One of the concerns we get from business owners is that they don’t want to open the can of worms that can come with talking to prospective buyers before they’re ready to sell.

This is quite understandable because there can be major fallout with your company, family, employees, and in the market place. Rumors can play havoc with your current operation and sales, so it makes sense to avoid talking to any potential buyers before you’re ready to sell.

The hard part is that you’ll always get calls from people who express an interest in your winery. You’ll be sorely tempted to talk with them about potential deals.

That’s why we encourage winery owners to start the process of selling well before they’re ready to sell. That is, you want to run your winery as if you had to sell today.

The way to do this without being negative is to meet with an M&A Advisor well in advance of when you might sell. It’s good to talk to an outsider and get their perspective on how you can increase the value of your winery in the eyes of potential buyers, and how you can begin to structure things so that you can attract the best buyers who readily offer the best deals.

There are three good reasons why you might want to start the process today, even if you’re not looking to sell until several years down the road:

1. Changes to the wholesale channel. The wholesale channel is changing. In the future, you’re going to have to be really large or really small. There are so many people in the wholesale network, and it’s only going to get worse. New wineries are popping up like crazy, and when you’re in the middle of the pack it can be hard to get any real attention. Preparing your business for sale to a group that can widen your distribution can be a good idea because the amount of competition is staggering, and only getting worse.
2. The timing. If you’re one of the top-performing wineries, you’ve got nowhere to go but down. Do you want to transition down the road to someone on the outside? Do you have the confidence in someone replacing you? It’s a constant dance in this business between profit streams and the needs of the business. It’s a huge investment, and as your family grows, it’s a lot to ask for them to put high levels of capital in the business for which they’ll never see a return. Thus, you can benefit by starting the process today so that you reduce the complexity of a sale when you’re ready to sell.
3. Shareholders want out. You may want to look at ways for the family members to get out gracefully and respectfully. As the number of shareholders increase, and they become less invested in the winery, they’ll want a way to get out without hurting anyone’s feelings. Where you probably don’t want to take on any more debt, you’ll want a way to stay in the business without forcing others to stay in the business.

One key advantage to talking with us now is that we’ll help you to prepare for the future sale without any of the downside of talking with potential buyers. You’ll get all the same information, and more, but nobody needs to know about it except you.

This way, you’ll be fully prepared for a sale when and if you’re ready to sell. Please contact us today about any California Wineries for Sale or selling wineries in California.

There’s a new generation of buyers for wineries today. A number of years ago, large conglomerates added wineries to their portfolios as a means to extend their market reach and increase their revenue. This approach has mostly failed.

They found that they were often competing with themselves in the same market, and because they were mostly in it for the money, they lacked the commitment to truly build the brands. Today’s buyers are more focused, and they realize a need to segment the market according to good, better and best within a single brand.

Gauging a Good Match for a Winery Buyer

Here are five attributes of a quality buyer who can help take your winery to the next level, both in terms of profitability and in brand recognition.

1. Financial Commitment. You don’t want the buyer to simply pay a pretty penny for your winery. You also want them to reinvest, and to grow the business with a firm financial commitment.
2. Agriculturally-based. Ideally, the buyer understands the commitment to agriculture, and knows the timeline associated with growing or maintaining a viable vineyard. They’re able to step in with both patience and knowledge, enabling the winery to grow in a way that makes sense.
3. Visionary outlook at distribution. They have an ability to quickly enhance or expand the distribution of your wines, either through their existing network, or through relationships they already have.
4. Brand-building. They have demonstrated an ability to build a brand, and can apply what they’ve learned to your winery. That is, they’re not just there to build their brand, but understand the importance of the brand you’ve already established and know how to expand that brand.
5. Pride of ownership. They have a pride of ownership that won’t exist with a company who’s just in it for the profits. They understand the nature of a family business, even if they are a privately held group. They bring this pride of ownership to any new business they acquire, and along with it a finely tuned sense for quality.

Your goal might be to exchange your “founder” hat for a new hat called “proprietor.” You can relax, and know that your winery is in good hands with the new owner, who will maintain and enhance your brand in the wine industry.

