One of the ways that a typical Real Estate Broker works is to run comparables on a property to determine its value. When selling a winery that’s also a business, the art and science of business valuation becomes much more complex. You’ll want to assess the true value of your winery.
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:
- 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.
- 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.
