The craft beer industry is exploding, with two new craft breweries being launched every day in the U.S.

According to the Brewers Association, craft breweries are defined as “small, independent and traditional.” But the industry is anything but small: The craft beer market is $26 billion. It’s an extremely competitive industry that’s growing by about 18 percent per year.

All valuations hinge on cash flow, and craft brewery valuations are no different. But here are some other issues that analysts consider when valuing a craft brewery:
Production capacity: How much beer can the business brew using its existing equipment? Will it need more or different equipment to support growth and innovation?

Analysts also look at brewing cycle times. Some breweries process their beers faster than others, which impacts overall output and capability. If the brewery is known for a specific beer or beers, it’s key that operations can support ongoing or increased production of its top offerings.

Key personnel: Where is the expertise in the business? Is an owner-brewmaster not only making business decisions, but also driving formulas and flavor decisions? Or is the brewmaster a non-owner who is at risk of leaving?

For the brewery to grow, it must have a sustainable model for consistent quality. A stable team—and a superstar brewmaster who will stay with a new owner—drives value.

Distribution: After the repeal of Prohibition in 1933, breweries were required to follow a three-tiered system that kept brewers, distributors, and retailers separate. This meant that breweries were required to use distributors to get their offerings to market.
While most of these laws have changed somewhat—breweries can now sell beer in tasting rooms in most states—distributors still play an extremely important role in getting various beers into grocery stores, bars, and restaurants.

Laws regarding distributor agreements vary by state. Will the target company’s relationship with its distributor be affected—either negatively or positively—by a sale?

Product offerings: What’s hot in the market this company serves? Is it IPAs, sour beers, or golden ales? Does the product mix meet the demographic? Is there a unique or local ingredient that distinguishes this beer? If so, what is the nature of the supply chain for this distinctive component?

Most craft breweries pride themselves on innovation. But that innovation must be tempered with business intelligence to ensure a healthy market and growth potential.

Tax issues: In December 2017, Congress passed legislation that included the Craft Beverage Modernization and Tax Reform Act, which lowered the federal excise tax for breweries. While this is good news for brewery owners, the legislation expires at the end of 2019.

With the rise of the industry and its growth pattern, craft breweries are now on legislators’ radar, for better or for worse. Conventional wisdom says that the tax landscape will continue to morph.

It’s clear that craft beer is an industry with staying power and not just a fad. Acquisition interest from huge beverage companies seems to indicate that craft brewers are onto something big.