Call us today about California Wineries for Sale or wineries for sale in California.

While it might make sense to request an appraisal from a qualified appraiser, the problem is that the business appraisal industry isn’t designed to give you the true market value of your winery.

We believe that fewer than 1% are truly trying to find the market value, and in fact may do their best to lower the value of your winery.

Unfortunately, the business appraisal industry exists primarily as a litigation tool for divorces when one or both spouses owns a privately-held business. There are two key concerns you should have about appraisals designed by litigation specialists:

1. The value is either inflated or deflated. They want to decrease the tax assessment on gains, minimize the spousal award, or do the exact opposite. Rarely are they working toward the actual real-market value.
2. Weak on terms. Terms are the elephant in the room because the terms of the sale are conveniently ignored in the legal process. The appraisal itself is an “academic” document that satisfies the needs of the attorneys, but not you, the seller. They have no reason to pay heed to the risk you hold via Earnouts, Notes, Holdbacks, and Representations and Warranties.

We are interested only in uncovering what your business is worth today, as well as how you can make it worth more with a few straightforward changes.

Business Valuation as Art and Science

To produce a quality valuation, the appraiser needs to judge which of the many possible valuation methods is best suited to your needs. They then need to apply their knowledge of the wine industry to get an accurate picture of value, as it relates to what you can actually sell the winery for.

Business valuation is a business in itself. You can get low-end, software-driven appraisals for $395, and you can order a Comprehensive Appraisal/ Summary Report for anywhere from $7,500 to $35,000.

The low-end appraisal systems won’t include the expertise of the appraiser, and can often provide inaccurate answers to your questions.

The comprehensive appraisal includes a great deal of the appraiser’s knowledge and expertise. A professional appraiser will naturally recommend a comprehensive appraisal, and for good reason when litigation is the order of the day.

These reports cost more because of the necessary analysis and reporting that must be performed for the report to survive rigorous cross-examination during any court proceedings, or for dealing with the IRS. This costs money, but it’s not a good idea to cut corners in such circumstances.

However, is a full-blown $35,000 appraisal really what you need when you’re simply selling your winery?

Doing a FLiP … Family Limited Partnerships

FLiPs, or Family Limited Partnerships, are a possible way to structure your winery when keeping it in the family. FLiPs are designed to reduce the value of your estate (for estate tax purposes) while allowing you to maintain full control of investments and assets inside the Partnership.

The main advantages of forming and funding a FLiP involve estate and gift tax savings and asset protection. The FLiP also allows you to retain control over the transferred assets while enjoying these advantages.

The main disadvantage to using a FLiP as an estate tax planning technique is that IRS is aware of how effective these structures are. IRS has tried, unsuccessfully to date, to argue that FLiPs are transparent entities which should be ignored for transfer tax purposes.

As always, it is important to document and support any information you provide to the IRS. Each situation is different, which is why it is important for you to have a knowledgeable team of advisors, such as an accountant, attorney, and financial planner to assure you are making the decisions which best achieve your own personal goals.

The Real World Approach to Winery Valuation

Our goal is to give you just enough information from which you can decide if or when you’re going to sell your winery, and if you were to put your winery on the market today, the price and terms at which we believe you’ll most likely receive.

We want to emphasize the importance of discussing the terms along with the price. Different buyers will request different terms, some of which may increase your risk. We need to discuss the risks the buyers will wish to mitigate and how this impacts the value of your business.

Along with the appraisal, we’ll discuss how you can increase the value of your business – the steps you can take, beginning with the low-hanging fruit, and working your way up.

The idea is to provide something you can use today, easily update in the future as your winery business changes, and doesn’t cost you an arm and a leg to obtain.

This kind of valuation or appraisal is a living document that you can refer to year after year. You’ll be able to quickly evaluate your gain (or loss) in value each year. Are you gaining in value or losing value? How can you increase the value of your business year after year?

Every winery is different, so it makes sense that every winery valuation is different. Our experience tells us that by offering you an accurate preliminary appraisal, you’ll be in a much better position to sell your business at the right time and for the best terms.

