockquote]
Smashing! Who’s stopped to think about how the ticket model really works? So basically, even though you are buying a ticket to an event… you’re just a helpless little cog in a machine.
Kottke mentions a few other industries that are a bit similar – advertising, TV, online search – but a notorious one is staffing. Not that you’ve ever found yourself out of a job, dear reader, but in the event you find youself answering all those Linkedin inquiries about that great position…. who’s really the client in that relationship?
Another culperit: insurance. I bet you have a great insurance agent that gets you great deals. But their freight is (almost always) paid by the carrier / underwriter. And while we know some terrific brokers, it doesn’t mean that the industry as a whole has your best interest in mind.
We ask these questions all the time in the course of valuation work (and occassional nerd out writing articles about them). But it’s something to keep in mind as you travel through the commercial world: who’s paying? Or in the case of Ticketmaster, who’s paying the most?
That’s the client.
There may be one less gift option for your Valentine as a global chocolate shortage crisis is among us. Time for some macroeconomics basics – shortages exist when the demand for a good or service exceeds the availability of that good or service. In 2013, the world collectively consumed 70,000 metric tons more cocoa than produced. This statistic is anticipated to reach 1 million metric tons by 2020 and 2 million by 2030. This shortage has resulted in a more than 60% increase in cocoa prices in 2013.
Being faced with a supply shortage, what are companies left to do?
Option 1: Find an alternative product.
Option 2: Take it on the chin and pray to the chocolate gods for a better season next year.
Option 3: Find ways to cut other costs to make up for the declining profit margins.
Option 4: Raise prices to consume to reflect the increase in cost of sales.
When your business is chocolate, Option 1 is not an option at all, Option 2 is not much better, and Option 3 can prove to be quite difficult especially for smaller main street businesses. As such, chocolatiers have been forced to raise prices (with market giant, Hershey’s leading the way).
One of our primary roles in analyzing companies is to identify risk factors that either currently pose a threat or present a dependency on an outside relationship and/or factor out of the business owner’s control. It’s best to be proactive and identify any red flags in order to put stop gaps in place. These preventative measures will not only help you sleep better at night, but will command a higher market value in the event of a future sale.
Intangible assets are a critical consideration when determining damages in an infringement case, negotiating a property settlement, valuing a company for conversion or sale, and quantifying a charitable donation. Despite their many applications, intangible assets are often underestimated or overlooked in the valuation process, particularly when they are non-revenue generating assets.
It is important to remember that because an asset does not generate revenue does not mean it is not valuable. Copyrights, internet domain names, goodwill, computer software, proprietary lists, existing contracts, patents and trademarks are all examples of intangible assets that add tremendous value even if they do not actively generate revenue.
Valuing intangible assets is not a straightforward task. They can be difficult to define and there is not a finite approach to the process of determining their value– that is to say there are many generally-accepted methods. For this reason, it is important to choose a skillful and experienced valuation professional who is able to identify the proper methods of determining the value of the intangible assets at question.
To determine value, most valuation professionals will begin by assessing the industry and market in which the asset will be used. Market size, as well as current and projected economic conditions of a particular market can have a significant influence on the growth potential of a company and its assets.
Next, they will determine an asset’s benefit base, which is the potential income and revenue an asset is projected to accrue throughout its projected useful life. In order to do this, a valuator could use a company’s real expenses alongside generally accepted accounting principles to determine economic income. Looking at expected operational income, royalty rates, cost savings and/or excess income associated with the use of the asset are also useful ways to determine the economic return an asset is likely to generate.
After gathering this information, a valuator will then discount the expected benefits of an asset by an appropriate rate of return, taking risks associated with returns into considering.
It is worthwhile to note that when it comes to patents, the IRS recognizes the income that can be attributed to the asset or its application, its safe rate at the time of valuation, and its reasonable, speculative capitalization rate as determined by the IRS, as acceptable means of determining the patent’s value.
While the process of valuing intangible assets does not have a standard method or approach, an experienced valuator recognizes their importance in the valuation process and will develop an approach that ensures the full value of these assets is considered.
