Saturday, March 29, 2014

How Much is Your Winery Worth Today?


The Alcohol Beverage Market


Probably once a week someone asks me, what are multiples doing. What they are really asking is "are sales prices going up or down." As a banker I love that question because it means there might be a financing opportunity and a way I can help in an acquisition (...yes I do have a day job making loans as boring as that might sound.)  If you understand valuation theory and want to go straight to the answer to the question, skip down the page to the Current Public Company Multiples section.

Still with me? The answer for alcohol beverage companies is that multiples for craft breweries are at the top of the list, large breweries are at the bottom and wine multiples are in the middle. That makes sense because craft brew is the rage with strong growth. Both spirit producers and craft brewers are cutting into the market share of the traditional beer producers. That reflects in the valuation growth of publicly traded companies as seen in the chart following.

How does the growth rate in an industry segment impact the value of a company? A buyer of any company wants to be in a high demand-driven market because that spells opportunity. If you are buying a stock, you are betting that will go up in value and its the same thing with the buyer of a company. Wineries have been in a strong growth phase for more than 20 years now but we don't see public companies gobbling up wineries and driving up valuations.

Unique Premium Wine Company Factors


Most luxury wine buyers are individuals or Private Equity firms who have a longer investment horizon versus public companies, and don't care about quarter to quarter results. They are in the business for the long run. Put in financial terms, the ROI of a luxury wine asset is negatively impacted by comparatively lower year over year earnings up front, but is then dominated by the amount and timing of the terminal multiple, or exit value of the investment. That doesn't suit Wall Street.

Versus public wineries, there is a difference when it comes to premium and luxury wine companies because they are tied to terrior. The properties are always small, and value is often hidden from current earnings and instead housed in the increasing value of unique vineyards. That makes current returns less than competing investment choices, and the time horizon to see a real return in the wine business longer than almost all public companies can tolerate. In fact the landscape is littered with public company acquisitions of wineries and subsequent failures as the public company drives sales higher with grapes from increasingly variable sources, and/or spins off their vineyards acquired to improve current period ROA.


Quick story: I once had a client pay a pant-load (that's a technical financial term) for a property. The price was well in excess - probably twice as much as what the market suggested the property was worth. When I asked how he kept bidding and justified the final offer price, his response was, "I like to think in multi-generational terms." As it turned out, his annual returns have been good, but the property value has already exceeded what he paid. And using that as an example, when it comes to wineries, some are so special and the selling price so high, that the terminal value has to be taken out decades to make sense out of the sales price and justify a competitive or positive return. On the other hand, the value of a brand without property is really a function of the current returns and the projected growth rate, and the terminal multiple plays a limited or no role at all in a valuation.

Because winery investments run the gamut from one-of-a-kind to a commodity, putting a value on them isn't easy. So for a real winery valuation I'll send people off to appraisers or people who value businesses for a living. But after decades in the business now, I can normally get pretty close for a starting discussion point or at least frame up a good discussion and narrow down some options which is what I hope you can do when you're done reading.


The Big Picture


The 30,000 foot view of what your winery is worth has to start with two basic thoughts; the value of a flow of cash/profits versus the value of assets. The first is to recognize buyers are essentially purchasing a stream of profits from you. They will pay more for your company if it has strong earnings. So using a multiple of earnings in the headline chart, if your company has $1,000,000 of EBITDA, the company could be worth $11,900,000. Said another way, that buyer is buying 11.9 years of profits. That gets back to the old "everything is for sale and everyone has a price" chestnut. If someone is going to offer you 75 years of the future profits of your company today almost anyone is going to take the money and clip coupons.

But what if your company is showing a huge loss? Applying the 11.9x multiple to a losing company means in theory you have to pay someone to take the winery off your hands. That is a possibility which is why sellers take losses at times and in the worst cases, it's why we have a bankruptcy code. Of course there is other value even for a company losing a modest amount of money that is held in the asset and the brand values, net of debt.

Each winery is going to be a little different but essentially the multiple of a company will decrease as EBIDTA approaches zero with the assets and brand value taking on a larger portion of company value or said the other way, the higher the earnings of a company, the less assets impact the valuation.

