Pricing an equity stake for a brewery investor

Pre-money, post-money and the stake

Three terms carry the whole conversation. Pre-money value is what the brewery is worth before the investor's cash arrives. Post-money value is pre-money plus the new cash. The investor's stake is their investment divided by the post-money value.

Here is an illustration, in a neutral unit. An investor puts in 50 units at a pre-money value of 150. Post-money is 200. The stake is 50 / 200 = 25%. If the founder agreed a 30% stake for the same 50 units, they would be saying the brewery is worth 117 before the money. It is the same cheque at a very different price.

So when someone says "we want 30% for 50", turn it into a pre-money number first. Then discuss whether the brewery is worth that.

Three ways to value a young brewery

No single method suits a brewery that has been trading for a few years. Use at least two and compare.

• Earnings multiple. Take a sustainable operating profit before interest. Multiply it by a figure that buyers in your market would accept. It only works if the brewery makes a steady profit. Many young ones do not. As an illustration, a profit of 20 units a year at a multiple of 5 gives a value of 100. A founder hoping for 150 would need to argue for growth that the multiple does not capture.
• Discounted cash flow. Forecast cash for five to ten years, discount it back at a rate that reflects the risk and add a terminal value. It is as good as the forecast. Small changes in the growth rate or the discount rate move the answer a lot.
• Asset value. Add up the brewhouse, tanks, packaging line, stock and licences at what they would fetch if sold. This gives a floor, not a ceiling.

Our guide to valuing a small brewery before you buy or sell a stake covers each in more depth.

What the investor is really checking

An investor wants to know how the money turns back into more money and when. Be ready to show:

• Volume sold by month for the last year, by channel and by beer.
• Gross margin per litre in each channel. Our guide to pricing craft beer shows how to build it.
• The amount of cash the brewery burns in a bad month and how long the current cash lasts.
• What the new money buys, such as a canning line or a second site. Say how it changes margin.
• A route out: a later sale, a buy back by founders or a dividend stream.

A brewery business plan that links each of these to a number does more for your price than any pitch.

The terms matter as much as the price

Two deals at the same valuation can be very different. Check these with a lawyer before you sign:

• Type of shares. Ordinary shares, or shares with preferences on exit.
• Control. Board seats, vetoes on budgets, new debt or a sale.
• Dilution. What happens to everyone's share when another round arrives.
• Founder commitment. Vesting, non-compete and the time you must give to the business.
• Exit. Tag along, drag along and the date by which the investor can ask for an exit.

A lower valuation with clean terms can beat a higher one with heavy preferences. Look at what the investor receives in a sale at a low price, not only at a high one.

Licence and approvals

Alcohol is a state subject in India, so the licence is tied to the entity and often to named people. A new shareholder, director or partner may need to be reported to the excise department or approved before the deal closes. Rules vary by state and change. Speak to a licensing adviser early. Make the closing of the deal conditional on any approval that is needed.

A fair way to check your number

Put your pre-money value into a sentence for yourself: "At this price, in five years the investor's stake is worth X, so their yearly return is Y." Work out X from your own forecast, with a cautious case as well as a hopeful one. If the cautious case still gives a return an investor would accept, your price is probably defensible. If only the hopeful case works, expect pushback.

Do the same for yourself. Ask what you would give up and whether the plan needs the cash at all. Sometimes a loan, supplier credit or an equipment lease costs less than an equity stake.

Common questions

What is the difference between pre-money and post-money valuation?

Pre-money is the value before the investor's cash arrives. Post-money is pre-money plus the new cash. The investor's stake is their cash divided by post-money.

How much of a brewery should I give for an investment?

There is no standard figure. Work backwards from the cash you need and a pre-money value you can defend, then check the terms as well as the percentage.

Which valuation method suits a young brewery?

Use at least two. Earnings multiples need steady profit, cash flow forecasts depend on assumptions and asset value is a floor. Compare the three before you name a price.

Does an investor need approval from the excise department?

Often a change in shareholders or directors must be reported or approved. Rules vary by state and change, so ask a licensing adviser before closing.