Valuing a Brewery
by Administrator on Aug 21, 2016
I have seen a number of microbreweries pop up in my market area, many in industrial areas, over the last few years. So running into the appraisal of one is not all that surprising. If you keep up with your local news stories you have probably seen some similar start-ups in your area, they are one of the few businesses that are really growing in 2016. I have read that their growth is due in part to local acceptance and in part to the popularity of American beers overseas.
The entry costs for even a small-scale brewery are relatively high if you are doing it as a commercial venture. Even if you build the brewery in an industrial area here in my Henderson, Nevada area you will have to lease or buy a 10,000 SF to 20,000 SF building that will cost you $ 700,000 to $ 2,400,000 depending on its size and quality. That’s not your backyard brewery anymore its big business.
Breweries are categorized by their annual production. A microbrewery (craft beer industry) for example only brews 15,000 barrels or less per year while a regional brewery can produce 15,000 to 5,000,000 barrels in a year. Most appraisers will find that they are dealing with the valuation of small breweries.
Valuing a brewery is for appraisers not that dissimilar from valuing most types of other going-concerns. There is a real property component to be considered and a business entity. For those who have never completed an assignment with a business entity it’s better to skip it than to imagine you can learn as you go.
Appraisers have to consider the brewing industry and its trajectory, and then get down to understanding the subject property and its specific operation.
It’s very difficult to find comparable brewery sales. I’m not saying that you shouldn’t search I’m just saying that in many areas your exhaustive search may provide you with few or zero sales for comparison purposes. You may have to extend your search beyond the normal market area boundaries.
The income approach is, as you would imagine, important to the valuation of a brewery. A Discounted Cash Flow (DCF) analysis considers the value of the anticipated future cash flow in present value terms. It can provide a good indication of net operating income from the business in future years if the business is well-established and the appraiser also reasonably projects all expenses. For breweries that means all of the hard and soft costs including but not limited to supplies, personnel, equipment replacement and management.
Appraisers must take a hard look at the balance sheet and the income and expense reports and make decisions about the reasonableness of them. All kinds of things can be added to or subtracted from the books that are not reasonably related to the operation of the business.
Most appraisers will consider net income multipliers (NIM) and gross income multipliers (GIM) that many in the industry cling to. Appraisers generally do not however give them a great deal of weight in their analyses.
Establishing a capitalization rate is important and finding a direct rate based on local sales may be impossible. Many businesses are valued base on a direct rate taken from a broad range of sales over multiple states and a build-up method that considers investor risk. Getting the capitalization rate right is important since even a small error can bias your value opinion up or down significantly.
The cost of brewery equipment, as you can imagine, can vary considerably from one brewery to another. The equipment usually only lasts for maybe 10 to 15 years and equipment costs for a brewery are of course tied to its brewing capacity.
I have had assignments where a brewery existed and only the real property and equipment required valuation. In this scenario there is little or no reliance on the income approach and in fact there may be no income to analyze. More often an owner wants to sell or finance an operational brewery so the going concern must be valued.
The cost approach is always challenging and if you don’t feel that you are qualified to identify and correctly consider the equipment and determine its replacement cost new (RCN) and depreciation it is better to get help than to guess. The land value, building and equipment costs may be the easiest part of your appraisal but they are only the physical component.
For more appraisal information contact Glenn J. Rigdon MA, MRICS, ASA is a Las Vegas / Henderson Nevada based appraiser who can be contacted via email or via his business website known as Appraiser Las Vegas (http://www.appraiserlasvegas.com), or you can also click on “Contact Us” on the home page of this website or visit my public profile at LinkedIn at http://www.linkedin.com/pub/glenn-rigdon-ma-mrics-asa/1a/30b/879/
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