Lucky me! I’ve been getting lots of suggestions from my little newsletter on topics to write about. One in particular is a request I have received frequently asking for advice on selling one’s brewery.
People who know my history, understand that I have sold quite a few businesses. My first brewery was called IL Vicino, and we had three. I also started a large packaging brewery in Palisade, Colorado - The Palisade Brewery. Lately I have been Mr. Colorado Boy, having started first the Colorado Boy in Ridgway, which I sold to a good friend and former student Daniel Richards, and Colorado Boy in Montrose. I sold that brewery/restaurant to my cousin Jenny McClellan. Alas, now I only have my brewing school, Colorado Boy Immersion Course, where we mentor future brewery owners by first having them spend a little time with us in a brewery. But I digress.
To give this topic the proper attention it deserves, I’m going to break this into two parts. In this one I will explain creating something to sell. Then next week I will go into the specifics of how I approach selling one of my children (breweries).
Sooner or later everyone thinks about selling their brewery. It’s a fact of life, even if they never do, there are days when not having the responsibility of equipment failures or employees not showing up is really quite tempting.
If you are putting your heart and soul into your business you could probably last about five years before you are fairly burnt out. That is if you are the person who makes sure everything gets done. It’s one of the most important things I stress in our class: the creation of a business operating system that actually operates your business so you don’t burn out. But again, I digress.
There are two types of things to sell regarding your brewery. First would be an asset sale. In this you are selling your equipment, furniture and fixtures, leasehold improvements, and maybe even your lease if it is valuable.
The other type of sale is a blue-sky sale. This is where you sell all of the above but also the business value. That is the reputation you have built up through a great product and business practices that keep people coming through your door. This is much more valuable and this is the one I want to talk about.
If you want to really sell your business, the logical place to start is to have something to sell. I’m not trying to be snarky, but more often than not you see people wanting to sell their business but they have no financial records, or profit and loss statements. I’m sure this comes as no surprise, but potential buyers aren’t going to believe you when you say you make a lot of money from your place and it has “so much more potential.”
The first thing you need to do, if you are not already doing this, is to keep good financial records. Use Quickbooks or some other accounting software, and pay a bookkeeper if you are not good at that sort of thing to put all your sales receipts and expenses into that program.
The other thing you need is to do monthly inventories to figure out what your Cost of Sales are. I went into this in detail in a previous newsletter, Tracing the Dollar, which lays out how to do this.
Once you have clean profit and loss statements, you now need to show a profit. What a buyer wants to see is a steady monthly profit, and signs of an increase in sales AND profitability over time. This comes from running your business like a business and not just a hobby. I am always surprised by the amount of work brewers put into opening their breweries, but when I talk about doing inventories, or good accounting, they cry that it’s too much work. Compared to the months or years of sweat and energy that go into running your business and the risk you take to open it; the fifteen minutes a day for daily accounting, and the one hour per month for inventory is really just Tinker Toys in comparison.
At a minimum you need at least one year of clean monthly profit and loss statements that show a profit most months. Three years would be much better.
What is your brewery worth?
Here is a simple formula I use to calculate what I believe my brewery is worth. Take your net profit for one year (I use an average of three years to be fair). Now add things back in that don’t have anything to do with operating your brewery. If you are taking a salary but aren’t part of the crew, add that on top of your net profit. I also use the brewery to pay for my cell phone and life insurance, so that gets added back in. Any amortization expense (large items you paid for but your accountant amortizes it over a period of time). Also add depreciation back in as this is not a current expense. Finally any thing else that brewery money is spent on that a future owner might not. This will add to your net profit, but these are not made up numbers. It’s up to the new owner if they want to have life insurance, or pay their cell phone out of expenses.
Now that you have this new net profit number, give it a multiple. If your business is doing really well, multiply it by five. If it is just cruising along but sales are flat, then multiply it by three. Two times net profit if things seem to be sliding backward. Seventy if you are Google. You get the idea.
What this means is if sales keep growing and you show a net profit of $100,000, I would put your business at $500,000. So if I bought your business for that, I should expect that I could pay it off in about five years, just out of the profits that it generates.
What a potential buyer also wants to see is your business systems and how well-run the brewery is. They will also look at potential ways to grow the business and you can help them with this. For example when Daniel Richards bought Colorado Boy in Ridgway, the first thing he did was open for Mondays. Prior to that we had always been closed on Mondays. That alone boosted his yearly profit above what I had projected, thereby making the brewery more valuable.
All this gets you to the point where you can seriously think about selling. Next week I’ll give you some great ideas on how to sell, and how I have done it. In the meantime I start tomorrow riding the Mickelson Trail in South Dakota, because I don’t have a brewery to run!