“There are lies, damned lies, and statistics” – Mark Twain
In April, GWP published Part 1 of this blog on winery transaction values, outlining a few of the reasons why the commonly referenced “EBITDA multiple” is not terribly predictive of what a winery owner might sell their company for in an actual transaction. The ultimate message of that piece and this one is that the real-world drivers of value in a transaction relate to the intersection of a seller’s brand attributes (growth, profitability, product category etc.) and the needs of the buyer. Any one or more “multiple” of financial performance will not determine a price.
Having said that, when preparing to market a winery or wine brand, as advisors we must determine a reasonable estimate of what a buyer might pay for our client’s business so that they can make an informed decision about whether to proceed with a sale effort, and then to set an asking price. We do not use an EBITDA multiple to do that.
Three brand-only transactions negotiated by our company were used last month as examples. Their sales prices yielded EBITDA multiples ranging from 11X to 34X. Now we’ll open the data set a bit wider to include revenue and gross profit multiples, and also to include some broader measures: an average of public company valuations and wine industry transaction averages (using a larger private and public company data set.) ¹
The first thing to note here is that we are using the EBIT multiple, not EBITDA. ² The second thing to note is that the earnings multiple is the most variable (and therefore less predictive) measurement. Both the Revenue and Gross Profit multiples fall within a much narrower range of results. That is why, when it comes to estimating what the value of a wine company might be in an arms-length transaction with a motivated buyer, we generally consider the “top line” multiples to be much more useful benchmarks.
Why are EBIT or EBITDA multiples so variable? The operating expenses of wine companies are idiosyncratic, and wine business models are highly variable, ranging from negociant to estate, 3 tier to DTC, and everything in between. The buyer can move the needle on operating expenses widely after a transaction, where cost synergies for selling and administrative overhead are quickly realized. But the bottle price of a wine product is not readily changed once the brand is established with the trade and consumers. Therefore, the top line of the income statement is really what the buyer is stepping into in an acquisition.
So, to reach back to the prior blog on this subject: If you have revenues of $5MM, does that mean your winery is worth $15MM? Maybe, but probably not. There are too many variables in wine company business models and asset structures, too few buyers and too many sellers, too much complexity in the industry to really predict what the end of a sale process will yield. (Or if it will yield a transaction at all.) In the end, transaction multiples describe deals that are completed, they don’t determine the outcome of an arms-length transaction.