Valuing a small brewery before you buy or sell a stake

Why small breweries are hard to value

A listed company has a share price. A small brewery has a set of tanks, a licence, a lease, a few years of accounts and a founder who knows where everything is. Most of the value is tied up in things that do not appear on the balance sheet. Some of the risks do not appear either.

Whether you are buying into a brewery, selling a stake to a partner or bringing in an investor, the same questions come up. What would it cost to replace this? What does it earn? What could stop it earning? We are brewers, not valuers, so treat this as a way to prepare rather than a substitute for a chartered accountant or registered valuer, who you will need for any formal valuation.

Method one: what the assets are worth

Start with a floor. List every significant asset with its condition and what it would fetch if sold today: brewhouse, fermenters, bright tanks, glycol chiller, kegs, kitchen equipment, bar fit-out and stock. Used brewing equipment sells at a steep discount to new. Fit-out in rented premises is often worth little to anyone else because it cannot be moved.

Asset value is a sensible starting point for a brewery that is losing money or barely breaking even. It answers the question "what is left if this stops working?" It ignores the value of a working business with customers, which is why a profitable brewery is usually worth more than its tanks.

Method two: what the business earns

For a brewery with a few years of stable profit, buyers usually look at earnings. The common measure is operating profit before interest, tax, depreciation and amortisation (EBITDA), adjusted for one-off items and for owner salaries that are above or below market. A multiple is then applied to those adjusted earnings.

What multiple is fair depends on growth, risk, the length of the lease and how dependent the business is on one person. We will not quote a range, because there is no reliable public data for small Indian breweries. A valuer will look at comparable deals where they exist. A discounted cash flow model, which values the cash the business should generate in future years, is a useful cross-check if the forecasts are honest.

Clean numbers matter more than any formula. If the accounts mix personal spending with business costs, or if taproom revenue is not split from food and beer, the buyer will either discount the price or walk away.

The licence and the lease

Two documents can change the value more than any multiple.

The excise licence. Brewing licences in India are usually held by the company for specific premises. Buying shares in the company keeps the licence with the business, but many states require excise approval or notification when directors, partners or ownership change. An asset purchase by a new company may mean applying for a fresh licence, which takes time and is never certain. Rules vary by state, so check the current position with a licensing consultant before you agree a structure.

The lease. A brewpub with two years left on its lease and no renewal clause is worth far less than the same brewpub with nine. Read the lock-in, renewal, rent escalation and assignment clauses closely. A landlord who must consent to a change of control has a say in your deal.

Due diligence that moves the price

Before anyone signs, the buyer should check:

• Excise, GST and other statutory dues are paid and filings are current.
• All licences, pollution board consents and fire approvals are valid.
• Equipment works as described, inspected by an experienced brewer.
• Keg count matches the books. Kegs out in the trade that never come back are a common gap.
• Brand names and logos are registered trademarks owned by the company.
• Staff contracts, dues and key-person dependence, including the head brewer.
• Any loans, guarantees or partner disputes.

Each problem found becomes either a price reduction, a condition of sale or a reason to stop.

Selling a stake to a partner or investor

If you are selling a minority stake, the price per share is only half of the deal. The other half is the rights that come with it: board seats, vetoes on major decisions, what happens if a partner wants out and how future funding dilutes everyone. Our guides to brewery partner agreements and brewery funding options cover those terms.

Use a lawyer for the agreement and a chartered accountant or registered valuer for the numbers. A floor detail to keep in mind: the bright tank that has been "slightly weeping at the manway" for a year will be found in a proper inspection. Fix it or disclose it before the buyer finds it, because surprises cost more in negotiation than repairs do.