Whether you are a business appraiser, a winery owner, or an investor, wineries are very unique to assess and have many variables that affect the value. Beyond the different valuation methods and how they can be applied to the wine industry, there are unique, industry-specific factors to be considered. In BVR’s special report, What It’s Worth: Winery Value, the authors cover special issues and considerations when valuing a business in the wine industry, including the industry’s regulatory issues, ownership, grapes, equipment costs, pest issues, and more. The following are some of the key features to investigate before your next engagement.
Because this is an alcoholic beverage-centric industry, wineries deal with the federal Alcohol and Tobacco Tax and Trade Bureau (TTB). There are also state liquor controls, and municipalities and local governments often have their own regulations on how wineries operate within their jurisdictions. The following are common issues the TTB handles:
- Changes in ownership;
- Background checks;
- Abandoned locations;
- Production and storage space blueprints;
- Event space zoning and usage;
- Water rights; and
- Tax laws.
If the owner has built a million-dollar primary residence on the winery property, the pool of prospective buyers will be cut down significantly. Any buyers looking to establish a presence in an area by adding some additional vineyards or an operating facility won’t want to buy a million-dollar house.
Owners should consider adding a nice mobile home on the property or building a practical, three-bedroom, two-bath, ranch-style house for a couple hundred thousand dollars. That way, even if the prospective buyer doesn’t want the residence, it can be used by the vineyard master or visitors who come to the winery.
When visiting the winery for a site visit, appraisers should pay attention to how things are laid out and where the winery is in its annual cycle. Make sure you understand the full process. Ask about bottling, including whether the winery has contract bottlers come in. When the winery does have a bottling line, have the people show it to you and ask how many bottles they can produce and how happy they are with it. Bottling lines can be expensive and take up a fair amount of space, so often the smaller wineries don’t have them.
Vine Ownership and Grape Costs
Appraisers should make sure that, when grapes are moved from the vineyard to the winery, the winery books the transaction at a market rate. It does not always happen, so it’s critical to ask about it and understand how it is happening. The following are additional questions to ask during the appraisal:
- Who owns the land?
- Who owns the equipment?
- Who owns the vines, trellising, irrigation, and land improvements?
A business appraiser can hire a real estate appraiser, or have the owner of the winery do it, to appraise both the vineyards and the building and winery. Then the business appraiser works with the real estate appraiser to make sure the overall valuation makes sense.
As with any business that has owner salary, the salary figure will likely need to be adjusted because it won’t be at a market comparable. Because wineries don’t tend to be great cash-flow producers, owners are undercompensated, not overcompensated. So additional costs may need to be added to normalized cash flows.
Make sure the equipment is being captured in the entity for which it is being used and, if it isn’t, make sure appropriate rent is being charged. Find out whether improvements to real property and land are in the right entity.
Currently, most, but not all, of the vineyards in the United States are based on grafted rootstock. This is a very important distinction because of the danger of phylloxera, an aphid that lives in the soil and attaches to self-rooted vines, sucking the life out of them and devastating the vineyard. Ask the owner specifically whether the vineyards are on grafted rootstock. If they are not, there is a real risk that the vineyard could become infected with phylloxera and be gone in less than five years.
Cooperage is the term used to describe the oak barrels. Most top-end winemakers use French oak barrels, and they are very specific about it. The prices have moderated a bit here because the euro has come down compared to the dollar. Most winery owners spend at least $1,000 per barrel. Some winemakers can spend as much as $1,500 on a barrel. Cooperage is always a large line item on the balance sheet.
“Library” in this sense refers to where the winemaker keeps wines from past vintages. Winemakers keep a library to get a good idea of how well their wine ages going back 10, 15, or 20 years. A library is also kept for special visitors or for special winemaker dinners and for when they will pull one out for dinner at home. Also, sometimes the library is not owned by the entity that is being valued. It might belong to another entity, or it might have been transferred to the owners themselves. You need to value the library and understand who owns it.
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. Luckily, the industry is so fascinating that many valuators would jump at the chance to take up the challenge.
To learn more about valuing wineries, including the unique methods and techniques of winery valuation, benchmarking data, and key value drivers, check out BVR’s special report, What It’s Worth: Winery Value. Preview the table of contents and download a free excerpt of the report.