Recently, there have been a number of sales of well-known and well-respected craft breweries to the major beer producers. In addition, there have been a smaller number of sales of craft breweries to private equity investors. Is one type of buyer better than the other from the perspective of the selling brewery? What are the key differences in the incentives and goals of the buyers, the structure of the purchase transaction, and the running of the business going forward? How do these differences impact the stockholders, management and employees of the selling brewery? This article explains the differences between a sale to a large brewer such as AB InBev, Constellation Brands or MillerCoors, known in M&A parlance as “strategic buyers”, and a sale to, or partnership with, private equity investors, who are also referred to as “financial buyers”.
As mentioned above, there are two kinds of buyers for a craft brewery business – strategic buyers and financial buyers. Strategic buyers are usually larger often publicly-traded brewers that are looking to acquire smaller or niche brands in order to participate in a more rapidly growing sector such as the craft beer industry, and then use their marketing expertise, larger budgets and distributor relationships to increase efficiencies and growth in the sales and distribution of the acquired brand. Their goal is to grow their revenue and bottom line in order to enhance the value of their existing business for their stockholders. Financial buyers such as private equity firms, on the other hand, are private partnerships made up of wealthy investors whose goal is to add additional management expertise and financial resources to an existing craft brewery in the hopes of accelerating sales growth and profitability in order to increase the valuation of the acquired company in a future sale to a strategic buyer or in an initial public offering (IPO).
These significant differences in the goals of the distinct buyers lead to very different outcomes, structures and incentives for stockholders, management and employees of the selling craft brewery. For example, in a sale to a strategic buyer, generally 100% of the ownership interests in the existing craft brewery are transferred to the buyer and the existing stockholders of the craft brewery are cashed out of their investment and no longer participate in the future growth of the business. Management and other employees will either be retained or let go depending on the needs of the acquiring company, although in most strategic acquisitions the buyer retains key members of management and employees for some period of time after the closing of the sale in order to retain their expertise. In addition, in craft brewery acquisitions, the strategic buyer generally wants to keep existing management in order to retain the “secret sauce” that led to the brand’s success and allow some level of independence in beer production, marketing messaging and management style. To the extent members of management or other employees have equity ownership in the selling brewery, that ownership interest is either cashed out as well or rolled over into equity ownership or stock options in the acquiring company.
On the other hand, financial buyers, such as private equity firms, will generally purchase a portion of the business and allow existing members of management and other employees to retain a significant equity position in the ongoing business. In fact, in many instances, the relative ownership of management and other employees will increase compared to their existing ownership percentages. The new equity positions held by members of management are generally represented by a rollover of their existing equity into the new entity formed to acquire the business coupled with grants of restricted stock, stock options or their equivalent if a limited liability company or partnership is used as the acquiring entity, known as a “profits interests”. The financial buyer’s rationale is that they are looking to the existing management team to enhance the value of the brewery over the next 3- 5 years with a goal of achieving another exit by way of either a sale to a large brewery (a strategic buyer) or an IPO. Financial buyers generally allow much greater independence in the operation of the ongoing business then a strategic buyer which can be attractive to sellers, particularly in the craft beer industry where the founders highly value their counter culture perspective, creativity and independence. As part of the transaction, the financial buyer provides access to greater financial resources to the craft brewery, either through direct infusions of equity capital or the ability to obtain larger credit lines on more favorable terms from other financial institutions. Private equity firms in particular also pride themselves in providing greater management and financial discipline to their acquired businesses that they believe improves the chances of success for the acquired business going forward.
We have entered a new stage of development in the craft beer industry, not unlike that experienced in other businesses that started out as lifestyle, counter culture “artist” driven businesses. Companies with greater financial and marketing resources have entered the industry through acquisition of existing brands and development of competing brands. The number of new craft breweries being formed has skyrocketed, making it harder to stand out from the crowd and develop the economies of scale needed for more profitable production and distribution. It is more important than ever that craft breweries that want to grow and succeed in the future look carefully at their options for financing the growth of their businesses. Sales to strategic investors or partnering with financial buyers are two options that should be carefully explored by any craft brewery with visions of becoming a national or regional player in this growing dynamic industry.