Defining the term "Multiple"


If you have a working knowledge of the term "multiple." skip down to the break in the page. A multiple is a number derived by dividing a company's total value by some other metric. Generally multiples are implied to be a multiple of cash earnings or EBITDA, but it can also be a multiple of sales. Here's the basic math using Boston Beer. NYSE:SAM:

FYETotalMarketTotal Sales EBITDA
CompanyShare $SharesCapSalesEBITDAMultipleMultiple
Boston Beer $ 241.79    12.8 $ 3,082.82 $ 739.05 $140.56 4.17 21.93

Since this is a public company, its easy to figure out how the market values the company. That's the Market Cap calculation which is just share price times shares outstanding. Then to get to the EBITDA Multiple, you divide the Market Cap by EBITDA. The Sales Multiple is the Market Cap divided by Sales. Why can this be useful in the wine business?

Its useful because we don't have public valuations in the wine business but in theory, you can take the average winery multiple in public companies, apply that to your own sales or EBITDA and voila, you know exactly what your company is worth.

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 Current Public Company Multiples


Here courtesy of Eureka Capital Markets, LLC is a breakdown of the average sales and EBITDA multiples of public wine companies as of March 1, 2014.


While you could do the quick math (Your EBITDA * 16.8, or Your Sales * 4.9) and come out with a valuation now, to get a better valuation you need to strip out the personal expenses in the company first which gets you closer to the free cash flow a buyer is really getting. Because there are always personal expenses in a family company, I tell our clients contemplating selling their business that they should start at least three years before and really scrub the financial statements of personal expenses. At a minimum, they should be able to pull the personal expenses out, and at least get review quality financials prepared. The quality of the financials will give the buyer more comfort with price, and you will get a bigger return by doing the scrubbing.

Private Wine Company Multiples


Before finishing I should answer the question some of you will ask which is, where are multiples for wineries now? The answer is they are lower than they were pre-crash when people seemed to focus on a 20x multiple and came to the conclusion the value of their company was worth a small third world island country.

Private wine company multiples always seem to carry higher valuations than many other private businesses. The Pepperdine Private Capital Markets Survey of 327 private equity companies done in late 2011 concluded the following:


Wine company multiples have a tendency to fall between 8x - 12x EBITDA which if you own a winery, should be good news versus the averages shown above. And if your winery is one with a strong brand, decent size, and a good following your multiple should probably should exceed 12x. Then again, if your winery isn't EBITDA positive and there is no sales momentum or strength, you might need to pay someone to take it.


What do you think? It's a complex question and I'm hopeful some are more enlightened versus more confused. Where do you see winery multiples headed? Do you think wineries are a good investment or are people crazy to think of the business as an investment?

 

Please join the site below to the right and/or log-in and offer up your views and perspectives.




15 comments:

  1. Rob, thanks again for another insightful article. I think that it would be important to point out that regardless of the method of valuation, an increasingly important factor is going to be their source of fruit/wine. A lot of the data that our industry has on multipliers includes sales of negociant brands - with little or no assets other than their brand identity and maybe a small amount of inventory. I recently saw a very large transaction fall apart when the seller shed themselves of their grape and bulk wine contracts due to their misperception that the contracts were "baggage" and that the suitor was only interested in the brand. The buyer backed out and alluded that one of their biggest assets that caused the high valuation had as much, or more, to do with their contracts than with their brand.

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  2. Tary - Thanks for logging in and passing on that crazy story! Some smart folks there.

    Clearly with a premium or luxury brand, there isn't a way to make consistent wine without control of your grape sources in some form and special vineyards always command a higher price. That said, the brands like Ravenswood, Rosenbloom ... and all the others that start with the letter R, the grape sources don't matter as much because the volume is going to be driven higher anyway and the original sources will be exhausted in year one. But yes - I do agree with your point.

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  3. Rob, I would love to run this article/blog in the AFMRA Ag E-News that is sent to our 2000 members, of which 266 or so are in California. Let me know if that is ok. Suzanne: sgruba@asfmra.org

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    1. Susanne - Yes thats fine and thanks for doing it!

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  4. Rob -

    Great article and you are spot on in my opinion. The wine business is still so agriculturally based and capital intensive that the returns, only with hard work and great expertise, are moderate. The industry carries much romance around it but that only represents about 3.0% of our time and the rest is plain hard rewarding work that I know I love. Money can be made but very slowly and cautiously.

    Thank you for bringing this reality to the forefront.

    Tom Payette
    Winemaking Consultant

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  5. Tom - Thanks for logging in and leaving a name. Its far more civilized that way.

