Book Review BVR’s—What It’s Worth

Winery Value

QuickRead’s Technical Editor, Roberto Castro, reviews BVR’s What It’s Worth: Winery Value

Washington State has 11 viticultural areas or American Viticulatural Areas (AVAs); all but one is on the west side of the Cascade Mountain Range.  The earliest grape vines planted in Washington State were at Fort Vancouver in 1825 by traders working for the Hudson’s Bay Company.  During the Prohibition, wineries went out of business and in the 1950s, a group of professors from the University of Washington—hobbyists—founded Associated Vintners, which was later renamed Columbia Winery, to grow and produce premium wines.  In 2007, the State of Washington certified its 500^th winery and by early 2009, the 600^th winery.  In California, there are over 200 AVAs.  The Alcohol and Tobacco Tax and Trade Bureau (TTB), an agency of the U.S.  Department of the Treasury, regulates the wine industry and approves the AVAs.  See http://ttb.gov/appellation/us_by_ava.pdf.  State, municipal, and local laws further regulate wineries.  This is a competitive industry, where appraisers need to understand the demand, market forces, and laws that impact operations.  In this review, we review BVR’s Special Report, What Its’s Worth: Winery Value.

This special report was published in May 2016.  Scott Kraft served as its editor.  The material in the report is drawn from prior presentations.  One of the contributors is Keith Meyers, CPA, ABV, CFF, of Portland, OR’s Perkins & Co.  Mr. Meyers is a shareholder and heads the firm’s Business Valuation, Litigation Support; and Beer, Wine, and Spirits Practice Groups.  James A. Andersen of Hemming Morse, LLP is another leading contributor to this special report.  Kraft tells readers that, “you’ll get advice from top experts who work with wineries and study valuation issues associated with this industry on a daily basis.  These experts walk you through the factors involved in winery valuation, from the best valuation approaches to use to how to value the buildings associated with the winery, the specialized equipment needed to produce the wine, and the key personnel who operate the winery.”

The report is broken down into the five following sections:

• Section I, The Landscape of Value for the Winery Industry
• Section II, Valuation Methods and Considerations for Wineries
• Section III, Buy-Sell Trends in the Winery Market
• Section IV, Selling and Succession Planning for Winery Owners
• Section V, Financial and Valuation Data for Wineries

In Section I, one of the first issues asked is what factor is unique to valuing a winery?  One of the big differences is “capital intensiveness” of the business.  Wineries are very capital intensive and lack cash flow earnings.  Stated otherwise, vineyards, buildings, property, and everything else that goes into winemaking is very expensive, especially when one factors the time involved going from the vines to the tanks or barrels, then the aging process, time to market, and storage.  It takes a number of years to generate a return.

The type of winery is also a differentiator.  Smaller wineries usually tend to have one brand (the family brand or one they devised), whereas larger wineries may own several brands and have special and advanced techniques for manufacturing.  Another key differentiator is the price point, segment, or tier at which the wine bottle is sold.  There are various price points, segments, or tiers; those include jug, popular premiums, mid-premium, ultra-premium, and luxury.

In this industry, “winery owners who have not planned a couple of years ahead in relation to their finances and debt structure are the riskiest to analyze for valuation.”  Also discussed is the three-tier sales channel structure and how a change in the mix can affect revenue.  There are a host of other factors, including: weather forecasting/vineyard replanting models, grape sourcing and manufacturing inputs, inventory controls, and staffing that affect the winery and need to be recognized in the valuation report.

The section delivers a light overview of the differentiating factors.

Section II focuses on valuation methods and considerations for wineries.  The chapter is based on the BVR webinar, Special Considerations in Valuing Wineries.  In this section, the report discusses use of the Cost Approach and, in particular, the wine inventory finished goods inventory.  The latter item is important since, “TTB requires finished goods inventory to be reported to them several times a year.”

The viability of the Market and Income Approaches are also discussed.  As noted earlier, understanding the laws and regulatory environment in which the winery operates and how the business is evolving is a key factor to developing a thoughtful analysis.  While the special report does not include citations to laws or regulations, here, it does a good job highlighting some of what is required.  The discussion on winery types is also helpful.  This business is evolving.  On one end, appraisers will see a “vineyard, which is basically a farm with vines on it.  At the other end of the spectrum is an estate winery, which has a vineyard and production facility together.”  The discussion delves into operating and custom crush wineries and then negociants—a “company that actually buys bulk wines and mixes, labels, packages, and sells it.”

This chapter provides an overview and underscores, “the valuation skills that you already have are a good start for valuing a winery, and the most common approaches used in the industry are familiar.  But there is a wide body of knowledge to conquer and a long learning curve to truly understand all the nuances of the winery business.”

