Winery Valuation: The EBITDA Fallacy (Part 1)

“There are lies, damned lies, and statistics” – Mark Twain

There is often talk in wine business circles about the “EBITDA multiple” describing the valuation of a company after an acquisition is announced.  However, this multiple may be irrelevant with respect to what drives the final transaction value when negotiating an actual sale between two parties.  Commonly a 10X EBITDA multiple is talked about as “average” in today’s market.   So, if you own a winery with “Earnings Before Interest, Taxes, Depreciation and Amortization” equal to $1MM, your company will sell for $10MM, right?  Maybe, but probably not. [i]

Here are descriptions of three brand-only transactions negotiated by GWP:

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So clearly in this data set, a standard earnings multiple was irrelevant.  How is the value of a winery business determined during an actual sale process?

  • The most important factor is whether the brand/winery you are selling is EXACTLY what the buyer wants or needs for their strategic plans. If you are lucky, you will have more than one motivated buyer, in which case you have negotiating leverage, which drives up the final sale price.
  • Once you’ve met the hurdle of having an interested buyer, the other aspects that drive valuation include such things as sales growth, scalability from both a sourcing and distribution standpoint, intrinsic profitability, and your product category (e.g. Pinot Noir when Pinot’s a hot product category.)
  • By intrinsic profitability we mean that a wine brand’s established bottle price relative to the acquirer’s production and selling costs are at or above normal profit levels. In the examples, above, Seller A had strong to normal profitability in their current operation, and would continue to do so for the buyer, so this EBITDA multiple was in the “normal” range.  Seller C had abnormally low profitability due to high costs, but the brand profits would be normal for the buyer, who had significant economies of scale and underutilized capacity.   The transaction valuation (driven by strong growth) in relation to Seller C’s low net profits therefore skewed the EBITDA multiple higher.

So why all the talk about EBITDA multiples in describing winery transactions?  To begin with, we all prefer to simplify complex situations.  Furthermore, this is the valuation metric frequently referenced with respect to publicly traded companies, so it’s a more common and familiar metric across the whole economy.  But the wine merger and acquisition market is largely made up of privately held companies selling to privately held companies.  This is why a multiple of earnings is a less reliable predictor of what the price of a seller’s brand will be in an arms-length transaction when the money changes hands.

 


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