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.