Scion Advisors - Articles

How to prepare your winery for sale: 5 steps to build a brand that’s worth more and avoid being a fire sale!

June 20, 2008
Ellen Hunt, Partner, Scion Advisors

You may be caught in a buyers' market for the next ten years: nearly 1,000 family-owned wineries on the West Coast expect to go through a change in ownership within the next decade. Highly established icon brands, like Stag’s Leap Wine Cellars and Duckhorn have been handsomely rewarded for their years of hard work, but the majority of wineries will end up as real estate sales, with little to no value allocated to their brand.

Bill Price, founder of the Texas Pacific Group and a veteran of wine industry acquisitions, says we can expect a bell curve of sales. The “A” brands will be the primary target of the first wave over the next two years, followed by a second wave of those “B” brands that prepare their businesses for a successful sale.

Whether you exit as a brand sale, or end up as a fire sale, will depend on what you do well in advance to increase the value of your business.

How long will it take to increase the net worth of my business?
Most owners do not have an effective ownership exit or transition plan in place, according to the report “Ownership Transitions in the Wine Industry” conducted in February 2008 by Silicon Valley Bank and Scion Advisors.

A successful exit strategy begins long before the actual sale or succession. This is normally a 2-5 year process depending upon a number of factors:
• The health of your business and your brand
• Its appeal to a buyer who is willing to spend the money
• Your realistic perception of what your business is worth
• A strong team of advisors who can drive a successful sale
• Your readiness as a business leader to step aside and move on to new projects.

“We don’t plan to sell our business, we want it to stay in the family”.
In Scion’s February 2008 report, 4 out of 10 winery owners said they prefer to pass the business on to the kids. Unfortunately, the norm is less than 25% of family-owned businesses make it to the 2nd generation and less than 1% makes it past the 3rd generation.

One of the main reasons generational transfers fail is lack of planning and preparation (see sidebar “Factors contributing to demise of family continuity”). Supporting this notion, our report reveals only 23% of wineries have financial plans in place, only 20% have an exit strategy completed and only 16% have strategic plans in place.

Business owners who succeed inter-generationally, such as the Antinori family (23 generations), or who exit thru a successful sale such as Duckhorn and Stags Leap Wine Cellars, do a good job maximizing the value and the returns from their business assets.

How to build a business that is worth more
Most buyers will be looking for a business with an upside and they will be assessing the risk very carefully. Ideal winery candidates must demonstrate several years of consistent growth in profitability and have the ability to generate at least $2 million in EBIDTA (Earnings Before Interest, Taxes, Depreciation and Amortization).

Your baseline goal is to get the best return you can from your hard work and have a business at the end of it all that provides financial stability. This holds true whether you seek to sell your winery to an outsider, to your employees or to your children. Even if you plan to remain in your business for the next 10 years, your business’ net worth has an immediate impact on your income and your ability to raise growth financing and equity.

Five important steps to maximize brand value and business assets

1) Develop a winner’s attitude: be prepared for the unforeseen
Run your business as if you plan to sell it within 10 years. “This philosophy focuses wineries on improving performance by applying more effective, common sense business practices,” asserts Hank Salvo, Scion Advisors partner and retired Robert Mondavi Winery CFO.

Faced with a key investor’s sudden departure or a family member’s illness or death, you may have unexpected financing needs. You may find yourself in “garage sale” mode: selling at a huge discount, unable to sell before bank foreclosure, or to realize a proper return on your investment in the business.

Preparing a marginally-performing business for sale in some industries can take 12 to 18 months, but due to the asset-intensive nature and market idiosyncrasies of the wine industry, this can take two to five years. On short order and faced with the unforeseen, it is nearly impossible to effectively position your business to suit the needs of a viable buyer and not be a fire sale.

2) Stop and take stock
You need an outsider’s perspective. Erle Martin, CEO Crimson Wine Group, observes, “Owners have a hard time assessing their own weaknesses. A good analogy is how difficult it is to assess your own wines because everyone develops a ’house palate’. Winery owners become myopic, focused on their neighbors, mired in day-to-day operations and can lose valuable perspective. If I were thinking of selling, I would hire someone like Scion to do a diagnostic scorecard, and then focus a plan on those areas that need fixing.”

3) Define what success looks like for you
Having clearly prioritized your desires is important. “If you don’t know where you’re going, any road will take you there,” says Bill Price. A clear vision of your goals and objectives allow you to make the best decisions related to your exit strategy.

For some, success could mean optimizing current business performance to maximize growth and profits. For others, it could mean preparing the business for an exit strategy, such as a sale or family succession.

You must see your business through the eyes of a potential buyer. You will need to identify your optimal buyer’s profile and learn what they are looking for. Equally important is an understanding of the value drivers they will use to determine an offer price for your business (see sidebar, “Six critical value drivers”).

4) Plan your transition in two phases
The first phase in your transition planning process involves getting your business ready for the right financial advisor and their buyers. This can take 2 to 3 years and this is where Scion can help.

“Working closely with owners in recent years, we have seen their commitment combined with our process generate serious results such as growing EBIDTA by 5 times within 3 years and building profitability through doubling average profits per case with a more rationalized product and channel strategy. At the core of each of these successes was a realistic plan and an aligned group of owners,” says Scion partner Deborah Steinthal.

The second phase is about finding the right financial advisor and buyer. “Today’s deal makers will choose carefully when and with whom to negotiate”, says Robert Nicholson of International Wine Associates. The cost of identifying and negotiating a deal for a potential buyer is huge: they have to research your business then perform due diligence with a potential seller. Once they develop a realistic valuation of your business, they have to figure out how to negotiate a price and contract that meets the needs on both sides.

5) Build your transition team
Preparing for a sale to a 3rd party or to your kids can be daunting and highly disruptive to your day-to-day business operations. To minimize distractions, limit the involvement of your internal team and clarify who will deliver a focused message, gather information and interact with potential buyers.

Along with your internal team, outside trusted advisors can be invaluable help in accelerating your learning curve, as well as provide insight, clarity and objective guidance in a process that can be both complex and emotionally taxing.

It all comes down to brand strength and financial performance.
At a recent industry conference, Dan Duckhorn stated that “Brand is paramount to a successful sale”.

Avoid being a fire sale. You will have a much better opportunity to come out ahead by taking control of a transition plan that maximizes brand strength and financial performance.

This is where the Scion team can help you build a stronger, more profitable business. We have a proven approach to help you to properly assess your business, generate a clear vision of your desired future, and prepare strategically to build a business that is worth more.