We do want to make it clear that the report we produce is going to be different than that which is called for under The Institute of Business Appraisers’ Standard. Our goal is to give you the information you need to make level-headed decisions about selling your business.

How Do We Determine the Value of Your Winery?

First, it’s important for you to understand that we define “value” in terms of the investor or buyer. It’s the “value to a particular investor, based on his or her investment requirements, perceived synergy or other strategic advantage and aversion to risk.”

That is, the statement or standard of value includes the strategic advantage the buyer perceives he or she will get from your winery, and also takes into account his perceived risk associated with buying your winery.

It’s never as simple as crunching a few numbers from your financial statements.

In terms of your assets, for example, value is affected by many factors including the technology, manufacturer, age or condition of the wine-making equipment. In most cases the pieces of a business are worth considerably less when sold separately than if they are part of a turnkey operation.

Whenever possible, we will include an appraisal that’s based on your financial data, and a market-based assessment, where we use our experience and some research to understand what wineries like yours might sell for in today’s market. We’ll determine which methods to use on a case-by-case basis.

There’s no perfect solution, but the goal is to come up with a “reasonable” value that’s based more on what we believe you can get for your winery than on what you’d like to get. If there’s a big gap between the two, we’ll advise you on how you can best close that gap, and how long it will take to do so.

The Three Most Common Winery Valuation Methods

What follows are the most common valuation methods. There are far too many methods to discuss here. First, though, it helps to understand our general valuation process…

You’ll generally hire us to provide a preliminary opinion of the investment value, as of the last year end. This appraisal is to be used by you and your legal and tax advisors to determine the investment value of your winery, and for you to assess your goals.

We’re going to use as our principal sources of information the financial statements you provide for three consecutive years. We’ll apply to that data any information you have or we find regarding the wine industry, and whether or not there specific issues, such as regulatory changes, that might impact the value.

We’ll pull market comparables and use data we have from deals we’ve done, or in areas in which we have relevant experience.

We’ll also consider economic factors in the wine industry. Then, we’ll discuss your winery and its outlook. We’ll look at your historical rate of growth in revenues, and gauge if this is a reasonable proxy for growth in future years. We’ll examine how location plays a part, as well as general employment data.

It’s important to note that we use quite a bit of data from the buyers with whom we’ve worked over our 20 years in business. We know what they’ve done, the risks they will or will not accept, and the kind of prices they’ll pay. This buyer-supplied data, along with information about comparable deals, is what allows us to make accurate, real-world value assessments.

Finally, we’ll look closely at your asset and liability mix and your operating and financial ratios, and compare them to what you know about your industry.

The actual method we use to evaluate the data may vary, but there are three generally accepted approaches: the asset method; the income method; and the market approach (Direct Data Market Method). Below, I provide a bit more detail on two of these approaches.

Capitalization of Earnings Method

The Capitalization of Earnings Method is a relatively simple, low-cost income-based approach to determining the value of your business. This method requires us to select a type of return and a rate at which to capitalize the return. For example, we might select pre-tax operating income for the most recent year. Capitalization of Earnings Method determines the business value using a single measure of the expected business economic benefit as the numerator. This is divided by the capitalization rate that represents the risk associated with receiving this benefit in the future.

Then, we’ll factor in things like your earnings track record, the industry growth, your business growth, competition, location, market concentration, deal financing terms and more.

Direct Data Market Method (DMDM)

The DMDM is a recognized method to estimate the selling price of a winery. In this approach, we use financial information and data on what wineries like yours actually sold for to prepare an estimate of what your winery is likely to sell for.

We may use the average of selling prices as multiples of revenues, Seller’s Discretionary Earnings (SDE), Earning Before Interest Taxes and Amortization and Depreciation (EBITDA), or Earnings Before Interest and Taxes (EBIT) and apply these multiples to the financial data we have for your company.

By combining two approaches like this, we can arrive at a reasonable value estimation , and if need be, update that valuation each year until you’re ready to sell your business.

This is not rocket science. These are same techniques WE use when we buy companies, so it make sense, unlike so many of the arcane things you may see in litigation-driven report.

The result is a more accurate than litigation orientated reports and can be used to make a clear decision about your business.

