A new set of glasses: Seeing your business through the eyes of a potential buyer

Ellen Hunt, Partner, Scion Advisors

Robert Nicholson, founder of investment banking firm International Wine Associates, is quoted in a June 2008 Forbes article as saying, “Jeffrey Hopmayer is prowling California’s wine country.” Hopmayer, chief executive of privately held Sapphire Brands of Nashville, Tennessee, says he expects to make ten acquisitions over the next five years. While we are currently seeing a surge of private equity buyers in wine, Nicholson reflects, “Bottom line is there are only realistically one, maybe two, qualified buyers on most deals today.”

Today’s buyers choose their deals with a careful eye on timing. They ask themselves:

• Is the seller really ready for sell their business? Are they too early?
• Does the business have too many problems?
• How much money will they need to invest to get a worthwhile return?
• How fast can they get that return?

To begin your ownership transition process, you must see your business through the eyes of a potential buyer. You will need to identify your optimal buyer’s profile and understand what they are looking for, as well as what value drivers they will use to determine an offer price for your business.

Fundamentally, there are two types of buyers: strategic and financial.

Strategic Buyers
The strategic buyer is focused on how well your brand fits into their existing wine business. Frequently the buyer looks at whether your products round out their portfolio mix by adding either varietal or geographical diversity, or both. Other primary considerations will be access to new markets, increased market share in existing markets and additional leverage within the distribution network.

For example, in July of 2007, Italian winemaking giant Marchese Piero Antinori teamed up with Ste. Michelle Wine Estates of Washington state, to purchase Stag’s Leap Wine Cellars in order to improve their muscle in the national market.

Another type of strategic buyer is one who is looking to enter the wine business and decided it is cheaper and faster to buy an existing wine brand rather than building one from scratch. Either way, they are typically making a long-term commitment to the business.

Strategic buyers are quickly drying up and are starting to hone their own portfolios by selling off some of their winery purchases. Constellation, the world's largest wine company, recently sold six winery brands to Ascentia and their associated properties to VinREIT.

Pros: Because of perceived market synergies and potential cost savings in combining two businesses, strategic buyers are often willing to offer you more for your business than a financial buyer would.

Cons: A strategic buyer is more likely to eliminate part or all of the existing management team if there are redundancies, resulting in cost savings and potentially higher profitability. The result could be damaging to your existing company culture and result in the alienation of loyal customers and employees.

Financial Buyers
Financial buyers typically seek to invest in undervalued companies where they can apply their financial and management expertise to create value that will be realized when they exit the investment in the short to mid term.

They typically view the value drivers as consistent cash flow and a portfolio of wines with solid market position with strong growth potential.

An example is the recent acquisition of Duckhorn by GI Partners, who were looking to invest in a strong wine brand to expand their existing portfolio of investments. They view the wine industry as viable with significant growth potential and, unlike many financial buyers, they are not opposed to asset-based investments and a mid to long-term investment horizon.

Pros: These buyers can be flexible and creative in how they structure a deal, allowing for current management to retain upside potential. Because many of the existing employees may remain with the company, there may be less disruption of the business and existing customer relationships.

Cons: The deal will often require ongoing involvement of the owner for some period of time. In addition, since financial buyers often employ significant leverage, the due diligence process can be more arduous and protracted as there will likely be a lending institution involved.

Conclusion
As stated in our related article, How to Prepare Your Winery For Sale: 5 steps to build a brand that’s worth more and avoid being a fire sale!, it is likely to be a buyers’ market for the foreseeable future, and the needs and interests of the buyer pool are constantly evolving.

This is where the partners at Scion Advisors can help. We are in constant conversation with many of the potential buyers and as a result, we have a solid understanding of what it will take for the seller to come out ahead in what is sure to be a very competitive market over the next decade.

Please contact Ellen Hunt for more information: (707) 266-4065.


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