It’s Not “Just Business”
Business is business…except when it’s not – as is the case in many family owned and operated businesses. It’s very hard to separate business and personal life, especially when the two are very intertwined. Business owners need to wear different hats when sitting at the conference table versus when sitting at the dinner table. One element that helps family members separate those hats is an Operating Agreement (aka Shareholder Agreement).
Families start companies with the thrill of entrepreneurship in their hearts and visions of lifelong collaboration in their minds, but the reality of our world today is that more than 50% of marriages end up in divorce. There is a strong corollary to businesses as well.
Don’t Forget the Shareholder Agreement
Partners should enter into any partnership with a Partnership Agreement. Regardless of the relationship of business partners – be that friends, siblings, or spouses – these agreements should be drafted and in place. Provisions can define valuation methodologies applicable in determining an ownership interest’s value, reassign ownership upon divorce, and outline transferability limitations and voting rights.
Like Shareholders’ pursuing an exit strategy, a best practice for Shareholders seeking divorce is for the owners to keep an eye on their business in order to protect and maintain sales, profitability, and corporate culture. Anything that distracts owners from running their business, is adversely impacting what is most likely the Shareholders’ largest asset (their business) – and as a result, the largest point of contention within any divorce proceeding.
Regardless of the type of business or the relation of shareholders and partners, don’t skip over the shareholder agreement. After all an once of prevention is FAR better than seeking a cure, right?
[alert title=”Seek Counsel.” “Warning”]As a best practice, make sure to consult your legal professionals in order to discuss the best preventative measures to consider in regards to entering into any business venture. [/alert]
Apple likes big events. Steve Jobs set the tone with masterfully constructed event, reserving a well-timed “And one more thing…” to the object of everyone’s speculations.
A few days ago, at the unveiling in Cupertino of the iPhone 6, the band U2 joined Tim Cook on stage without any advanced notice. And to the surprise of everyone, it was announced that their new album “Songs of Innocence” has ‘dropped’ on the iTunes store, and every customer of the service can download it for free.
We are talking about 500,000,000 customers. Half a billion. In 119 counties.
Why are they Doing It?
Apple’s Steve Jobs was always involved with music. iTunes and the iPod were his babies. He made a few deals with artists to release their whole discography, convinced the big companies that this is the way of the future and changed the way we listen to music.
People want to listen to their favorite songs, he theorized. Let them have an easy interface and let them choose what they want to hear and make their own lists. Piracy? Yes it is possible, there will always be people ready to break the law to save a buck, but if you make it cheap enough, the masses will come.
He was right. With all the digital music existing on the web these days, music piracy is way down since Spotify became a smooth running site.
As for U2? They were always innovators, and we’ll have to wait and see how it will impact their sales and tours. But rumor has it that $30,000,000 for their efforts probably helped guide their decision.
The New Business of the Music Business
It used to be simple to track how much money is being made in the music industry. The format may have changed in the past 10 -15 years – from a record to a tape to a CD – but the principle was the same: You put out an album, people go the store, listen to it and buy it. A percentage of the sale goes to the music company and the artists who wrote, composed and performed the song.
It was even easier to track on iTunes. From every 99 cent download, the artist got a few pennies. But now? With free videos on YouTube, web services that stream songs such as Spotify, MOG, and RIO, and internet radio, Slacker Radio and Pandora, is it possible to track all those plays and charge for them? The truth of the matter is that in 2011 a source in the music business told Rolling Stone, “… the actual formula used for determining artist royalties from streaming services … it is too ridiculously complicated to reproduce here.”
By 2013 there is a little more order but the business as a whole is in trouble. There was a decline of 4% vs. 2012, a year that saw a slight rise in worldwide revenues. Experts say the decline is caused by a shift in behavior of the Japanese market and an aggressive move to digital, not because less people are listening to music.
By the Numbers
- YouTube. There are more than 1 billion users per month, who watch 6 billion hours of content.
- Streaming. Has about 28 million subscribers, and 3 times as much visitors if we include the free versions. Streaming generated $1 billion in revenues last year, 50% more than in 2012. And the potential is huge. Currently, only 4%-5% of the population uses streaming services in the US and the UK.
