Based on the $8M valuation we worry about the ability for investors to seek a long term outsized return for the below reasons.

• Lifestyle business: The family of founders have built a line of latino inspired craft beers that their customers love and they celebrate their culture through their tap rooms. However, with plans to only open 5 -6 new locations over the next 5 years across the Southwest, we think the team is focused on building a lifestyle business rather than a high growth craft beer brand.
• Assuming at full capacity the team can produce $1 to $1.5M in annual revenue (management estimates) from each location that would project $6 to $9M in revenue over the next 5 years coming from their 5 to 6 locations. This level of revenue is just not enough to drive an $8M valuation right now.
• If instead of focusing on creating a small set of tap rooms with food and experiential elements, the business was focusing on opening up distribution channels to sell their unique craft beer across the nation, we would have a very different outlook on the business. Management even calls out the fact that 90% of their sales are coming from the tap room, unlike most craft beer companies that have 90% of sales coming from distribution and 10% from the tap room. This highlights the lifestyle element of the business.
• Border X Brewing is really about celebrating drink, food and community at their brick-and-mortar tap room locations and becoming a regional brand loved by the local communities. Although we love that type of business, we think the lack of focus on becoming a national brand through major distribution channels limits the upside for investors.
• The reality is we don’t expect they will look to make a quick sale on a business that they care so much about. Investors will have to hope they decide to sell out the business or a portion of it to a PE shop down the road in order to provide returns to investors. We don’t like the limited opportunity for liquidity based on it being a family run business.
• High valuation: With an $8M valuation and $694K in 2017 sales management is valuing the business at over 10X revenues, which for a brick and mortar craft brewery is too high. A regional company like this will more likely be traded on an EBITDA multiple since the upside growth potential is limited to the regional footprint.
• With that in mind, we dug into the Form C to see what level of profitability the team achieved last year. Net income was just over $9K on almost $700K in sales, which works out to  a 1% margin. With much more investment being required over the next 5 years to build out all of these new taprooms, we think this is a capital intensive business that will continue to have razor thin margins on limited sales.
• For these reasons, the EBITDA multiple won’t be favorable if the team decides to sell. We think a more reasonable valuation would have been between $2 and $4M. It also appears that the team does not own their tap rooms, which is fine but it leaves them with minimal actual assets ($160K), so we can’t justify the valuation on owning expensive equipment and property either.
• Distribution channel: As we highlight above the business has focused most all of their efforts on selling through their tap rooms with 90% of sales coming from this portion of the business. There are no indicators that management is trying to invest heavily in getting the brand onto shelves across the country. Instead, the plan laid out is to utilize word of mouth to grow distribution a bit, but most of the focus is really on using the tap rooms as the sales channels.
• Tap rooms are high in overhead cost and low on profitability. Having to be in the business of food as well is even more of a hindrance to driving significant profitability. On a tech company profitability is less of a factor because of the long term scaling opportunities, but on a regional brick-and-mortar business this is of much greater importance and we don’t have strong convictions that they will be able to achieve high profitability.
• In conclusion, we have great respect for the founders and do actually think they have built an impressive business. Most of these businesses never make it out of their infancy but they obviously deliver a really strong product that people love.
• They have also created real differentiation in the market with over 70% of customers coming from Latinos who clearly don’t feel there are other products in the market that meet their flavor profile. We commend them for these accomplishments, for all of the positive press, and for the early revenue achievements.

In conclusion, we have great respect for the founders and do actually think they have built an impressive business. Most of these businesses never make it out of their infancy but they obviously deliver a really strong product that people love.

They have also created real differentiation in the market with over 70% of customers coming from Latinos who clearly don’t feel there are other products in the market that meet their flavor profile. We commend them for these accomplishments, for all of the positive press, and for the early revenue achievements.

Nonetheless, from a pure investing perspective, if you are investing in search of 10X returns, we do not think this is the company for you.

If you have any questions regarding this underweight rating you can reach us at hello@kingscrowd.com