The strong pace of craft brewery acquisitions seen in recent years will likely reverse course in 2020 due to the economic challenges and uncertainty caused by the ongoing coronavirus pandemic. But despite the impact of COVID-19, dealmaking in the craft beer industry is unlikely to grind to a complete halt. Even in volatile times, there are good opportunities to be found, and favorable small business loan options in the market may give some well-positioned buyers a strong incentive to move forward with acquisitions of strong brands.

In an environment of strained resources and lower demand, however, craft beer acquirers will have an opportunity to be more selective. As a result, hopeful sellers looking to put a brewery on the market in the near future will need to demonstrate value and set themselves apart from the pack. Fortunately, there are a number of concrete actions that brewery operators can take right now to enhance their appeal to prospective buyers and improve their chances of securing a good offer.

If you are eager to sell your brewery in the short term, or if you are interested in laying the groundwork for a transaction once consumer and business optimism return to more normal levels, here are five strategic ways to make your brewery more competitive and position your business for a successful sale:

1. Understand what your brewery is worth. The purchase price is arguably the most important deal term and one that will likely come up early in your talks with a potential purchaser. Valuation is often the key difference-maker between transaction success and transaction failure: too low, and you risk leaving money on the table; too aggressive, and you risk chasing away a serious bidder. Regardless of size, sellers must be prepared to comprehensively and rigorously analyze the projected figure or range. Before engaging in these negotiations, do your homework. As an initial step, you need to take a hard look at your brewery’s financials over the past several years and make sure you have a firm grasp of performance, cost structure and trends. But that is just the starting point. Business valuation is a complicated and multi-faceted process, and it may be wise to enlist the help of an appraiser or investment professional. An appraiser can measure the fair market value of your brewing equipment and any other assets used in the business, and brokerage companies and investment bankers can offer insight into how other similarly-sized breweries in your area have fared in the sale process. Additionally, be sure to reflect on the current environment and ensure you are prepared to talk candidly and thoughtfully about the short- and medium-term financial impact on the business of the physical distances practices resulting from the COVID-19 outbreak. If your on-premise channel was forced to shut down for a period of time but you were successfully able to offset some of those losses through alternative revenue streams, be ready to emphasize those actions and frame the discussion on your terms. By making these early preparations, sellers can put themselves in a position to have informed conversations about their businesses and articulate a convincing case for a favorable valuation.
2. Get your house in order. In the lead-up to an M&A transaction, it is important that a brewery exhibit good corporate housekeeping practices. Doing so instills confidence in the buyer that the brewery is well-run and well-managed. Buyers (and their advisors) will want to see that you have conducted your business in compliance with all applicable laws, so it is important to verify that all required licenses and permits (at the federal, state and local levels) are in hand and up-to-date – and make sure you have the documents to prove it. As part of its financial diligence, a buyer will also request copies of the brewery’s recent tax returns and financial statements. These should be complete, orderly and accessible. Disorganization may be viewed as a potential “red flag” and may lead the buyer to scrutinize your financial practices more closely and/or seek legal protection in the form of more robust representations and warranties in the purchase agreement – which shift certain risk to sellers and could eat away at your proceeds from the transaction. For the same reasons, all breweries should also maintain a well-ordered corporate record book containing (among other information) the seller’s organizational materials and documents that present a clear picture of the past and present organizational structure. If there are any gaps in this area of diligence, it may not be enough to kill the deal, but it could lead the buyer and its counsel to explore ways to allocate risk to the brewery.
3. Explore opportunities for diversity. Diversity of revenue will be important to buyers in the current market. As on-premise offerings and tap and tasting room opportunities are limited due to government lock-down orders, and talk of a second wave occurring later in the year, prospective buyers will want to know if there are means to supplement that lost revenue. This does not mean you have to rewrite your business plan, but think creatively about this question from the viewpoint of an acquirer. Could your infrastructure and personnel support an e-commerce model? If so, that could be a good selling point in your discussions with a bidder with experience in that platform. If you have them, you should review distributor agreements through the lens of a prospective buyer as well. These may contain exclusivity provisions or otherwise restrict the way that business is conducted, and you should understand how these limitations would be perceived by a buyer in the current economic climate.
4. Protect your intellectual property. While the brewery’s physical equipment is important, ultimately it is the brand and the recipes that drive M&A deals in the craft beer industry. As part of its due diligence, buyers will need assurances that this intellectual property is legally protected. In the case of most breweries, operators should obtain (and be prepared to furnish as part of the due diligence process) trademarks for beer names, logos and slogans. You should also ensure that all employees sign non-disclosure and invention assignment agreements covering all recipes, formulas and processes.
5. Assemble your team. For most, navigating the M&A process will be completely foreign. That’s why it is crucial to assemble a team of sound external advisers. Your outside advisers may include legal counsel, a certified public accountant, and a business broker. Engage your team early and involve them at each stage of the process. Sale transactions are riddled with high-stakes issues and challenges, and it is important that you have the assistance you need to identify pitfalls and red flags and ensure that transaction risk is being allocated between the parties in a fair manner. It pays to reach out early because even before substantive work can be performed, you’ll need input on threshold issues regarding the transaction (like the tax implications of a proposed structure or how best to approach the letter of intent), and when that time comes it will be important to act quickly.