How to Calculate Winery Value

Seminar offers winery and vineyard owners ways to maximize assets

by Paul Franson
Michael Houlihan gallo
When Michael Houlihan sold his Barefoot wine brand to Gallo it produced 600,000 cases per year.
Napa, Calif.—Many winery and vineyard owners would like to find out how much their property is worth and present it in the most favorable manner in preparation for a sale. The Seminar Group recently presented a program about that subject in conjunction with another meeting about buying and selling vineyards and wineries. While designed for lawyers needing yearly education, the information was equally valuable for property owners and other professionals who attended.

The seminar began with an explanation of how wine businesses are valued. Naturally, overall market conditions should be the first consideration. Prices were generally much higher before the economy collapsed in 2008, though they are rebounding.

Lawyer and valuation expert James Anderson and CPA Matt Franklin of Zepponi & Co. explained the three ways such businesses are valued: assets, market value and income potential.

Asset valuation
Asset valuation is generally used for distressed or unprofitable businesses. It’s the total of tangible assets (such as land and buildings), improvements (such as vineyard planting), production, equipment and wine inventory as well as permits and privileges (such as the ability to offer public tastings in a restricted county).

It does not consider intangibles such as the brand or goodwill based on the unprofitability of the business. And since most true business buyers such as other wineries are primarily interested in how the acquired business complements theirs, residences and home sites have little value except to lifestyle buyers, who are rare these days.

Market approach
The market approach values the business based on what someone might pay for it for strategic purposes, like filling a hole in a product line or because the buyer has excess capacity. That might be based on comparable sales or the potential. Gallo, for example, bought Barefoot wine brand from Michael Houlihan (another speaker) when the winery’s sales were 600,000 cases per year, thinking (correctly) that it could increase those numbers to millions of cases per year.

Income or discounted cash flow
The third approach, income or discounted cash flow, is the choice of savvy buyers like wineries looking to ensure grape supply. It reflects the future cash flow based on the investment. Like market-based valuation, this is most suitable for profitable companies with high cash flow. It’s expressed as a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). Unfortunately, outlying high multiples like very high prices for cult properties may make potential sales unrealistic.

The second speaker was Ron Janowczyk, senior vice president of Purple Wine Co., whose founder, Dennis Carroll (who also spoke at the symposium), sold first Blackstone for $144 million, then Mark West for $160 million, both to Constellation.

Janowczyk presented rules, some of which were counterintuitive. These are primarily for wine brands, not vineyards.

1. Avoid multi-state distributor agreements. Most acquirers will have their own distributors, and it can be difficult or expensive to get out of existing deals.
2. Get the press to talk about you, both in print and online. If you don’t have a PR agency or expert, get one. And remember that good press starts with a compelling story.
3. Stay domestic. Prospective buyers may wonder why you’re pursuing less profitable foreign business. Can’t you compete domestically? Also, most buyers have their own international efforts and would just have to abandon yours.
4. Seek out the best “B” and “C” distributors who do a good job (and pay you!) You’ll get lost with a big distributor, and any acquirer can estimate the boost the brand will get when they add your brand to their network. Sometimes, however, you have to accept the distributor that will take you.
5. Maintain limited staff. An acquirer would prefer not to fire redundant staff or absorb it in most cases. They’ve got their people and want to leverage your brand.
6. Value data on wine sold, not shipped.
7. Squeeze your programming dollar. Support your brand with tastings, visits and cooperative promotion with resellers that pay off, not discounts. “Spending a lot on sponsorship of the America’s Cup is a negative.” Mark West built up its wine by the glass this way to 35%, a huge percentage.
8. Maintain a disciplined channel strategy. Do one thing well, either three-tier or direct. Just because a retailer wants to sell your wine doesn’t mean you should give it to him, particularly if he will highly discount the retail price. Mark West was five or six years old before it went to grocery chains. “We were already strong in by-the-glass and independent wine shops.”
9. Limit your product line. Mark West sold 600,000 cases of Pinot Noir and a little Chardonnay. Blackstone sold mostly Merlot. “Nothing creates more value than a big focus on one product.” Of course, the story is different for direct and club sales where having many products is an advantage.

Building brands
In another valuable session, mergers and acquisitions expert Mario Zepponi of Zepponi & Co. presented pitfalls that arise in building brands. The first is a brand that lacks a distinctive identity or clear distribution strategy. Another is failure to protect trademarks, copyrights and intellectual property.

An obvious problem is inadequate working capital, especially for fast-growing brands.

Deeper issues might be unstable supply of grapes or bulk wine. Zepponi suggests balancing supply for wineries between estate vineyards, contracts and spot market sources. A winery should have a sensible relationship between its wine sources and bottle prices, too.

Another serious problem is poor control of production costs. First is understanding of the fixed and variable costs. Contracting production services might make more sense than doing it yourself.

If you want to sell, you should clean up old inventory applying the lower of cost and market value in valuations.

Zepponi also warns to know who you are: Is your primary sales channel direct or wholesale? Even if you focus on direct sales, it makes sense to have your wine in key restaurants.

He also finds real estate can distract a winery owner and affect his winery’s value. Perhaps you should separate real estate assets including vineyards from the brand and evaluate the financial impact of owning vs. leasing. "If you have a successful brand with no real estate, I’d think twice about buying a vineyard or winery, especially if you want to sell in a few years."

The M&A expert also lists issues that can really hurt valuation and potential sale starting with poor financial management. Financial information should be current and accurate; you should have a strong CEO reporting results in a generally approved basis of accounting. You should set deadlines to act on unfavorable trends, and forecasting should be realistic and current.

While a strong management team is vital, it’s best to de-emphasize the role of principals who may leave. It’s also important to have a strong plan to retain skilled managers.

And last, Zepponi emphasized the need for a succession plan including a competent successor or exit strategy. Winery principals should understand that ownership can be separated from management.

Posted on 11.13.2012 - 10:28:03 PST
Hi Paul,

Great article! Nice summation. I would however add another zero to the number of cases Barefoot was selling upon sale. We were actually just about 600,000 cases per year. Thanks.
Michael Houlihan