Vineyard & Winery Management Magazine
Feature Story
Surviving the Sale of Your WineryHow to manage the process and make the best possible deal
By Timothy Allen, CPA
We've all read the recent business articles about wineries being forced to sell because of money problems. The fact is, if you as a winery owner are facing financial pressure, you don't care about what anyone else in the industry is doing - you care about your winery.
I've worked in winery finance my entire career. I have been involved with the sale or refinance of 15 wineries during that time, most of these in the last seven years. There are specific patterns that show themselves during the sales process. Yes, your fruit source and your brand are unique, but your financial pressures are not.
How do you know if you're getting into financial trouble? Your accounts payable are more than 60 days past due. You consistently make the bank payment on the last day of the 10-day grace period. You're introduced to a new team at your bank, who will be "managing the relationship for the foreseeable future." Cash flow and net income are negative. You're at the end of your credit line. The bank wants to meet with you, and it's not to take you to dinner.
MANAGING THE SALES PROCESS
If you are forced to sell your winery, there are steps you can take to protect yourself, get along with your bank and investors, and get the best price.
1. Hire the best wine industry professionals - CPAs, attorneys and brokers - and take their advice.
Would you give a dime to get a dollar? The answer should be "yes." If you hire talented professionals, yes, you will pay them well. But if you choose to go it alone, your result will be worse. There are too many complex considerations such as estate tax, property tax and wine sales contracts to leave to chance. I have seen winery owners forgo attorney work at $400 per hour, only to have it cost more than $1 million later. There are many excellent, well-educated professionals from which to choose (and no, your brother-in-law is not a good choice).
The other half of this suggestion is to actually take the professionals' advice. Would you hire Michel Rolland to be your consulting winemaker, only to keep making wine the old way? When professionals give you advice, it's because they've seen your type of transaction before, and they can help you.
It is critically important that you, the winery principal, stay on good terms with your potential investor. Feel free to say: "I would have done this deal weeks ago, but you know those CPAs/attorneys/brokers. They just love to push paper." Trust me, your potential investor has spared no expense on his own professional team.
If money is tight, try to make a deal with your professionals to pay them X% more if they'll defer payment until escrow when a transaction is final.
2. Explore all of your options first, then choose the best one from what comes in.
When a winery is faced with a financial crisis, it's natural to want to pursue the most attractive option first. So the owner will first go to the bank, then the insurance companies, then subordinated debt, then think about selling a vineyard. Six months later, when you realize you have to sell the winery, too, the bank is locking the doors. In a financial crisis, time is not your friend. Don't put yourself in a bind by holding out for your one favorite option.
I've seen an offer drop from $20 million to $15 million to $10 million because the seller pursued only one option. Without competing offers, why wouldn't the buyer continue to drop his price? Instead, do a "shotgun" approach, and go after all your options on day one. Create a competitive offer environment. If you can't bear the thought of selling your winery, can you bear the thought of handing the keys to the bank instead? I recommend giving yourself one year's time to pursue all the buyers, get a little further out of this economic climate, and get the best price. Time allows for choices to be developed, which will create the highest return.
I know it can be disappointing. If you "just had $1 million, everything would be back on track." We all just need $1 million. But a mere $100,000 in unpaid debt is enough to force a transaction if you don't have the money.
3. Make immediate changes in spending.
This means making aggressive cuts in payroll and ancillary programs. Pare down staff and functions to the core business: making and selling wine. Preserve as much cash as possible to create more time. This is also a good time to take another look at aggressively managing your working capital: Collect on your accounts receivable and talk to your vendors about getting paid later. They'd rather get paid later than not at all. If things get tough, get tougher: Give aggressive discounts for cash payments, sell wine in bulk, push back bottling, etc.
Create a rolling eight-week, detailed cash-flow forecast. Understand where your cash is coming from and going to every week. Use this schedule to tell yourself how much time you have with which to work.
4. Be ready to accept less than what you wanted.
If you need to quickly sell a vineyard asset, winery asset or the winery business itself, be prepared to take a significant discount on your price. There are many attractive opportunities on the market right now, so there are a lot of choices available to buyers.
5. Talk to your bankers, early and often; don't avoid them. Keep making your loan payments.
When money is tight, pay the bank first. A vendor can stop providing you goods and services, but the bank can take your business. You should also understand that your bank can't give you any more money. The Feds require both collateral and adequate cash flow. That means that until you become cash-flow positive, you have all the money from your bank that you're going to get, no matter how much collateral you've pledged.
MORE TIPS
Here is some additional advice to consider when selling a winery business:
-There is no such thing as a 50/50 partner. You may think bringing on a 50/50 partner will create the best of all worlds, but that world doesn't exist. The partner with the money is the one who will run the show. As soon as your winery needs more capital, and your partner makes a capital contribution you can't match, you'll be diluted to a minority investor.
-A verbal promise that can't be written into a contract may as well have never happened. A deal that relies upon the verbal promises of the other party should be avoided. Some bad buyers don't honor their written contracts either, so be careful about the partner you choose.
-Choose your partner carefully to avoid seller's remorse. If you sell to a large public company, chances are it will increase production and reduce prices. Don't be surprised. Anyone who buys your winery is betting that they can make more money by doing things differently. But if choosing a family wine company over a large public company will cost you $10 million, you have to ask yourself (and your investors) how important having the right buyer really is.
-Try to distance yourself emotionally from the transaction and the process. Let your professionals do the heavy lifting, and position them as intermediaries. Emotion will work against you in this process.
-Treat your existing minority investors well and communicate with them early and often. They understand the business risk they took. They just want to be treated fairly.
-Talk to your employees as early as possible. Don't give them reason to leave in the middle of the process. Your employees are smart, and the grapevine spreads a lot of rumors. Do what you can to inform and protect your staff so that the transition will be smooth. Your employees are your responsibility, not the buyer's. Accept the fact that you'll probably lose your team. You're the only one who's going to get a five-year consulting contract after the sale.
-Finding a minority investor to save your winery is like finding Bigfoot. Accept that finding a large minority investor is difficult, if not impossible. The glamour of investing in the wine industry only goes so far. Corollary: I do believe private equity offerings with a low dollar minimum, such as $25,000 per share, can and do work, especially for those wineries with a popular direct-to-consumer business. But you need time to create the offering, communicate it and attract funds.
-Timing is everything. If you can hang on for two more years, do it.
INVEST IN FINANCE
If you invest in a good financial infrastructure at the outset, you'll be far less likely to have to sell your business down the road, when prices are at their worst. There will be no ugly surprises and you'll be ready for contingencies.
Many winery owners do not adequately understand their books and records. This requires communication, realism and decision-making based on real accounting information. When and if you do decide to sell your business, the proper financial infrastructure will get you a better price.
A winery sale is an emotional process and it's very hard on everybody. Understand that the process won't last forever, and rely on your professionals. If you find yourself in a tight spot, contact me (tim@allenwine.com or (707) 968-5089) and I can give you some good referrals.
Timothy Allen, CPA, is the founder and managing partner of St. Helena Winery Accounting & Finance LLP, a full-service, outsourced accounting and finance company exclusively serving the wine industry. Allen has worked as a CPA for Deloitte & Touche; controller for La Crema (Kendall-Jackson); CFO for Sonoma-Cutrer (Brown-Forman); director of operations and finance for Arrowood (Robert Mondavi); CFO for Rosenblum Cellars, and president and CFO for Kuleto Estate.
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