In Part I of this article, we discussed reasons why a brewery owner would want a professional, independent appraisal and how to hire an appraiser. In the case study, we looked at the valuation of a large (~18K bbl) operation, and explained the valuation process in some detail. In this installment, we’re going to dive right into the valuation.
The Valuation Case Study
BigBrewCo is a large, regional brewery/taproom operation that opened in 2011. They do about $5.8MM in sales, brew around 18K bbls. (with current capacity for about 27K bbls), and distribute to restaurants, package stores and major grocery chains in a 6-state area. Their product line-up is broad and complex, encompassing a wide range of styles with planned new releases and rotations throughout the year. BigBrewCo currently has two existing taprooms; at the time of the valuation, they were completing the build-out of a third.
If all we were valuing was BigBrewCo’s existing business, it wouldn’t present any great challenges. However, BigBrewCo’s owners have some very aggressive growth plans: they plan to expand into another two states for their distributed product and open another seven taprooms by 2027.
This situation effectively requires two different valuations: one for the distribution segment of the business and a second for the taproom segment. Why is that? First, the gross margin structure is completely different: roughly 30% for the distribution business versus almost double (59%) for the taproom business. Second, sales are forecasted to grow three-fold over the next decade, with almost three quarters of that growth from taprooms that have yet to be opened. Third, the cash flow risks are quite different. Besides relying on unopened taprooms for most of the growth, BigBrewCo management assumes that they will be able to find a landlord that will build the taproom structure for them (as part of a mixed-development complex), with the Company only paying for the leasehold improvements (about $50K per taproom). This isn’t an unreasonable assumption, since this was how the new taproom location was executed. Nonetheless, the assumption does create additional risk. Finally, the forecasted volume growth means that the Company’s capacity will be maxed out, requiring significant expansion capex.
In terms of the valuation process, we created two separate forecasted income statements to reflect the differences in revenue growth and margins. If you read the first article while imbibing a 5.1% lager (rather than an 8.2% double-IPA), you’ll remember that risk is reflected in the discount rate, which is referred to among finance snobs as the weighted average cost of capital, or WACC. The WACC for the distribution segment was 12.1%, while the riskier taproom segment WACC was 15.5%. Capex was allocated between the two segments. Interest expense was charged to the distribution segment. Working capital requirements were essentially the same for both segments.
The cash flow model for the taproom segment yielded a value of $10.9 million, presented as follows:
Next, we valued the distribution segment, added the value of the taproom segment to it, and make a few other adjustments to arrive at a total Company enterprise value of $13.2 million. After subtracting out debt, the total company equity value was $9.8 million, presented as follows:
The bigger your brewery gets, the more complex it becomes to value. And if you have segments with significantly different margins, risk profiles and cash flows, it makes sense to value them separately so you can really see what’s driving the value of your brewery.