- Radio streaming revenues last year were a modest $590 million in the US alone, which represents a rise of 28% vs. the year before.
- Total value of the recording industry – $15 billion.
According to Ifpi.org (International Federation of the Phonograph Industry) the pie looks like this:
- 51% come from a Physical format sales
- 39% come from digital revenue
- 7% Performers’ rights – (A growth of 19% compared to the year before.)
- 2% Synchronization revenues.
- The industry is spending $4.5 billion on artists, repertoire and marketing.
Spotify pays its artists $0.006 to $0.0084 per song. YouTube monetizes the music with ads, and pays roughly $2 per 1000 views. With so many millions viewers all over the world, the potential for profits is as strong as ever. They say Robin Thicke’s song “Blurred lines” had 76 million views and a profit of at least $250,000 from YouTube alone. “Gangnam Style” reached more than one billion views, and made a cool $2 million.
What it All Means
The landscape has changed, and continues to change, for music companies and record labels. There are few other industries as a whole that have had to innovate as rapidly in order to remain relevant. To that end there are many lessons to be learned in how industry participants have dealt with change. This ties back to our recent piece on innovation (The Robots Are Coming) – learn to innovate and adapt, folks!
Oftentimes the number one driver of value in a business sale is recurring revenue streams. Examples of businesses that tend to yield hire multiples, ceteris parabus, include:
- Web-based business with monthly billings
- Central Station / Home Security – again, monthly billing model
- Government Contractors – clear view on future contract revenues
Since we do so much work in the GovCon space we’ll focus there (but the following concepts are crucial regardless of business type or industry).
In many cases company’s focus on historical performance as the basis of value. But what is a buyer really buying? In GovCon, to some extent they are buying bid history and past performance. But their focus is on the future. And if you are considering going to market, one of the most important steps you can take is put together a solid, well thought out, highly supportable waterfall chart.
What is a Waterfall Chart?
Simply put, a Waterfall Chart is a forward looking matrix that attempts to quantify future revenue streams. If you’ve spent some time in the consulting world (or reading the economist), you’ve probably seen a chart like the below:
This is your standard waterfall chart. It shows the composition or make up of some overall value. We often see a Waterfall Chart depicting company expenses as well.
Using a Waterfall Chart for Revenue Projections
At the most basic level, a waterfall chart shows how future revenues “tail off” as contracts end. The below is a simple waterfall chart that shows our government contractors backlog.
What do you notice? Well, as a buyer the first thing you notice is that revenues are declining every year. Why on earth would you buy a company that is evaporating? If it truly were declining with now future it would most likely be a firesale. But most buyers are smart – they realize you’ll eventually bid and win new work. But failing to show them what the future looks like is a recipe for a lower government contractor valuation.
Forecast and pWin
To take your waterfall forecast to the next level, add two more sections: works that’s been awarded, and work you are bidding on. But these revenues should not be added as a 100% certainty. Afterall, you won’t win every bid right? And in GovCon world, every IDIQ will not necessarily result in awards.
As the chart below indicates, add in your revenues in the “out” years by applying your pWin.
You now have a completed Waterfall Chart that highlights what your future revenues will look like.
[blockquote background=”#ffffff”] Pwin – Probability of Win on a given contract or opportunity. Successful organizations work to understand the factors that influence pWin – not just historical rates. [/blockquote]
For a Waterfall to be an effective government contractor business valuation tool, it’s imperative to drill down on WHY you’ve selected a particular pWin on a contract-by-contract basis.
Defending Your pWin
Buyer’s naturally have a skeptical eye – afterall they are the ones parting with a check in today in order to capture future revenues. You should expect to need to defend your projections at length.
To be successful in your defense consider developing an algorithm or framework for how you develop a pWin. Items to consider:
- Is the contract scope of a particular contract in line with your company’s record of performance?
- Are you the incumbent on the contract?
- Have you done business in the past with this specific customer?
- Does this contract related to any other contracts you are currently performing on?
- If not the incumbent, are there any issues that you are aware of with the incumbent?
