What Will Your Wine Company Sell For? (Part 2)

“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

table 1The 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.

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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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