With the modern craft beer movement now in its third decade, the industry has seen an increase in brewery founders beginning to look for a way to exit their businesses to begin their next stage of life.

The Australian brewing sector has seen an increase in sales this year, including South Australia’s Gulf Brewery which is set to change hands with its founder looking to retire, and the owners of Brookes Brewery in Bendigo who are searching for a buyer to scale up the business, whilst they pursue other opportunities.

If the craft beer industries overseas are a benchmark, then the next few years should see a slowing of growth, consolidation in the market and an upturn in those looking to exit. The US Brewers Association for example reported growth slowing to 4 per cent last year, (down slightly on the 5 per cent growth reported the year before) and warned that the industry there is “unlikely to return to the meteoric growth levels seen over the past decade.”

BDO business services partner Chris Balalovski said that succession planning with a preferred exit in mind is vital for brewers, almost from day one.

Too often the idea of exiting the business is the last thing on the mind of a brewer’s, or any small or medium enterprise owner’s mind.

When founder’s fatigue sets in, retirement or family issues call, or owners simply want a new challenge, the problem becomes more immediate.

“The biggest issues when it comes to succession planning are timing, communication, funding, identifying successors and structuring,” Balalovski explained.

While -and perhaps because – many breweries are launched as passion projects, owners do not consider how and when they will leave the business.

Buyouts and mergers

Many a brewer has dreamed of getting a knock on the door from a major brewer.

Little Creatures, Feral Brewing and a whole host of other smaller brewers have managed it, and with AB InBev divesting its APAC business this month, experts predict we could be in for some more M&A activity in the future.

But a buyout comes with its own issues, and major corporations require higher levels of due diligence than most brewers will be used to.

“Expect the worst, and expect them to be comprehensive and tough,” Balalovski warned.

“Major brewers, whether they’re listed or not, will have a due diligence process that must be followed.

“It will include analysis of financial metrics, contractual rights and obligations, lease commitments, intellectual property, balance sheet strength and an idea of whether you are you locked in on your distribution contracts.”

Balalovski said that any potential buyer would go to the “next level” when it came to comprehensive financial analysis.

“They will seek assurances that super guarantee amounts have been paid and they will also walk the floor and determine whether there’s something that causes them concern about health and safety or people.

“People don’t make it onto the balance sheet so that will be very important for someone doing their due diligence.

“It’s hard to put your finger on, but the due diligence will definitely cover culture. They’ll want to know if there is a sense of contentment and loyalty. They’ll be scratching around for other problems.”

Chris Balalovski of BDO

He said that management strength will be high on the list, including an analysis of the qualifications and experience of all top staff and overall staff turnover and satisfaction.

“You don’t get an idea of satisfaction from surveys necessarily, and they don’t want to risk your staff all walking out if they get taken over by a major brewer and staff want to work for an independent.”

Balalovski advised brewers to think about whether a buyout might be an option, if not now then in future.

Meeting staff from the organisation puts your company on their radar, he advised, and also gives a better idea of what the potential buyer’s key metrics are. Low risk collaborations and industry events are key to forging these relationships.

“Although you might not meet industry standards at one time, if you’ve been working in collaboration with the company and they know you well enough, you might be surprised that even if you’re a few years away from hitting standards, they’ll still cut the right sized cheque.”

In terms of making a business ready for sale, there are a few things to work on.

“There may be valuation concerns when there is contingent risk, occupational health and safety and environmental risks or tax and super liabilities,” he said.

“But most importantly with a valuation is brand, and it’s a very difficult valuation exercise when it comes to brand.

“Brewers are perceived as creative and imaginative in brand development, but then that makes it difficult to catch up and stand out.”

While the craft beer market in Australia may have not reached saturation point yet, we are facing an overload of creativity, Balalovski remarked.

“There seems to be crowding with microbrewers, the number and diversity of products is causing difficulty in being creative with brands.

“It’s easier if you want to stand out in a less imaginative industry. For breweries being creative is par for the course, so they really need to develop the brand which is easier said than done because of the crowding.”

But still, brand is significant element on a balance sheet for most businesses, he said, and one well worth investing time and money in.

Leadership

There are multiple ways to exit a business including a merger or joint venture partnership, an external or management buyout or even a winding down of the business.

But central to all of these options is the question of leadership. Breweries are often founder-owned, and can tick away nicely under the one boss until the question of an exit comes up.

“If there’s no diverse and broad leadership there are gaps and operational risks,” Balalovski said.

“Key person risk is the problem here. It’s problematic in any industry. Intellectual property manifests itself in know-how and techniques that become unavailable.

“Succession plans can be scuppered or entirely evaporate when nothing has been documented and it’s all in the founder’s head. Potential buyers will ask what assurances do they have that this IP will transfer to them.”

He explained that this can also cause IP in the form of the personal brand and reputation of the key person to become unavailable.

“Breweries can be personality driven and people will still associate that person with the business,” he said.

“If it is a person with such a profile then we need to consider, if their face and their name evaporates, what effect it will have on the business.”

Balalovski said that the only effective method of mitigating against this is a set of comprehensive legal agreements.

This would seek to ensure the transfer or ongoing availability of IP, for example locking the exiting owner in for a fixed-term contract to ensure their availability to answer any questions about the operations of the business so the new leadership team is prepared when they do fully exit the business.

Family businesses

The brewing industry is a collegiate one and often it’s a family and friends-orientated sector as well.

From a small local brewpub like the newly-launched Fick Brewing Company up to the sixth-generation family business of Australia’s third-largest brewers Coopers, brewing can be a familial occupation.

“Communication means ensuring you have the interested parties involved, and when family is involved communication can be appalling,” Balalovski said.

A family business means that even purely commercial decisions can take on a decidedly personal note.

“You need to ask who in the family can be a successor, do they have the skills and the will?

“A matriarch or patriarch may want son or daughter to operate the business, but the children themselves might have different designs.”

Another issue with succession is money.

‘Will the new owner, whether they are a family member or not, be required to pay a consideration?’ and ‘What form will it take?’ is something business owners often forget to ask.

Mechanisms should be put in place to ensure the successor has the ability to pay, said Balalovski.

Adapt or die

While having a succession plan from the outset can help, keeping it flexible is key, said Balalovski.

“You might have a robust succession plan but then it gets derailed next week because there’s a change in industry, or in legislation or staffing.

“Whatever legal structures we’ve set up, you need to accommodate changes in succession plan, and it needs to be flexible.”