What To Do With Your Business Valuation

As you can see, the true purpose of a business valuation should be to give you an accurate assessment of the market value of your winery, and to establish your optimum terms. Please contact us today about any California wineries for sale or selling your winery.

You’ve agreed with the buyer on the key issues of the sale of the winery. We create a non-binding letter of intent (LOI) that details the price, down payment, financing, and summarizes the key business issues for the sale of the winery.

The LOI leads to the final purchase agreement, which establishes additional terms and conditions of the sale and a host of ancillary agreements, such as noncompetition, opinions of counsel, earnouts, securitization, employment agreements to name a few. Also included will be all the legal details such as a list of representations and warranties for the seller and buyer.

What happens next is that he buyer will want to certify certain facts regarding the condition of your winery.

What’s in a Purchase Agreement?

This purchase agreement will contain conditions which must be satisfied in order for you and the seller to complete the transaction. One of these conditions will be the completion of the “Due Diligence Review.”

The due diligence review exists to protect both you and the buyer. The goal of the investigation is for the buyer to fully understand the winery, its markets, customers, legal position, and any risks inherent in the transaction.

From your perspective, the due diligence process is your opportunity to disclose to the buyer all facts and information about your winery, relieving any anxiety he has about buying the winery.

We will spend more time on due diligence negotiations (what is acceptable and what we’ll do) than on the actual terms of the sale. That’s why we devote so much of our efforts to preparing you for the due diligence phase.

Due Diligence: Why Many Deals Fall Through

The due diligence process is the single biggest reason that the time to close a business sale transaction has increased four-fold in the last twenty years. Buyers – and bankers – are pouring over the details like never before, and any single “surprise” can cause a significant delay or ruin the deal altogether.

That’s why we spend so much time and energy collecting information, documenting issues, and bringing transparency to the entire sales process before we ever speak with a buyer.

The key to shortening the due diligence investigation (sometimes by that same factor of four) is to have everything ready and organized prior to the beginning of the transaction. We’re going to anticipate the items that the buyer will need, and have them ready for delivery within a moment’s notice.

We don’t want any surprises for the buyer, if at all possible. With each negative discovery, the buyer loses confidence in your winery, and will either demand a lower price, or if enough surprises have been uncovered, walk away entirely. A failed transaction means a considerable loss of time and professional fees paid to attorneys and accountants.

You have to remember that what’s familiar to you is new to the buyer. They’re already nervous about the purchase even before they see any documentation or detailed information. Our job is to reduce their anxiety by quickly providing all the information they need with full disclosure.

What’s Needed for Due Diligence?

As part of the due diligence process, we’ll ask you for a number of documents and information. This list might include (this is a partial list):

• Corporate information: organization charts; company charter and Bylaws; meeting minutes; stock books; office locations; and lists of your consultants, advisors, etc.
• Corporate transactions: stockholder list; copies of notes, loans, credit agreements, mortgages, deeds, etc.; shareholder agreements; stock purchase agreements
• Management & Employees: organization chart, including resumes; list of key employees; list of current officers; management reports; employee contracts and independent contractor agreements; employee handbook
• Operations: copies of contracts & agreements; copies of PR and marketing materials, brochures, etc.; copies of leases, sub-leases, etc.; standard forms of agreements; trademarks, copyrights, etc.; facilities leases and equipment leases; equipment list.
• Financials: copies of financial statements; letters issued by accountants; budget information; AR and AP aging reports
• Legal: lists of complaints, claims and any pending or past litigation; description of outstanding judgments, orders, etc.; pending actions or investigations.
• Miscellaneous: insurance policies; planning or strategy statements; any industry reports or industry analysis; copies of audit reports covering pension, retirement or employee benefit plans; real estate surveys, title reports or appraisals made in the last three years.

The most important thing to remember about the due diligence process is that it doesn’t have to be hard. By doing the necessary work up front in gathering and organizing everything we expect the buyer to need, we’ll smooth the process, quickly alleviate the buyer’s concerns, and pave the way to a successful transaction.

Contact us today about California Wineries for sale or selling your winery.