    Appreciate the comments. The people around us see this business as sexy and perhaps even a luxurious lifestyle. Like any job, there has to be something you like about it - but I'll bet if I did a survey of the professionals in the trade, they would say they work their arses off and its far from a glamerous lifestyle. And the money .... I just hope you made your wealth before you came! And BTW, if you want to check out the metrics of industry profitability, see http://svbwine.blogspot.com/2012/08/how-much-do-wineries-really-make.html

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    1. Rob -

      Thanks for your reply and addition information via the link. Yes - we work or butts off and like a farmer we go to bed, exhausted, but with a satisfying smile on our face. That is worth something beyond a dollar! :)

      Tom Payette
      Winemaking Consultant

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  6. Rob, really useful article. It seems like goodwill and assets are pretty crucial to these transactions.

    A couple of questions:
    - how do acquirers assess brand goodwill? I assume assets and infrastructure have a book value or some easier way to assess value, but have you seen anyone run comps to think about this?
    - any thoughts on multipliers for brand-only companies? I.e. brands without a winery or vineyards?

    Thanks again.

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    1. Thanks for the login and comments NFC.

      Acquirers in the wine business want different things. Some want a winery but no brand, some a brand and no winery, some want a vineyard and no winery, and some a house, vineyard and winery.

      When it comes to a brand only, probably sales multiples are a little more useful, but the way an acquirer is going to look at it is they will strip out everything else they wont be responsible for, like overhead, and even grape costs if they are going to expand the sourcing. Some will be acquiring the brand to grow while others might want it for the distribution in place. Bottom line .... it all depends but big picture for brand only, sales multiples are probably more useful but often are lower than what might otherwise be expected versus when other assets are included.

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  7. How much does location enter into the Picture? For instance lets suppose we have similar sized wineries making roughly the same SDE in Napa, Mendocino, Lake county, Paso Robles and El Dorado County. How would the multiple vary for the different wineries?

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    1. That's a great question Peter and I think I have the answer. Since the real indicator of value is EBITDA, it shouldn't matter in a pure sense if that money comes from Napa or North Dakota. That would be too easy a response though because there is an asset underlying the earnings and the asset in Napa is worth more than North Dakota. But remember the higher the earnings, the less the asset matters and visa-versa. If you could produce earnings in a fictional winery in North Dakota that dominated Napa, that winery would carry a higher multiple .... and likely start a modern day grape-rush to North Dakota at the same time.

      Bottom line, on average multiples in Napa will be better than the Sierra Foothills but perhaps not as much as many would think. The sales price however will be materially different.

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    2. one might think that as parts of the Sierra Foothills become increasingly known for top grade wine that the growth of property values that are now a fraction of those in the north coast might be enough to push the multiples up to maybe equal those of Napa or Sonoma because a buyer of a non public business may be looking for long term increase in value. Not so?

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    3. Anon 6:49 - Thats a definate maybe. Its important to separate upside value and current asset values from multiples. Its clear to me the Sierra Nevada has many locations that can produce some great wines. Zinfandel's are one of my personal favorites but I suspect Malbec might also find a place. Developing a real name for the region isn't easy. Just ask Oregon who have toliled long and hard to breakthrough and have their wines recognized for type and consistency.

      What is true in my mind is the Sierra Nevada should increase in value (%) quicker than Napa/Sonoma but thats because they have a small base. I think the multiple might expand as well, but that is going to be dependent on the industry coming together and finding a way to break through the clutter of individual winery noise, and create a region consistent with a type and quality of wine the consumer can grasp. While I love several zinfandels made out of the Foothills and have them in my cellar, I don't count relative to the consumer. Get them to recognize and identify with the region as Oregon has done, and EBITDA and asset values will expand, along with multiples.

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  8. Rob - great article, thanks for the perspective. How much weight should a potential buyer place in the value of permitted capacity in places like Napa County? For instance, what if the operations had moderate EBITDA due to so-so management (say, $4-5MM), but based upon the incredibly high amount of permitted capacity, operating earnings should theoretically be much higher? I guess my real question is - are winemaking operations ever valued using a gallons/year or another similar type of metric that takes into account potential, not just straight EBITDA performance? Thanks again, very insightful article!

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    1. Anon: Thanks for offering your opinions. I think I have a response for you. Often times before a sale, a company will find ways to move up sales. Its not gallons per year, but the idea is to move more gallons, even if they are less profitable than other sales. The reason is sales are also a determinant in an acquirers appetite. You can see in the above there are sales multiples as well as EBITDA multiples. So higher sales can drive a sales price higher even if nothing happened to EBITDA. In the final calculation however - its really about what the buyer sees and how they intend on using the asset.

      If a strategic buyer can take the assets and do much more with them than the seller can by removing the overhead and applying their own sales and marketing, then they may be willing to pay more than someone who decided they want to be in the wine business and just wants to maintain the status quo.

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