Are breweries worth their CSF valuations?
A new wave of equity crowdfunding campaigns from brewing industry businesses this year has prompted questions about the valuation and workings of a crowdfunded business.
This was put in stark relief following the situation at Endeavour Brewing, one of the first Australian breweries to undertake a crowd-sourced funding (CSF) round.
The year that Endeavour announced its crowdfund, the generated revenues of $4.8 million but returned a pre-tax loss of $219,189. Its crowdfund offer valued the business at between $16.6 million and $18.7 million, and at the completion of its campaign, the company had raised more than half a million dollars.
The Sydney brewery said that it would spend the money on working capital, export and distribution, marketing and ‘special projects’ in its initial offer documents, the latter was later revealed to be plans for a production brewery.
Two years later, the new brewery was never built, all three of its founders have been removed from the board and it reported a loss of nearly $600,000 for the year subsequent to its crowdfund and investors have recently been told their investment is most likely worth nine cents on the dollar, despite a recent $5 million sale of its intellectual property.
Retail investors who were involved in the crowdfund have received little in the way of communication about the business or what is being done with their investments since the offer closed.
In a global context, BrewDog has faced similar criticisms of its crowdfunding campaigns and valuations, and several failed PR campaigns have reportedly shaken the resolve of its 180,000 investors, whilst a number of examples in the UK have highlighted the risks of equity crowdfunding.
While these examples belie the dozens of successful brewery equity crowdfunds across the world, but they do raise a host of issues and questions regarding the role and rights of retail investors, the valuation of breweries, and whether their business valuations give a true indication of the real ‘worth’ of the business – a difficult thing to determine under normal circumstances, and even more so under the conditions of an equity crowdfund.
“There has been a high interest and investor intake in equity crowdfunding campaigns by breweries,” explained Dr Marina Nehma, expert in equity crowdfunding at UNSW Faculty of Law.
“But I do not think that an intake from investors is a fair way to judge a business, as with crowd equity funding, the hype, promotion and message being sent may influence how the business is perceived.
“Investors may also be fans of the beer, hence you may have fan club investors investing in the beer without fully understanding the objective market value of the shares they are purchasing. A big part of the impression is subjective – how do they view the brand?”
How to value a business
Business valuations tend to be a dark art. Businesses are worth only as much as someone is willing to pay for them, wholly or in part.
The federal government acknowledges that there are multiple ways to value a business based on earnings, revenues, or projected income, but also that the valuation price is negotiated with the buyer or investor, something which does not occur with equity crowdfunding as investors are expected to accept the business valuation given to them in the CSF offer documents.
Dr Jeff Coulton, a business valuations expert at the UNSW Business School discussed these different valuation calculations.
“Businesses are valued in a variety of ways. Two of the most common ways are calculating the present value of future free cash flows, and by using multiples of metrics such as earnings, or EBITDA [Earnings Before Interest, Tax, Depreciation and Amortisation],” he said.
“For businesses in the growth phase, it can be harder to predict future free cash flows. It can also mean that current earnings, or EBITDA, may not be representative of future values, since the business is growing.”
So businesses can be valued based on multiples of their EBITDA – but how many multiples depends on the industry they are in, projected and current performance and a host of other factors.
This is further complicated for high-growth or startup companies, who may predict much higher earnings in future years compared to losses in recent years.
“If the focus is on equity, that is, the shares in a company, it is more typical to focus on earnings,” Dr Coulton explained.
“If the task is valuing an overall business or enterprise, for example if it’s about the value of the assets rather than the shares, then EBITDA is a more common measure to use in a valuation multiple. Enterprise Value to EBITDA is used a lot for business valuation too.
“In addition, it is hard to interpret price-earnings ratios when the earnings number is negative. In such cases, valuation is often based on measures such as EBIT, EBITDA, or even revenues.”
The host of CSF campaigns being undertaken currently has provided some interesting insights into the valuation of brewery businesses.
O’Brien Beer’s crowdfunding offer went live this week, offering fully-paid ordinary shares in Rebellion Brewing Pty, its parent company, at $1 per share to raise a minimum of $500,000, and a maximum of $1.5 million.
