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?


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