In this post we’ll cover the math behind brand distribution rights, so that you can increase the value of this asset for your brewery. We’ll also present an example of a brand sale and review the one rule you must follow to maintain and increase the value of your brand distribution rights. To read part one of this series, click right here.
Gross profit dollars x GP multiplier = value of brand distribution rights
The amount of the Gross Profit Multiplier varies greatly. Many factors influence the number, such as current and future brand growth, points of distribution and potential competitive buyers. In my experience, I have seen Gross Profit Multiples range from a low of 2x Gross Profit to a high of 10x or above. Let’s look at an example:
Craft Brewery X self-distributes 10,000 cases of its beer in its home market. Those sales produce total distribution gross profit for the brewery of $100,000. Based on market conditions, the value of the distribution rights is between five times and seven times the gross profit.
- $100,000 gross profit dollars x 5x GP multiplier = $500,000
- $100,000 gross profit dollars x 7x GP multiplier = $700,000
The value of the brand distribution rights can add up fast. Further, and most importantly, the value measurement isn’t on net profit, it is on gross profit. Therefore, you can break-even, or lose money on self-distribution and still drive the value of your brand distribution rights through the roof. The value of anything is entirely dependent on what someone else is willing to pay for it. This holds true for the value of your brand distribution rights as well.
So, while the gross profit multiplier method is a common way that brands change hands among distributors, you’ll still need a willing buyer to pony up the purchase price. Pull out your calculator and run some numbers on your sales. Do you self-distribute and generate $100,000 in GP? Will a distributor pay you five times or seven times multiples to take over the distribution rights? What are your brands worth? How much could your brands be worth if you increased your self-distribution sales? Do the math. It could be a very large number.
Want to sell your distribution rights? Follow this rule…
This is a simple rule, but it is all important. Good information equals a higher value for your distribution rights and ultimately a higher sales price. The one rule you must follow: You must keep good records. What kind of records should you keep? Any buyer of brand distribution rights is going to want to see sales information, gross profit reports and customer lists. A buyer will look for sales volume in dollars, cases (units) and case equivalents (24 12-oz equivalent packages). They will need to see gross profit reports showing the information by brand, package and customer.
In some instances, the buyer may want to see trend reports — year-over-year growth by account or by brand. In short, the buyer will need a lot of good information in order to fork over premium dollars for your brand distribution rights. Make sure you get it right. If you don’t have a good system to track this information, get one. Gross profit will drive value. Track your gross profit now. Everyone looks at sales, but not everyone looks at gross profit. Be unique, be different, be smart: Set up gross profit reports and run them early and often.
Remember, every dollar of gross profit may return to you four times, six times, eight times or more. A small investment in time and resources will pay off big time when you decide to sell your brand distribution rights.
Wrap up + what this all means for your craft brewery
Brand distribution rights have tremendous value. Franchise laws, exclusivity and recurring revenue combine to create this valuable asset. If you self-distribute, this asset could be yours. Before you sign away your distribution rights to a distributor, ask yourself a question: What are your brand rights really worth? Get out the calculator and do the beautiful math behind gross profit. You may be surprised at how big the number could be.
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.