This valued the company, which made $2.1 million in customer receipts in 2020 and a total loss of $465,940 for the year, at between $15.1 million and $16.4 million.
It is primarily looking at investing in its staff, looking at brand and account management, sales and marketing functions and also investing working capital in its production operations. It owns its equipment and brands but not the building in which O’Brien Beers are brewed.
Meanwhile Beer Cartel’s equity crowdfund values the business, which competes with the likes of Dan Murphy’s BWS and Amazon, at between $20 million and $22 million. The business recorded $3.3 million in turnover in 2020 and made a net profit of $227,819, according to its offer documents.
At the time of writing, the online beer retailer had reached its minimum, raising $782,811 from 583 investors so far.
Co-founder Richard Kelsey told Brews News that for Beer Cartel’s valuation, it used past raises of comparable businesses as a yardstick, then tailored its valuation to the retailer’s specific business strategies and performance, as well as the wider industry in which the business sits.
“Each craft beer business, whether it be brewery or bottleshop, that has done a crowdfunding raise to date has used a revenue multiple,” he explained.
“At the bottom end we saw Holgate took a 3.85 times revenue multiple while at the top Brewdog Australia used a 18.9 times revenue multiple.
“We ended up going with a 4 times revenue multiple, which matched how Batch had priced their business while being lower than Bucket Boys who completed their raise in 2019.
“The valuation we took was also based on growth to date (25% annually for the last 5 years), future forecast (25%+ using the invested funds to continue to grow the business) as well as the benefits that investors can access.
“In terms of the amount being raised it is a balance between the minimum amount to make the campaign viable to execute and the funds identified to propel the business forward at a faster rate than just through organic growth. For us that was $250,000 as a minimum, up to $2 million.”
Hear more about Beer Cartel’s crowdfunding campaign on the Beer is a Conversation podcast.
Another recent campaign has been launched by Co-Conspirators Brewing Co. which is listing on equity crowdfunding platform Birchal. Its offer put the business valuation at around $7 million and $8.5 million.
Co-Conspirators is a successful beer brand, having contract brewed its beers at a number of breweries over the years including Bodriggy, Dainton, Wolf of the Willows and Holgate Brewhouse, however it does not own its own brewpub yet, with construction underway.
Will investors get a return?
“Dividends are typically paid by firms that have attained profitability. Firms tend not to start paying dividends unless they expect to be able to maintain the dividend payment into the future,” explained Coulton.
“It’s not easy to determine whether or the businesses would have received less money from ‘professional investors’, but it is possible that equity crowdfunding participants will get value beyond simply the financial return.
“They may feel an affinity for the business or product, or may obtain loyalty-based benefits that would not be valued by institutional or professional investors.”
Ultimately though, an equity crowdfund for a brewery will not necessarily pay dividends and should be considered less of an investment for the retail investor, and is more a donation to the company that they support with rewards often providing extra value for the investor.
Dr Nehme highlighted some fundamental differences between retail and professional investors which can affect returns, and certainly say in the business.
“Retail investors are in a different position than professional investors, especially angel or venture [capital] investors, as they have no say in the way business is running and they have minimal avenues to hold the company accountable,” she said.
“Professional investors may weave accountability within their agreement when they invest in the company.”
This lack of control or say in business strategies and practices is not necessarily a bad thing, particularly for well-run businesses. But should things go wrong there is little recourse for the retail investor.
“Recourse from investors is limited. Because they are investing small amounts of money, it is not worth it for them to sue. What can be done is a class action but again long shot and need a law firm to take that on board,” Dr Nehme continued.
“[However] the reputation of the company will be affected and there will be less goodwill to invest in it in the future.”
Overall, she explained, the premise of equity crowdfunding is very different in comparison to ‘normal’ investing.
“As there is a high demand for it around the world, governments have attempted to carve exemptions with some protections to allow it.
“Ordinary fundraising would not accept half of the things that are done by crowdfunders.
“For example, you really have to look in the document to find the valuation of the company, as this is not as important to investors in crowdfunding.
“They go more with the vibe of the investment rather than concrete facts. Their perception of the value of the product is paramount, hence fan club investors being created and capitalised on by breweries.”