For those interested in knowing more about the industry, this reviewer recommends subscribing to industry websites—for example, the TTB, a wine growers association—and magazines that focus on the industry, such as Wines & Vines or even Wine Spectator to get a better sense of the competition and innovation.

Section II, the lengthiest of the special report, also delves into other areas; specifically:

• Six Questions to Ask When Analyzing Winery Operations and Cash Flows
• Valuation Example: A Winery Case Study
• Four Unique Aspects of Wineries Make Valuation a Challenge
• Cases of Note in Winery Transactions

With regard to the six question chapter, the questions asked are intended to help the appraiser decide how to plan and execute a winery valuation engagement.  The first question is are the winery’s books maintained on a cash or accrual basis?  This is important since a company on a cash basis “will result in significantly different asset, liability, and net income (loss) calculation than generally accepted accounting procedures.  Items that may require adjustment due to a tax or cash basis of accounting are as follows: accounts receivables, depletion allowances, deferred farming costs, inventory, and last in, first out method adjustments.”  Other questions discussed include:

• What inventory costing methodology is used by the winery?
• What are future capital requirements?
• Is the winery’s forecast reliable?
• Where does the winery source its grapes?
• Are winery and vineyards leased from a related party?

This section also includes a valuation example provided by Mr. Meyers.  The excerpts are from an 85-acre winery–of which 60 acres are planted—that produces 14,000 cases per year.  Readers will benefit from reading Mr. Meyers’ thought process and the issues he tackles.

Mr. Meyers is also the author of the following chapter, Four Unique Aspects of Wineries Make Valuation a Challenge.  While the information shared here has been previously covered, Mr. Meyers’ comments serve to underscore the challenges one faces valuing a winery.  It is worth reading and bearing in mind.

The report also includes a chapter on case law.  The following are discussed: Arn v. Arn, Ohio, is a marital dissolution case; DFG Wine Co, LLC v. Eight Estates Wine Holdings, LLC, Delaware, a shareholder dispute; and Estate of Heck v. Commissioner, a Tax Court decision, involving the use of the Market Approach to value a minority interest.

Section III of the report focuses on Buy-Sell Trends in the Winery Market.  This is a short chapter.  This section offers some market data information and the buy-sell landscape.

With regard to the economic data, it states that “of the 8,393 wineries in the United States as of July 2015, some 59 had volume of 500,000 or more cases, and only 255 had volume of 50,000–49,999 cases.  Compare that total with the number of small or limited-production wineries producing under 5,000 cases a year.  There are 6,569 of those, making up to 70% of the total.”  This chapter concludes with thoughts on the viability of these smaller wineries.  It is worth getting the authors perspective.

On the issue of buy-sell trends, the information shared here is derived from a report prepared by Silicon Valley Bank in 2014 called Ownership Transition in the Wine Industry.  This report surmises that “the majority of the winery transactions in the next five years will tend to be smaller wineries, defined as those producing 10,000 cases per year or less.  These wineries are also more likely to include an estate property as part of the transaction, which could have a negative impact on the valuation and sales transaction process.”  The report goes into further detail regarding what it sees happening in wineries producing 5,001–10,000 case range, 10,001–25,000 case range, 25,001–50,000 case range, 50,001–100,000 case range, 100,001–250,000 case range, and those with more than 250,000 cases annually.

Section IV is also a short but valuable chapter.  The focus here is on Selling and Succession Planning for Winery Owners.  The initial focus is the identification of what can be done to maximize the value of a winery; a winery is not just land.  Another chapter focuses on the importance and value of succession planning.  There are no surprises here.  Succession planning is time consuming and not often well received by those in the industry.

Section V focuses on Financial and Valuation Data for Wineries.  The primary source of information for this chapter is BizMiner.  Valuation appraisers and lenders are familiar with this data source.  The last few pages offer additional referral sources.  If you are not familiar with the industry and want to learn more, these additional resources will help you better understand the business.

In conclusion, this is a valuable reference source for appraisers that think this is an interesting industry.  It is interesting and challenging.  So, pour yourself a glass and read this special report.

Roberto H Castro, JD, MST, MBA, CVA, CPVA, CMEA, BCMHV is an appraiser of businesses, machinery and equipment, and Managing Member of Central Washington Appraisal, Economics & Forensics, LLC. Mr. Castro is also an attorney with a focus on business growth and succession planning with offices in Wenatchee and Chelan, WA (home to many small wineries). In addition, He is Technical Editor of QuickRead.
Mr. Castro is knowledgeable of the industry and can be reached at (509) 679-3668 or by e-mail to rcastro@cwa-appraisal.com, or rcastro@rcastrolaw.com.