For craft-beverage companies that are now in the process of seeking acquisition or recapitalization—indeed for almost every company—the COVID-19 pandemic has suppressed sales revenues and resulting EBITDA. Yet there is wide acknowledgement that COVID-19 will not last forever. After some period of time—probably a matter of months—the effects of COVID-19 will diminish and, eventually, vanish. Admittedly, the economy won’t immediately bounce back. When we look back, the recovery will likely be compared to a “dimmer switch” that slowly turns up to full power over time.
On the far side of the COVID-19 pandemic, there is reason for optimism—substantial “tail winds” will power the economy. First, interest rates are low, and the past decade of monetary policy suggests that they will remain so. Second, the Federal Reserve Bank has shown signs that it will remain in an activist posture. Third, adding to serious pent-up demand for craft beverages, federal and state stimulus packages will pump substantial funds and tax incentives to fuel growth.
New Ownership Post-Pandemic
If a craft-beverage company seeks acquisition or recapitalization during, or soon after, the pandemic, the financial reports presented to potential acquirers will surely show suppressed performance caused by COVID-19. Craft-beverage company valuations are often based on the trailing twelve months (TTM) or last calendar/fiscal year EBITDA performance. However, an acquirer is not purchasing a company’s historical performance. That performance is normally a predictor of future revenue and earnings, and it demonstrates the company’s overall operational capacity. But an acquirer is buying future earnings. Accordingly, a company’s value should be tied to those future earnings and not to its performance under temporary stressors, albeit extreme ones such as COVID-19.