When you minimize the combined taxes of buyer and seller, you are increasing the value of the transaction. Consequently, you will be in a better negotiating position with the buyer of your winery.

This article discusses the most common ways to structure a winery sale transaction, and how these structuring methodologies will impact both the seller’s and buyer’s taxes. As Winery Sales Specialists, we’ll generally look at several options, but focus on the ones that maximize your after tax money.

What You, The Winery Seller Considers

You will want to minimize your capital gains and set the timing of the gains. For example, you might want your gain to coincide with the receipt of installment payments.

Also, the seller will be concerned with the nature of the payment. At current tax rates, the rate on capital gains is less than that of ordinary income. Thus, you will want the gain characterized as capital gains, and not ordinary income.

What the Winery Buyer Considers

The buyer, on the other hand, wants to reduce the after-tax cost of acquiring the winery. He may want to buy the assets of your winery, which he can then depreciate quickly. Or, your business may have a net operating loss or tax credit carryforward that he can preserve for future use.

The buyer may be in a position to pay more for your business if he can see favorable tax implications from the sale.

How to Structure The Sale of a Winery

There are three major structural alternatives in the purchase or sale of a winery:

• Sale of assets
• Sale of stock
• A Merger

What’s Better? Selling Stock or Assets?

The main goal, of course, is to maximize your after-tax gain. This isn’t as easy as it might appear at first because each structure has its inherent advantages for both buyer and seller. When the structure is to the buyer’s advantage, then as the seller, you can negotiate a higher price.

On the other hand, if the structure is in your favor as the seller, then the buyer will often want to negotiate a lower price.

Some of the difference has to do with the tax structure of your winery. For example, with a C corporation, the seller usually does better by selling stock. If you sell the stock, you pay capital gains on your net proceeds from the stock sale, based on your tax basis in the stock (what you paid into the corporation in exchange for the stock).

If you sell the assets, you’re “taxed twice.” First, the corporation will pay capital gains on the difference between the selling price and the tax basis of the assets. Then, when the corporation is liquidated, you’ll pay personal capital gains on the excess of the net proceeds of the sale, over your existing basis in the stock. Plus, the capital gains tax rate for the C corporation is (currently) much higher than the personal capital gains rate.

The buyer might push for an asset sale because he’ll see an immediate tax benefit. For example, if a buyer pays $1 million for an asset-based deal, then the IRS allows the buyer to start depreciating those assets immediately.

In contrast, when a deal is structured around stock, the assets on the books must be amortized at their value to the seller, which is likely to be far less than the total sale price. The negative aspect from a buyer’s vantage point is that intangibles like goodwill can’t be written off as quickly as they might be in an asset-based deal.

Consider the Inherent Risks

When the buyer purchases the assets, he has an opportunity to significantly reduce the risk of the purchase. Assets include hard assets — real estate, computer equipment, furniture, and all your wine-making equipment — as well as intangibles, such as your brand, reputation, client lists, and so-called goodwill.

When you buy assets, nothing unwanted gets carried over from the original corporate entity. If you buy the company’s stock, then you get all the disclosed, but also undisclosed, liabilities. Buyers are concerned about what might be lurking in the dark, such as environmental liabilities, lawsuits, or even unpaid tax bills.

There are ways to mitigate the risk in the agreement. For example, in an asset sale, the contract can state that the buyer will assume certain liabilities of the seller. Because third parties won’t be bound by the terms of the contract, the contract can also include escrow arrangements or indemnification clauses that will remove some of the buyer’s risks, by stating that the seller’s money will be used to pay for claims.

When Might a Buyer Want Stock?

There are some reasons why the buyer may prefer a stock sale in certain situations. Certain contracts such as leases, supply contracts, customer contracts, or employment contracts may have been written between the corporation and the third party, and it will be easier for the buyer to maintain these contracts if the stock is transferred.

There are ways to protect the buyer from potential problems in a stock sale. One of the reasons we insist on full disclosure and transparency is that we can mitigate many of the issues through the due diligence process. You, as the seller, can also make certain representations and warranties regarding the business that will ease the mind of the buyer.