As you can imagine there are plenty of ways to develop a frame work, but the important part is that you think through the issues, document the issues, and indicate WHY you have indicated a particular pWin to a contract.
We most often see Waterfall Charts used in conjunction with government contractors and defense contractors. The nature of the work directly lends itself to this type of forecasting. That being said, there is no reason that you cannot apply a similar methodology to another line of business.
Once you develop a feel for developing your own Waterfall, it becomes a fantastic and powerful tool in business valuation and M&A scenarios.
[alert title=”Note from the Author:” “information”]I was recently interviewed for an Inc.com magazine piece detailing key factors that impact valuation. That’s like listing out all of the components of a hotdog – an extensive list of ingredients with some complicated formulation and maybe even an item or two that is best left up to the imagination. Well needless to say, my minds been racing as to the best way to answer this question and to be “frank”, the response circles back to the fact that there is no one-size-fits-most answer. With unlimited number of business models and demographics, each valuation engagement is an entirely unique process. With that in mind, I thought we’d take a quick look at a very unique business model: the “pop up store.”-JT[/alert]
Our Unique Business- The Halloween Pop-up Store
Keeping in the ghostly spirit of the season, let’s observe the popular pop up Halloween costume warehouse. These businesses appear at every vacant building and storefront along any major highway or mall complex during the months of September through October. This is a unique business model that has to overcome hurdles such as managing inventory and obtaining temporary rental space. Below is a summary of some of the key elements that drive as well as detract from value.
The Halloween Industry
So with all of the obstacles a Halloween store needs to overcome, why is this business model something of value? Not only is it estimated that Americans will spend $7.4 billion this year on all things Halloween (costumes, decorations, and pumpkin buckets full of candy), but the National Retail Federation estimates that people will spend $350 million alone dressing their pets!
Retail giant Spirit Halloween, a subsidiary of Spencer Gifts, LLC, is a success story in and of itself. The Halloween super giant has experienced tremendous growth since its first store opening in 1983. In 1999, Spirit Halloween operated 63 seasonal locations throughout the United States. After its acquisition by Spencer’s, Spirit has expanded its store base from 63 locations to over 1,100 for the 2014 season.
The National Retail Federation (NRF) released some other surprising predictions for this year’s holiday. According to their study, more than two-thirds (67.4%) of celebrants will buy Halloween costumes for the holiday, the most in the survey’s 11-year history. That equates to $1.4 billion spent on adult costumes and $1.1 billion on children’s costumes. Additionally, the average person will spend $77.52 this Halloween, compared to $75.03 last year. The rise in this price is due in part to the anticipated parties that 54 million people will throw or attend, especially since the holiday falls on a Friday this year. This translates to higher than average anticipated earnings levels for Halloween retailers.
Key Value Factors
Ultimately, as a rule of thumb, IBIS World reports that the sale of 70% of a store’s inventory is considered a successful year. More importantly, the ability to save, store, and resell unused inventory the following year lessens the blow on any unsold items. Other than the hot costume trends of the year, standard Halloween concepts can be recycled year after year. Despite the many Disney Frozen and Ninja Turtle costumes you will see this year, “pirates, zombies, cops, and clowns are evergreen,” according to Steven Silverstein, CEO of Spirit’s parent company, Spencer Gifts. “That’s our secret sauce. You have to be able to carry over a significant amount of inventory year to year. In traditional retail, you might not be repurposing anything. For us, consistent themes remain, and we’re repurposing 30% to 40%. We’re not just trying to get rid of it.”
Gross Profit Margin
While these stores are geared towards the sale of all things Halloween, the largest margins are within the costumes themselves. Profits have been stated as anywhere from $24 to $180 an outfit.
These Pop Ups are in operation for no more than two months out of the year, but they make those two months count! Spencer Gifts’ reports an estimated $250 million in annual revenue. Approximately half of total sales are now attributed to Spirit Halloween (aka, the Halloween franchise generates the same level of revenue as its Spencer’s counterparts in one-sixth the time). Even within the online arena, 90% of Spirit’s online business year-round comes in the 12 weeks leading up to Halloween.
