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MANA GEMENT INSURANCE FOR WINERIES Great Price, Broad Coverage and Responsive Friendly Service. Wine Team - Debra Costa, Brian Stephenson and Liz Bishop. Because You're Different! available on the subject. We consider the benefits of each method as well as our knowledge of the winery being valued before selecting which method is most appropriate to each situation. Asset values Asset values are perhaps the easiest method to understand. Each asset (inven- tory, land, buildings, equipment, vineyard, etc.) on the winery's balance sheet is given a market value. Typically, the inventory and real estate will have values exceeding those on the winery's balance sheet and become incremental to the historical cost figures shown there. In some cases, a liq- uidation valuation would be considered— usually at values below the balance sheet. Newly developed wineries—those that are not cash-flow positive, or are expe- riencing declining sales—are typically valued using asset value; however, we find that it can be valuable to assess the asset value of every winery we value. Each seller should review the company assets and decide ahead of time which ones he or she intends to keep. 101 Second Street #120 Petaluma, CA 94952 707.781.3400 www.heffins.com License # 0564249 "Multiples" explained Discussions of multiples are common both before a deal begins and after it has been announced. The multiples most com- monly used are the multiple of revenues and EBITDA (earnings before interest taxes and depreciation). For example, a winery that generates $15 million in annual revenue and sells for $30 million would be said to have sold for a "two times" revenue multiple ($30 ÷ $15 = 2), and a winery with EBITDA of $2 million that sells for $20 million would be said to have achieved a "10 times" EBITDA multiple ($20 ÷ $2 = 10). The value of multiples is that they give buyers, sellers and advisors a yardstick with which they can evaluate comparative values across multiple deals. If a Sonoma winery owner hears that his competitor sold for "2.5 times" revenues, he can get a ballpark value of his own winery. The limitation of multiples, however, is that they are crude estimates and don't take into consideration what can often be differences between types of buyers and sellers, particularly when one seller owns 78 Wines & Vines JAnUARY 2012 significant vineyards and another does not. Some buyers might pay a price that is five times revenues for Winery A but would not be willing to pay two times revenues for Winery B, despite the fact that Winery B seems very similar. It is only through deeper analysis that the actual value can be better estimated, and the greater value of Winery A will be made clear. Discounted cash flow A discounted cash flow (DCF) is the analysis that sophisticated buyers will use to arrive at the present-day value of future cash flows generated by a business. This process involves projecting future revenues, subtracting future costs, elimi- nating duplicative expenses (costs that a buyer can eliminate and are part of the savings, or synergies, that a business will benefit from in an acquisition) and arriv- ing at the cash flow produced annually by the business. The benefit to sellers of our DCF analysis is that it uses the winery's internal projections of future sales and performance, which can then be used to present the longer term potential of the business to buyers. Although we do not share specifics of our DCF analysis with buyers, projecting the winery's future cash flow allows us to explain how and why businesses will grow under ownership. One criticism of the DCF valuation is the inevitable variation in the projections used in the analysis of future results achieved by the winery. However, a DCF analysis is the valuation process undertaken by serious buyers who may as a result of their DCF be able to justify a higher valuation for their winery acquisitions. Thus, the DCF has the benefit of establishing a present-day value that the business offers to a buyer, even if the analysis is not entirely accurate in predicting future results. Other methods While there are other methods such as "excess earnings" and comparisons to publicly traded (and thus publicly valued) companies, we find that winery buyers do not use these methods, thus they are not instructive in determining a potential market value for a winery or brand. Robert Nicholson and Josh Grace work for International Wine Associates, a leading provider of strategic advisory, valuation, merger and acquisition services to the global wine industry. Incorporated in 1990 and headquartered in Healdsburg, Calif., IWA has completed transac- tions valued at more than $1 billion and has worked with most of the leading multinationals and many small, family-owned wine estates.