If you are the founder and owner of your distillery, you have probably referred to it on occasion as your “baby” — and you may have actually lost as much sleep growing your business as you would raising an actual child. This financial and emotional investment you’ve made as a small business owner can make the prospect of selling extremely difficult and very personal.
However, selling doesn’t need to come with the connotation of “selling out.” In fact, craft distillery sales are often celebrated, and a few have even made headlines over the years, including the 2016 sale of High West Distillery to Constellation Brands for an estimated $160 million, or the more recent announcement that Italy’s Illva Saronno, the maker of Disaronno Amaretto, is acquiring a majority stake in Sagamore Spirit and relocating their U.S. headquarters to Baltimore.
Even if the sale of your business isn’t a headline-grabbing megadeal — in which case you probably already have a team of bankers, accountants, and lawyers advising you — completing the transaction is still a complex process. It’s important to approach the decision to sell deliberately, cautiously, and with the counsel of professionals.
This article aims to provide a big-picture framework for approaching the sale of your distillery. But remember, since every situation is highly unique, I strongly urge you to seek individualized tax, legal, and business advice from experienced professionals.
Why Sell?
The first thing to understand if you’re selling your distillery is your own motivation, which will help set your goals as you go through the transaction and negotiate the terms of the deal. Spoiler alert: Most people find that their true motivations go beyond just “cashing in” on the monetary value of their business.
For example, perhaps you enjoy the day-to-day work of running your distillery, but you can no longer bear the emotional and financial weight of owning a business. This could lead you to the decision to sell the business but to remain on board as a key employee (perhaps also retaining some minority ownership) who will continue to manage day-to-day operations without the stress and responsibility of being the owner. On the flip side, if you’re motivated by a desire to kick back and enjoy retirement, you will not want to set yourself up to be a long-term employee after the sale. You’ll need a buyer who can quickly step in and enough cash from the sale to realize your retirement dreams.
Properly identifying your reasons for selling can also ensure that you don’t overlook other options for solving underlying problems that may (or may not) be preferable to selling the business.
What Are You Selling?
The next consideration is what exactly you are selling and what it is worth in the market. This may sound rudimentary — you’re selling a distillery, right? — but when it comes to selling a business, the longtime owner often sees things differently than potential buyers.
It’s important to call in professional help to assess your business with fresh eyes. Businesses are most often valued based on the cash flow they generate, and there are several factors most buyers will consider when assessing the potential cash flow from acquiring your business.
Some of the questions you will need to answer to determine exactly “what” you’re selling are:
- Is your business profitable? If your business isn’t profitable or you’re not able to pay yourself a salary, then there may be more value in “parting out” your equipment and inventory rather than selling the “going concern” operation. If you’re not profitable now but can show a strong growth trajectory pointing towards profitability, a buyer may still be interested, but a distillery stuck in the red is a hobby and not a business.
- Is your operation a full-fledged distillery that creates spirits from raw materials, a non-distiller producer (NDP), or a blend of both? For an NDP, you’re generally selling the brands you own and the relationships you’ve established with suppliers and sales channels. For a production distillery, you will also have the ability to create new products from scratch for your own or others’ brands as well as some hard assets that could make it easier for a buyer to finance the purchase of your business.
- Do you own your real estate or lease? Most buyers will want to think of the value of your business separately from the value of any real estate you may own, but the value and risk profile of your business will vary depending on how long a potential buyer can predict the total occupancy cost for your location.
- What stage of growth are you in? The Sagamore Spirit sale happened to come a few years after they started bottling their own Baltimore-distilled rye, but a few years before they reached the stage of being able to completely shift away from relying on third-party producers. This is often a sweet spot for whiskey makers, with Smooth Ambler being another example. With any distillery, a well-built foundation for predictable future growth will be more appealing to a buyer than a haphazard series of one-off products or a business that has already seen its growth plateau.
- What human assets will remain with the business? As mentioned above, for some sellers, remaining with the distillery as an employee post-sale may be an option, or there may be key employees who are likely to stay on board. If so, there is a much larger pool of potential buyers who know that they won’t need to personally take over the key operating roles.
- How is your revenue generated? Buyers will see a sharp distinction between a distillery that generates most of its revenue through an on-premise tasting room and a distillery focused on distribution to third-party retailers. The former will be viewed more like a restaurant or hospitality business whereas the latter will be seen as a consumer products manufacturer. Most craft distilleries generate revenue from both on-site and off-site channels, so being able to clearly explain your sales channel mix will be vital to helping a potential buyer understand your operation.
How Do You Sell?
Selling a business is a team sport and you’ll always have a better chance of winning if your team is stacked with experienced, veteran players.
Start with an accountant. Ideally, you will have been working with a skilled CPA for years before you consider selling your business. But if not, this is the first team member you should bring on board. An accountant can organize your sales and expense records accurately and help make adjustments to better reflect what a potential buyer will be stepping into financially. Having these accurate numbers organized in a way that outsiders can quickly understand is key to zeroing in on what your business is worth before you go to market.
Next is an experienced business broker or investment banker who can help you assess your operation and give you an overview of how a buyer will analyze what you’re selling and what it’s worth. If your distillery generates under a million dollars in annual sales, you’ll most likely work with a business broker. For larger operations, an investment banker may be the right fit. Regardless of what they call themselves, choosing the right advisor who understands your business and can communicate its value to buyers is hugely important.
Finally, you will need an experienced transactional attorney as early in the process as possible. Along with drafting the legal documents for your sale, an attorney will take the lead on identifying and minimizing the risks you take on during and after the deal and work to maximize the predictability of the sale process by carefully planning out all the “what ifs” that could come up as the buyer steps into the business. Keep in mind that distilleries are highly regulated businesses at the federal, state, and local levels with several unique risk factors, so finding an attorney who truly understands the regulatory and licensing environment in your locality is crucial. A law firm with multiple specialist attorneys in one shop is often able to provide the most seamless service for this type of transaction.
With your team in place, you’ll be well positioned to present your business for sale in the market, evaluate offers, and negotiate a deal that accomplishes your goals.
Don’t Forget to Consider Current Market Conditions
One important factor that’s outside your control is the macroeconomic market at the time you go to sell. You probably won’t be surprised to hear that many business buyers have pumped the brakes on making deals over the last 18 months amid rising interest rates and economic uncertainty.
These factors weigh on craft distillery transactions as well, but countering that headwind is the fact that the craft spirits industry has matured immensely in the last decade and it’s much easier for a buyer to evaluate the risk-return profile of a craft distillery now than it would have been during the industry’s earlier Wild West days. If you decide to go to market now, just understand that you may need to take a somewhat lower price or be more creative to attract buyers in today’s more risk-averse climate.
But don’t fret. The sale of a high-quality business is possible if you’re patient, creative, and put in the work – you’re a distiller, so I’m sure those are personality traits you have!