Seasonality is an integral component to financial analysis. As such, we make sure to observe trailing twelve month financials when valuating companies with an effective date other than the Company’s fiscal year end.
Location, Location, Location
Pop up stores look to inhabit locations between 8,000 to 15,000 square feet. Fortunately, commercial landlords view business model’s like this as a saving grace, happily taking $20,000 for two months in a unit that would otherwise sit empty. Unfortunately, the Company will have to pay a higher than average rent expense for the fleeting occupancy. The high price tag pays off; however, as visibility within high traffic areas is a key driver for profitability in general as well as in comparison to other costume and décor retailers.
Ironically, at the depths of the economic crisis in 2009, when most retailers were seeing shrinking sales and “going out of business” signs, Halloween pop-ups were at their peak. Rental space was readily available and these tenants were in high demand. While a down economy improves bottom lines by decreasing one of the company’s largest expenses, it also negatively impacts revenue potential. NRF estimates that 1 in 5 shoppers say Halloween spending will be impacted by the economy. This impact will cause 20% to DIY their own costume and 8% to hunker down, shut the lights, pull the shutters, and not hand out candy this year.
Competition lies primarily in convenience – previously addressed location being the primary driving force. As with all elements today, the internet makes the playing field that much more competitive. Brick and mortar stores tend to fair well compared to their online counterparts as most people wait until last minute to ship for and purchase their costume and shipping can be both expensive and unpredictable. Big box retail giants such as Walmart serve as a significant competition especially in the convenience factor. A customer can go to a “mart” store and accomplish much more than just their Halloween shopping – time is a limited and valuable resource.
Wrapping It Up
These are just some of the factors that would be analyzed in valuing a seasonal retailer. Additional items to consider and evaluate include the Company’s financial history, health, and trends; capital structure; management team/hierarchy; and, vendor relationships. Other elements that are critical in different industries include things like customer concentration; contracts in place with those customers, vendors, and employees; patents and other proprietary content/products; and, shareholder dependency to name a few.
October, or shall I say Oktober, holds a special place in the hearts of beer aficionados everywhere as the popularity of international drinking festivities has created a Christmas in October for the US craft beer market.
Wait, Why is Quantive Interested in the Craft Brewery Market, Anyway?
We find researching market trends and key statistics for each of our business valuations to be very interesting (that is when we find time in between our Comicon Conventions and Death Star Petition writing). This especially holds true when engaged in a fun and emerging market such as craft beer. Through this research, we indicate key factors that may increase or detract from the value in assessing this niche sector.
The craft market itself is divided into four subgroups: brewpubs, microbreweries, regional craft breweries, and contract brewing companies. The Brewers Association defines each of these industry market segments as follows:
- Microbreweries – A brewery that produces less than 15,000 barrels of beer per year with more than 75% of its beer sold off-site.
- Brewpubs – A restaurant-brewery that sells 25% or more of its beer on site. Beer is brewed primarily for sale in the restaurant and bar.
- Regional Craft Breweries – An independent regional brewery with a majority of volume in “traditional” or “innovative” beers.
- Contract Brewing Companies – A business that hires another brewery to produce its beer.
David & Goliath
The beer industry has been feeling a little hung over lately with various research outlets indicating the decline in its overall market share in comparison to its wine and spirits counterparts. Interestingly enough, while beer consumption has slumped, there has been a notable shift in sales composition with craft brew capturing a larger portion of total revenue from the Big Beer giants such as Anheuser-Busch InBev and MillerCoors (who together represent 75% of the US beer industry).
In fact, craft beer is anticipated to represent nearly 15% of the entire beer industry’s sales by 2020. This movement includes current beer drinkers shifting from their traditional tap staples as well as wine and other spirit consumers trading over to the “affordable luxury” that is craft beer.
The Wall Street Journal reported, “Craft beer has grown despite attempts by big beer companies to advertise craft-like beer, emphasizing smaller batches and trying different flavors in an effort to win back customers. Their biggest inroads have been in light, wheat beers such as Blue Moon (MillerCoors) and Shock Top (Anheuser-Busch InBev).”
