A few years back I had the privilege of working with Salford brewers Seven Bro7hers. It ended up being a three-year stint, sometimes two days a week, sometimes one, as they wrestled with the challenges of growing their business whilst remaining true to their core family culture - yes, there are seven brothers.
It was during this period that the name Brewdog came to encapsulate all that seemed exciting and sexy about the craft beer sector - the brand that most others in that (then) growing sector secretly aspired to be.
However, recent years have seen a reversal of fortunes for the sector and there has been a lot of buyer’s remorse from large businesses who bought a craft brewery, possibly without delving too deeply into the ‘numbers’. They got carried away, which on one level was great for the sellers, but most things come home to roost when emotion trumps hard-nosed commerciality. I’ll come back to that later.
As a seller you are, of course, looking to maximise your valuation. Why wouldn’t you? It’s not your fault if the buyer gets carried away and gets caught up in industry jargon. And yes, I’ve been there and done that.
I was one of the executive team of three who floated Conviviality on to the AIM in 2013.
All our pitches were built around an EBITDA number X a multiplier - five in that case. That delivered a float at a valuation of pushing £70 million – and we could have got more at that time.
Ultimately a business is worth what someone is willing to pay for it
A few years ago there was a lot of speculation that the Brewdog owners were going to float the business. It never happened of course and even if it did those 120,000 crowdfunding ‘investors’ – ‘Equity for Punks’ you may recall – may have found out that their £79 million was actually a gift to the founders rather than an investment.
Whilst the public utterances of the business may infer a continued David v Goliath positioning the reality is that it is 70% owned by TSG Consumer Partners, an American private equity company based in San Francisco.
The ‘Punk’ ethos has been a lucrative marketing brand. Co-founder James Watt, who has now largely stepped back from any day-to day involvement, is never slow in coming forward in reminding his many followers on social media that he’s personally worth £250 million. That must have come from the sale of some of his shares to TSG and he clearly sold TSG a brilliant story.
Any enquiry about Brewdog’s valuation brings up Watt’s proposition that the business is worth £2 billion. Of course, like any sale, if someone decides to pay that amount that’s what it’s worth. But is it likely? The last time Brewdog reported a profit was in 2019, and that was £1.1 million.
My calculator doesn’t have enough capacity to work out what the multiplier would be to get that level of profitability to a valuation of £2 billion. A brief delve into the businesses performance from 2006 through to its latest published accounts shows that it has lost around £90 million in that period. Will Brewdog turn out to be a Brewpup for TSG? Is it already?
Calculating real value
Over the 10 years since I left Conviviality I have had the pleasure of working with a number of businesses and always tried to focus on helping the delive real value. As against fantasy valuations.
EBITDA is a fantasy number. Earnings Before Interest, Taxation, Depreciation and Amortisation (which is the depreciation of an intangible asset – itself another fantasy figure). Of course I’m speaking as a buyer here, don’t even get me started on another figure that sometimes tries to get used along with a multiplier – adjusted EBITDA. Which is basically a seller just making up the numbers to suit their story.
I’ll say again, I don’t have any problem at all with sellers trying to get the best price they can. Why wouldn’t they? And if someone persuades someone else that a business that has lost £90 million in the last 18 years is worth £2 billion well done them. However, any proper due diligence will peel away any web of acronyms, however brilliantly constructed, especially in a sector that has, perhaps lost its shine.
The brand has a value, of course, but even that will have been damaged by some of the self-trumpeted antics of the management and any suitors will have noted that two of Brewdog’s bars in the north have closed down in recent months. £2 billion or about £50 million? Or less? I’ll leave it to you to judge.
The bottom line
Camden Town Brewery arguably got the best price for the business
The bottom line is the bottom line. Yes, ‘It’s worth what someone will pay for it’ is a truism but when I was looking at potential takeover targets it was always driven by actual net profit - all acronym driven propositions from the sellers were politely discarded.
That may seem simplistic and on one level it is, but how many times do takeovers fail because the alleged ‘synergies’ turn out to be a chimera, or a CEO gets carried away with their self-judged level of business brilliance? Many, many times! I saw both when I was in ‘corporate’. All good learnings to take.
When it comes to the buying and selling of businesses the noun caveat emptor really does apply. But ‘deal fever’ can be a real thing if the business sector is in growth and that provides the seller with an opportunity for maximising their price.
When I was acting managing director of Conviviality, or plain Bargain Booze as it was then, my chairman, the late Roger Peddar, gave me some sage advice. He told me: “The key skill of any executive is to know when to declare victory and leave”.
How wise he was and if you look back you can probably think of businesses that were sold at the top of the market – say Camden Town Brewery – and how many perhaps missed the boat – perhaps Brewdog? £2 billion. Any takers?
Keith Webb provices management and board advice to food, retail and drinks companies through his own consultancy business. He can be contacted at keithwebb860@btinternet.com.
