The deal environment within the craft brewing industry is “a bit slow” with “a lot of volatility, a lot of uncertainty,” which isn’t very conducive to dealmaking, Arlington Capital Advisors managing director Ryan Lake shared during the 2023 Brewbound Live business conference earlier this month.
“Everything is hard to predict right now,” he said, pointing to economic disruptions, the geopolitical environment, inflation and the on-premise’s bumpy return. Meanwhile, the major strategics are also evaluating their portfolios.
“They’re trying to stop the bleeding in certain areas, they’re trying to maximize what is working, some of them are shedding assets,” Lake said. “It’s a bit of a strange year.”
Dealmaker and advisory board member Simon Thorpe said the structure of deals has also changed from a decade ago.
“Those of you who remember 10 years ago where most of the deals were for cash and people were paying up front, that’s not happening anymore,” he said. “It’s really about equity rolled into platforms, and it’s about performance-based outcomes. So there’s much less cash up front.”
Thorpe added that “multiples at the moment are nowhere near what they were in the past” with a 6x to 8x EBITDA multiple.
“If you’re looking at how you’re valuing your brewery, we’re looking at $500 a barrel instead of $1,000 a barrel 18 months ago,” he said. “We’re looking at multiples of revenue that are 0.8x to 1.2x. If you do the math on your own breweries, then what you see is the valuation in the current market is way down versus where it was even a year ago, and certainly versus five years ago.”
Buyers are also factoring debt into their valuations, so sellers need to work that into the equation when valuing their businesses, Thorpe said.
“What you find is there’s precious little left to take off the table once you’ve done that,” he said. “Because what we’re seeing in the market at the moment is a lot more breweries have taken on more meaningful debt and that’s a problem in terms of people wanting to transact.”
Three Weavers founder Lynne Weaver, who sold her Inglewood-based brewery to CANarchy and later bought it back, noted that partnerships are few and far between and if you can’t add value to a partner, they’re not going to be interested. Weaver said brewery owners need to be truthful to themselves about their standing in the industry in their regional area and within their distributor if they want their business to be sustainable in the future.
“If you do not believe that you are [sustainable], then you need to start making some really drastic changes in a sense to make yourself sustainable,” she said.
The panelists agreed that getting profitable is going to be paramount to success in the future. Thorpe emphasized the importance of being a distinctive brand that can scale and travel.
“Get profitable,” he said. “No one in the marketplace now is looking at businesses that are negative EBITDA, negative cash flow. There’s just not the appetite to do it anymore.”
Thorpe described the three types of sellers in the market:
- Brewery founders who started their business 25 years ago and either don’t have a successor or they prefer to sell;
- Brewery owners who are struggling with negative EBITDA, negative cash flow and have tapped out their investment channels and now forced to transact to survive;
- Founders in the middle who are looking for added scale via a platform or partnership in order to grow.
Those who can put together positive financial and growth stories have a better shot at getting a potential acquier’s attention.
“From an M&A point of view, the strategics don’t get out of bed for anything less than $30 million of EBITDA,” Thorpe said. “So if you think about what you’re making at the brewery at the moment, just to get their interest, you’ve got to get to scale.
“Around $25 million to $30 million of EBITDA, at that point then you’ve got something that not just strategics but significant financial investors are going to be interested in.”
Brewbound Insiders can watch the full conversation above, including insights on adding value, scaling and becoming sustainable.