The beer consumer demographic has demonstrated a growing interest in the science of craft brewing. A sophistication is emerging (to which some have even coined the term “beer snob” for those uber enthusiasts) creating a demand for quality beer craftsmanship and interesting flavor palates. This interest has even trickled down to the college demographic who have traditionally been associated with the overconsumption of low price point beers from red solo cups. As of spring 2015, Paul Smith’s College, a private, four-year college located in the Adirondack Park in upstate New York, will officially offer a minor in “craft-beer studies.” Likewise, Central Michigan University created a program designed to train and certify students in “fermentation science.” Other universities joining the beer enthusiasts’ ranks include the University of California’s Davis and San Diego campuses, Oregon State, and Central Washington universities.
This main-streaming and up-scaling of beer- which has by all accounts historically been a bottom of the barrel beverage – shows the changing tastes of Americans. And changing market forces have valuation considerations.
Show Me the Barley
Overall, the beer market accounted for $100 billion in sales in 2013. Roughly $14.3 billion was craft beer, a significant increase from sales of $11.9 billion in 2012. While craft beer’s claim within the market is still just a sliver in the overall pie, craft sales have grown 17.2% in 2013 despite the beer markets overall fall of -1.9%. In 1998, the Brewers Association reported craft beer as contributing to 2.6% of the US beer market (with Imports accounting for 8.4% and Non-Craft beer the preponderance at 89%). Fast forward to 2013, and the Wall Street Journal’s recent report indicated that the craft movement is on the rise with a 7.8% market share (up from 6.5% the previous year). This trend is not expected to stop either. Sales projections for the craft brew industry over the next five years show an expected growth of another 32%, totaling $4.1 billion, by 2017 (Source: IbisWorld).
So Who are these Crafty Folks Anyway?
The Brewers Association defines American craft breweries as, “small — producing under 6 million barrels a year — and independently owned — they can’t have greater than 25% investment by a noncraft-beer alcohol company.” The craft movement has grown exponentially in the last few decades; the US now boasts more beer styles and brands than any other market in the world. And fun fact for all the craft enthusiasts: the average American lives within 10 miles of a brewery.
Some market movers and shakers who have made a name for themselves include:
- Boston Beer Co. (aka Sam Adams)
- Sierra Nevada Brewing Co.
- New Belgium Brewing Co.
- Lagunitas Brewing Co.
- Deschutes Brewery
- Bell’s Brewery, Inc.
- Duvel Moortgat USA
- Brooklyn Brewery
- Stone Brewing Co.
Boston Beer Co. accounted for approximately 16.5% of 2012 craft brewer sales (representing 2.215M barrels). Sierra Nevada’s market share drops off drastically at 7.5% followed by New Belgium with 5.9% and Gambrinus with 4.7%. No other market player contributed to more than 2% of total market share, so while the top four brewers accounted for 34.6% of total sales, the rest of the market is highly fragmented, highlighting the industry’s focus on servicing its local market versus infiltrating a nationwide platform.
How Beer is Shortening the Unemployment Line
Talk about job creation, the Census Bureau announced in July of this year that the number of breweries in the in the U.S. doubled in five years primarily due to the growth in craft beer. On average over the past two years, 1.2 craft breweries opened each day, contributing to a total of 15.6 million barrels of beer in 2013. Moreover, the number of operating breweries in the U.S. increased approximately 15% from 2012 to 2013 leading to a 1.7% growth in industry jobs. In 2013, breweries totaled 2,822, with 2,768 of those considered craft. Combined with already existing and established breweries and brewpubs, craft brewers provided 110,273 jobs, an increase of almost 2,000 from the previous year.
Get to it Already… So What’s All This Mean?
Below is a summary of our findings:
- Craft brewers face many challenges including access to market, availability and cost of raw materials, high regulations, and high tax rates within its market sector. Contracts with raw materials vendors are integral to production cost as well as production volume. Additionally, malt and hops are tied directly to the commodities market, and as such, experience spikes in cost in relation to similar commodities such as corn, wheat, and soybeans.
