What is fairness? What is the usefulness of breweries’ valuation?
Firstly, let me clarify what equity and valuation mean. Personally, I believe that founders should know the value of their breweries at any given time, regardless of whether they plan to raise investment or sell their business. However, if you do plan to seek funding to help build your brewery, it is crucial to have a valuation in mind.
Building breweries requires substantial funds, usually obtained from four sources.
Founders invest their own money.
Obtaining a government grant would be beneficial.
Getting a loan from a bank or secondary financial institution is also helpful, but it is challenging for newer businesses.
Raising money in exchange for ownership equity in the business. This is usually done privately or through equity crowdfunding campaigns. Large public companies achieve this by trading shares on the stock exchange.
Considering these points, here are some general factors to keep in mind.
1. Some people get what they pay for.
An item’s worth is determined by what someone else is willing to pay for it. This concept is often applied to valuing residential real estate. For example, if a house sells for $1 million and nine people think it’s overpriced while one person is willing to pay $1 million, then the house is worth $1 million, even if 90 percent of people disagree with the valuation.
Valuation is not about reaching a consensus; it’s about the founder setting a value and finding investors who are willing to invest at that price.
Don’t focus too much on getting everyone to agree with your valuation. When presenting your business, concentrate on finding people who have confidence in its future.
2. Protect your interests.
It’s easy to complain about overvaluation, but when you eventually sell your business to a larger company, they will likely have complaints as well. You can’t expect founders to retain their shares and also give away as much equity as possible for minimal compensation. A higher valuation allows you to retain more ownership, and founders should strive to preserve as much of their business as possible for several reasons.
Firstly, if you surrender too much equity, you will lose control of the business and may find yourself forced to sell, even if you don’t want to.
Secondly, if you give away too much of the business, it becomes difficult to raise capital later on because you would be reluctant to allocate the small percentage of equity that remains. If your brewery is growing, you can expect to conduct multiple rounds of investment fundraising, so don’t view the initial fundraising as the only opportunity.
In conclusion, founders have worked hard to achieve the goals of their breweries, and such opportunities may not come again. Therefore, it is essential to secure as much of the business as possible. Ideally, you would never give up any equity, but due to the aforementioned reasons, it is practically impossible to raise capital in any other way.
As a general rule, be cautious about the amount of equity you surrender. If in doubt, aim for a higher valuation that allows you to give up less ownership.
Taking risks with investment may not be for everyone, but it could be worth considering. Alternatively, pricing your business too low and giving away a significant portion of it for a small amount of capital could be avoided by waiting until your brewery is more mature and valuable, thus minimizing the need to surrender equity.
Conducting an investment round means selling a part of your business, but not all of it. Make sure you receive proper compensation.