Stock sales may also be simpler to carry out since there’s no need to transfer and re-title every single asset.

You can find buyers who won’t care if they can’t depreciate assets, maybe because they’ll be taking on so much debt tied to the transaction that they don’t need any more tax write-offs. Or your own company might carry with it other advantages, maybe in the form of a below-market lease or some other beneficial legal agreement, which could compensate.

Does a Merger Make Sense?

You can also merge your business with the buyer’s existing business to create one surviving entity. In a merger, the surviving entity includes all of the assets and liabilities of both companies.

From your point of view as the seller, the merger is similar to a stock purchase But you are paid in stock of the new company. This is usually not a liquidity event, meaning after the merger you would own a certain percentage of the new entity.

This type of structure is uncommon for closely held companies. It involves some complex issues, and it may not be easy to combine the two separate organizations into one. We have successfully done mergers and the most common reason is the merged entity has higher total value after the merger, and we then sell the merged company afterwards.

Conclusion

If you’re structured as an S corporation or LLC, your life may be easier. There’s maybe no tax advantage to selling stock over assets. Either way, the gains get passed directly through to you as the stockholder. If the buyer benefits from an asset sale, then you’re in a better position to negotiate a higher price, because either way your tax liability will be the same.

Please contact us today about California wineries for sale or selling your winery.

In the years you’ve owned your winery, you’ve been wise to use accepted and legal business practices. You’ve put your children on the payroll and funneled your profits back into capital improvements. You’ve given perks to yourself and your family.

This has given you more working capital and reduced your tax burden. It’s all perfectly legal and accepted.

However, prospective buyers will look at your financial statements from a completely different perspective. They’ll “subtract” these items from your profit margin. They want to see the cash flow potential of your winery under their management.

We want to clean up your financials so that it’s easily understandable by the buyer and shows the true profit to them when they are proud owners.

We add transparency to the process and make it easier for the buyer to see the financial value of your business by performing a financial recast. We want to make the potential profit of your business “clear” to a buyer. That is, the profit potential is completely transparent to the buyer.

Recasting Your Existing Financials

We achieve this by “recasting” your existing financials into something that’s more easily understood by the buyer. Essentially, we (with your CPA) adjust your past income statements (the last three years) to mirror what might have happened should you:

• Removed your perks, adjust owners’ salaries to market, Adjusted rent to market if facility is owned
• Eliminate various expenses and income that will not happen following the sale, including discontinued products or the gain from the sale of business assets…
• Remove one time non-recurring extraordinary expenses; i.e., big consulting project expenses…
• Remove personal assets, and any non-operating expenses or income…
• Eliminate interest payments on business loans…
• Strike assets that won’t go with the company…
• Review Inventory write offs, the possible requirement for them now and then any other conditions…
• Write off any accounts receivable that are uncollectable…
• Write off any loans the company made to you…
• Remove other debt that wont be assumed by the buyer.

You’re not trying to mislead buyers. The goal of recasting financials is to provide the buyer a clear understanding of the money generating potential of the business.

Be sure to carefully document any changes for your original documents on the face of the recast financial statements. You need to fully disclose everything to the buyer. This can reduce the Due Diligence process, and ensure a level of trust and faith between you and the buyer.

We’ll make these recasting adjustments to both your income statement and balance sheet. A primary reason we do this is that the fair market value of certain assets could be more or less than the book value, so we want to make these adjustments on your balance sheet.

The recast balance sheet may also identify assets and liabilities that are to become excluded from the sales transaction, such as cash you’ll keep for yourself.

Financial Recast Demo Statement

It is common in financial recasting to add back certain discretionary, extraordinary and non-cash expenses in order to indicate the approximate historical cash flow of the business. SDC is usually termed as Earnings Before Interest, Taxes, and Depreciation (EBITDA) and before owner’s compensation. ANI is often known as Earnings Before Interest, Taxes, and Depreciation (EBITDA) and before owner’s compensation. ANI is often referred to as Earnings Before Interest, Taxes, and Depreciation (EBITDA) and after reasonable industry market rate compensation to replace the owner with an employed manager.

Please contact us about California Wineries for sale or for selling your winery.