It is critical to complete a thorough situational analysis when buying or selling a craft brewery. Unless you are “simply” (and it’s never simple) buying used brewery equipment, you need to understand where the brewery has been, where it is and where it can go.
Typically, you should request 5 years of historical financials and income tax returns. You should recast these to determine the discretionary cash flow to the owner (“DCFO”) for each of the 5 years. The FIRST thing to realize is that your financials incorrectly state what you earn in the business. The IRS allows you to deduct expenses like depreciation, amortization, interest, owners’ salaries, benefits and other perqs. Non-recurring or non-market wages, expenses need to be determined and adjusted.
Similarly, inventory, fixtures, furniture, equipment and vehicles are typically understated on the balance sheet. The IRS allows you to depreciate these but you can increase their values typically to their used fair market values. You need to recast the balance sheet and determine values of raw material, packaging, etc inventory at cost, WIP (Work in Process) at cost + a percent of margin, finished goods at cost + a percent of margin, used fair market value of the brewery equipment, other furniture/fixtures/equipment and vehicles, etc.
Other factors include:
-The lease needs to be assessed for fair market rate, term, renewals, ability to be assumed, personal guaranty ….
-Who will be brewing? Is there an existing employee brewer, assistant brewer, etc?
-Will this be an asset-purchase or legal entity purchase (eg membership interest purchase of an LLC). There are legal, purchase price and operating expense implications to each approach
-Regulatory compliance history – has the brewery broken local, state, federal laws
-Will a bank lend money on the purchase or sale?
-and many other considerations
You should find a reliable, craft brewery industry specific checklist to help guide you. You might consider finding a craft brewery experienced firm that can provide an independent, third party valuation of the business.
Feel free to email or call me if you have further questions. The same considerations apply if you are considering preparing your
Jeff Adam, PE, BCB, MCBC, CBB, FRC