Pricing meetings are a ritual where there is a lot at stake and the wholesaler is usually way ahead of their suppliers. They do this every day; you do it once in a while, so the wholesaler has the edge. To a wholesaler, every penny actually matters. If a wholesaler sells 10 million cases equivalents a year, 10 cents a case is a million dollars. So whether he makes $8.00 or $8.10 on your brands is important. And the same goes for you. For a 20,000 bbl brewery, 10 cents per case means over $27,000 per year, and if you can gain 50 cents through negotiation you can pick up over $137,000. And it compounds every year. To achieve this you have to be prepared and quick in the meeting.

Start with some due diligence in the market and ask retailers about their margins. Many will tell you how they mark up their skus. Do not try to negotiate margins with the retailer. At your wholesaler meeting, start with your desired price to the consumer based on your own knowledge of the market. Ask for the wholesaler’s opinion. Have any competitive craft brewers announced price increases? If so, should you follow? The wholesalers have an objective sense of the market and tend to know where your brand fits in. Ask what margins the largest retailers require and compare that with what you know. I had a client who was assuming a 25% retailer margin, but didn’t realize that the retailers take 30% on single-serve packages and extra on four packs, so the pricing ended up being out of line until adjustments were made.

With some simple math, you can now figure out how much the wholesaler needs to charge the retailer (the PTR = Price to Retailer). The wholesaler will now require his margin, and it matters whether they take 30%, 28% or something else. Most wholesalers are reasonable and want to help you. If you can convince them that it is in their best interest to “invest” in your brand through slightly reduced margins, this is in everyone’s best interest. From there you get to the laid in cost (LIC) for the wholesaler which includes FOB, inland freight, state taxes and in some states, other costs like handling fees. The end result of all this is your FOB. The value of your company is driven in large part by your gross margins, so your FOBs need to be as high as possible. Do pricing well and you will have a more successful company. And your wholesalers will respect you for knowledg

You created this brand. It was your vision, your risk and your hard work that got it to where it is now, a popular local craft beer. So why is it that if your largest wholesaler wants to sell your brand to another wholesaler, the valuation of the distribution rights could be anywhere from 4x to 8x the wholesaler’s gross profit? That is probably worth more than your whole company.

Most craft brewers have figured out that the game is set up in favor of the wholesalers. Since franchise laws were set up, brewers usually cannot terminate a wholesaler. But the wholesaler can usually terminate you anytime (simply drop your brands if they don’t sell enough) and they can also sell your brands to another distributor, in some states without your consent.

Here’s why your brands are worth more to the distributors: the principle of the “Golden Cases.” The wholesaler already has the warehouse, trucks and the people in place. They do not need to add any fixed cost when they acquire the distribution rights to your brand so your brand’s gross profit represent pure profit to the wholesaler.

We have done numerous valuations for craft breweries and for brand transactions between wholesalers. The value lies in projected future cash flows to the acquiring business. The distributors that are now in business are the winners of decades of consolidation where the big bought out the small and only the strong survived. They have the scale and sophistication to optimize their business models. You have a relatively small operation and a lot of fixed costs, and your profits get reinvested into capital for expansion. So while your company may have a lot of value, the wholesalers always get more.

Craft breweries will be able to realize these same synergies when they merge. This will be explored in a future blog post.

Maybe you will never sell your craft brewery. But it still makes sense to know how much it is worth. Sometimes initial investors want to cash out. Maybe you are looking for new, larger investors. Maybe the bank wants to know so you can increase your credit line. Valuations done properly are intensive numerical exercises combined with some expert judgment and comparison with similar companies. There is not a lot of published information about valuations because they tend to be confidential, except in the rare case of a public craft brewing company.

Another benefit of understanding the value of your company is that you have the opportunity to improve the key drivers of that value, so if the day comes when you want to reap the financial rewards of your hard work you can monetize all your potential. The steps you take today, including pricing, margins, capital expenditures, wholesaler selection and distribution agreements, along with many other factors, will have a significant impact on your future valuation.

As a craft brewery owner there is no greater feeling than being at the bar, anonymous to the consumer, and watching someone step up and order your beer. It is the culmination of your dream; the beer you created is wanted by someone who could have ordered anything. But what that consumer never sees is the years of hard work and the personal and financial risks you have taken to get to where you are. And you’re not “there” yet, not yet satisfied that you have fulfilled your mission to make great beer and have built a sustainable, successful business.

I’ve worked with both large and small brands, and I’ve found that building small brands is more fun and rewarding—which led me to go out on my own and start a craft brewery. That was in 1997, back when the first wave of craft beer began to fade before its renaissance in the early 2000s. My company, Rheingold Brewing Company had some great success, especially in the then-gritty neighborhoods of the Lower East Side of Manhattan and Williamsburg, Brooklyn. We had one of the top selling beers in CBGB’s and other bars that set the stage for the craft brewery movement. It was a fantastic journey, but we also had our challenges.

I know what craft brewers go through every day—the great joys of being in the best business in the world, with pride in the product and brand you created and the camaraderie with great people. At the end of the day, we all enjoy great beer. I also know how much work goes into it—behind the glamour you have quality control, cash flow, employees, distributors, investors, banks and compliance.

There are always challenges and opportunities to be addressed, and sometimes it is hard to know where to go to get sound advice from someone who can immediately grasp the situation and help you see clearly where the right path is. Sometimes when you are working so hard it is impossible to focus on working through important issues and making the big decisions about the brewery you risked so much to build.

Brewers Advisory Group is not a big company. When someone needs our help we become your partner, if only for a while, and we want you to succeed. We want to free up your talents while we help you figure out the