How do you measure the value of your beer brand’s distribution rights? Part 1

Beer distributors have been selling brand distribution rights and realizing tremendous gains for decades. Why should they have all the fun? As the name implies, brand distribution rights are rights granted to sell certain beer brands in specific territories. These rights are created by a contract between brewer and distributor. The brewer grants the distributor the right to sell and distribute their brands, and the distributor sells, delivers and services the products.

While these rights are typically assigned to the traditional beer distributor, the rise of self-distributing breweries has created a new path to value for breweries. Thanks to franchise laws and high demand from buyers, brand distribution rights can be extremely valuable. Craft breweries self-distribute their own beer for many reasons. Control, trying to establish a separate business line or profit center, or they just don’t want to be stuck with the traditional beer distributor.

However, a huge benefit of self-distribution is the ability to create, grow and sell brand distribution rights. In this post, we’ll review the basics of franchise laws, the value of distribution rights and what this all means to your craft brewery. The distribution landscape has changed and there is a lot of money at stake. Read on to see how you can get in on the action and create a valuable asset for your brewery.

Why distribution rights have tremendous value

You, the brewery owner, own your beer brands. You own the names, the trademarks and the rights to brew and sell the beer. However, once you sign a contract with a distributor you no longer own the distribution rights to your brands. The distributor owns it. Franchise laws provide for exclusivity, and the very nature of exclusive rights creates value. Beer brand distribution rights have the potential for tremendous value due to the exclusivity of the territory and the brand.

How distribution rights value is created

Typically, a distributor is granted the right to be the only one allowed to sell your beer in a specified area. If retailers want your beer in Boston, for example, they have to buy it from your distributor. The value of brand distribution rights is created when sales are made to customers and repeat purchases occur. The distributor’s job is to make the market. They develop customers and create recurring revenue. These recurring sales become an annuity — repeatable, consistent and predictable income. Business people like recurring revenue, and this is what creates the true value of your brand distribution rights.

Beer brands and beer brand distribution rights are two different assets. Both hold tremendous value for your craft brewery. So, before signing away the potential value of your brand distribution rights, it’s worth considering a self-distribution model in your business.

EBITDA basics for breweries: earnings before interest, taxes, depreciation and amortization. Just click.

What are distribution rights really worth?

In the beer distribution world, the value of brand distribution rights is measured by the amount of gross profit the brands produce. Gross profit is the difference between the sale price to retailer and cost of the product, freight and taxes to the distributor. The total pool of gross profit dollars is then multiplied by a factor – commonly known as a “gross profit multiplier.” The product of these two numbers is the value of the brand distribution rights.

In the next post we’ll cover the math behind brand distribution rights so that you can increase the value of your rights. We’ll also present an example of a brand sale and review the one rule you must follow to get maximum value for your brand distribution rights.

Kary Shumway is the founder of Beer Business Finance and Craft Brewery Finance, online resources for beer industry professionals. Shumway has worked in the beer industry for more than 20 years as a certified public accountant, chief financial officer for a beer distributor, and currently as CFO for Wormtown Brewery in Worcester, Mass. Craft Brewery Finance publishes a weekly beer industry finance newsletter, offers guide books on topics such as cash flow planning and basic budgeting, and an online course to improve taproom profits. The newsletter with a free four-week trial, industry guides and resources are all available at www.CraftBreweryFinance.com.