- Industry consolidation is taking off as many brewers find ways to maximize production to keep up with demand, while introducing product diversification with new beer types. Mergers and consolidation allow these smaller businesses the ability to benefit from economies of scale.
- There is significant market competition as illustrated by the number of brewers per state, and capturing a large market share is difficult with a niche product that offers distinct styles and flavors.
- Despite extensive market competition, the success rate of craft breweries is fairly high in comparison to other industries. The Brewer’s Association has stated that 51.5% of the brewpubs and 76.0% of the microbreweries that have opened in the modern era (since 1980) are still open today (representing only a 48.5% and 24.0% failure rate respectively).
- Size matters in this industry. Larger establishments are more likely to be targeted for acquisitions by larger market players and thusly are able to achieve higher multiples.
- There is a growing demographic of craft beer consumers as craft beer captures more and more of the beverage market. Women are an important target market and key growth area as craft steals women from the wine category.
- Consumers are less price sensitive when they feel as though they are getting a premium product. There is a growing market consciousness regarding what is being consumed, how it is made, and supporting local establishments. All of these items equate to paying a premium price; however, the value is thought to be worthwhile.
- As with most retail products within the food and beverage arena, shelf space is the hardest hurdle to jump. It is difficult to not only secure shelf space, but to also be placed in an optimal location without getting lost in a sea of worthy opponents.
Next Round is on Me – Investing in the Beer Movement
Big beer has been concentrating on expanding internationally and growing through acquisition versus organically. Why? The U.S. is a no-growth market. And from an acquisition perspective, Big Beer needs big acquisitions to achieve material growth that is accretive to earnings.
As global market consolidation continues overseas, domestic craft brewers continue to grow their current market reach and increase brand awareness, nurturing each entity into a business that will pique the interest of these beer giants within the near future. Until then, the focus remains on international dealings and as it happens, the US isn’t the only market seeing the potential within the craft movement. Kirin Beer, one of Japan’s top three beer producers, shocked the market with their expressed interest and later 30%+ stake in an emerging Japanese craft brewer, Yo-Ho Brewing. Kirin is expected to invest more than $9.2 million in Yo-Ho, buying shares from parent company Hoshino Resort and in a private placement. This acquisition marks the first major Japanese brewer to join forces with the country’s growing craft beer movement.
The following are additional industry acquisitions of merit:
- February 2014: Anheuser-Busch InBev, the company behind Budweiser and Corona beers, bought New York based Blue Point Brewing Company for a reported $24 million.
- December 2013: New Belgium Brewing Company’s employees acquired a 59% interest in their company.
- March 2013: Fireman Capital Partners purchases Utah Brewers Cooperative, LLC in a private placement for $35 million.
- December 2012: Cerveceria Costa Rica participated in a merger/acquisition of North American Breweries, Inc. for $388.4 million.
This small sample illustrates the diverse buyer groups interested in entering this lucrative and growing niche market. Buyers are willing to pay a premium for the profitability and growth trajectory demonstrated through market research and overall alcoholic beverage trends. Most acquisitions tend to be strategic efforts to gain market share in a new demographic (foreign or domestic) as well as add a new product line (beer style).
Making Dollars and “Sense” of it All
What does this mean for a craft brewery owner? How does it impact business valuation for brewers? You, my friends, are in a booming industry that is ripe for achieving premium market multiples and a wealth of interest from various qualified buyer pools. If you have successfully launched a craft beer brand generating a strong following and quality product, it should be time for you to entertain your options. Expansion is inevitable if you intend on emerging out of this area of fragmentation or would like to strengthen your financial position through economies of scale.
In order to obtain interest from the larger beer players within the Big Beer arena, a microbrewery needs to scale. Microbrew and brewpub valuations will remain moderated until you begin to achieve a larger revenue base and customer reach.
Ultimately, to achieve a big exit, you need to scale and demonstrate you can achieve national access, presence, and distribution.
And Let Us End on this Note…
We sincerely hope you enjoy the rest of Oktoberfest! Drink responsibly everyone.
Quantive is a veteran owned and operated financial services firm. We work exclusively on matters related to corporate value: business valuation, value growth, and M&A advisory.
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