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MANA GEMENT Getting Ready for a Sale Advisors detail ways to assess winery value By Robert Nicholson and Josh Grace of International Wine Associates coming years—it is becoming increasingly important for winery owners to focus on what they can do to prepare their busi- nesses for the rigors of the sales process. Often, the greatest challenges to complet- ing the sale of a small- to medium-sized winery can be avoided with some focused work in the early phases of the sale-prep- aration process, before the winery is actu- ally on the market. Many of these items are analogous to a homeowner putting on a coat of paint, however, some are more substantial, like replacing the roof. Hopefully, this list will be instructive to those who are now considering a sale but, like many family-owned wineries, have heretofore run their businesses with dif- ferent goals and objectives in mind. Because a sales process can take 12 months or longer, it is important to review the following items 18 to 24 months before beginning the process in order not to delay the sale any longer than necessary, since delays can lead to erosion of value. In our experience, we have found that a review of the following items would help the sales process of most wineries: Improve data collection: Buyers will want to have access to detailed reports showing how much each product costs to produce, how profitable each brand is, what the future growth projections of the company are and how distributor depletions and inventory are tracking. Many wineries do not report in enough detail or forecast future growth. Clean up the balance sheet: Make sure all receivables and payables are current and that any items related to other entities are clearly identified. W Indentify "family expenses": Many winer- ies reduce taxable income by paying salaries to family members, giving them company cars or paying for certain ex- penses. These need to be clearly identified 76 Wines & Vines JAnUARY 2012 ith the recent rate of winery and brand acqui- sitions accelerating—and with a large number of long-term winery owners looking to retire in the Potential winery sellers should start preparing the business for sale 18 to 24 months before they intend to put it on the market. so potential buyers will not include them when valuing the business. Restate financial statements: Work with a CPA or an advisory firm such as our company, International Wine Associates, to recast statements. As above, most win- eries report their books in such a way as to minimize income (and therefore taxes). However, in a sale we work hard to show each winery's profits in the best light, which entails restating earnings as if to interested shareholders looking to invest. Deal with unsalable inventory: Many wineries hold old inventory that makes the brand appear to be behind a vintage or two. It is preferable to show potential buyers that the winery has no old inven- tory (other than a library) and is releasing on schedule. Old inventory should be disposed of or written off, preferably in the year prior to a sale. Get key agreements in writing: Many small wineries operate on handshake agreements with growers, staff, family members, leases, etc. While this works for day-to-day business operations, these Highlights • The authors' company, International Wine Associates, has completed win- ery transactions valued at more than $1 billion. Here they explain the steps that would-be winery sellers should take to get ready for a sale including the valuation process. • The process should begin at least 18 to 24 months before a property is offered for sale. • Setting a value on the winery can be done via asset values, however, the au- thors recommend discounted cash flow as the best method for some wineries. • Five types of potential buyers are identi- fied and described.