Geoff McIntyre
Paying attention to what purchasers of wineries look for can make a big difference
I was meeting recently with the owner of one of the wineries we work with and the topic of conversation turned to attracting a buyer or investor for the business. They asked me, “How much longer do we [my wife and I] want to be working this hard?” And, “How are we going to get our money out and realize a return on what we have invested?”
We discussed:
• How a privately owned business is valued
• What does a buyer or investors look for in a business and how to make a business more attractive to potential buyers or investors?
These great questions indicate the owner has made a real paradigm shift in how he was looking at his business. He had (temporarily, at least) escaped the overwhelming pull of the day-to-day demands of running an estate winery to consider a longer term view. He had started thinking of his winery as his product –not just his wine. Michael Gerber summarized this nicely in his landmark book, The E-Myth: Work on your business, not in your business. This phrase has become well known in entrepreneurial literature to the point of becoming cliché, but what does it really mean?
The winery owners we work with all have a good sense of what their wine customers want. They are wine drinkers themselves, they interact with their customers directly in their wineshops, and many talk regularly with their licensee customers. They get that when it comes to their winery visitors, they are not just selling wine, they are selling an experience.
To view your winery business as a product that someone might buy or invest in, think about things at a higher level. A good marketing professional will tell you that with thousands of wine labels out there, you need a strategy for making your brand stand out. This is called differentiation and it applies equally to selling winery businesses as well as wine. You need to understand what your buyer wants that you are uniquely positioned to deliver and tailor your message accordingly.
How a privately owned business is valued
We will keep this discussion to basic concepts, so there are two main perspectives when valuing a business: the asset based (balance sheet) approach and the earnings based approach. Both approaches should be looked at when valuing a business, but often one will be more appropriate than the other.
The asset based approach focuses on what the business owns and what it is worth. In an estate winery, assets mainly mean land and buildings, equipment and wine inventory. Wineries are capital intensive businesses, so assets are important when determining overall value. A business with valuable assets reduces the risk for a buyer; if things don’t go well they can always look at selling the underlying assets and cutting their losses.
An earnings based approach focuses on historical and projected operating results. All other things being equal, a winery business with a history of consistent profitability and positive cash flow will command a higher price than a winery in a start-up phase, or one with an inconsistent earnings history. People generally expect history to repeat itself, so past consistency reduces perceived risk.
A business valuator will also look at a value indicated by an earnings based approach and compare that to a value indicated by an asset based approach. This often involves comparing key metrics, like return on assets (ROA) or return on investment (ROI) with published industry statistics. If a target business has a history of generating a ROA or ROI greater than the industry benchmark, it is a good indication that it has developed a mature and valuable brand. A buyer should be willing to pay a premium for such a winery.
Here is a short list of some of the things we have found to be of particular interest to potential buyers or investors:
1. Land and Location
Buyers in this industry are quite often just as interested in an appealing lifestyle as in a successful business, and we all know B.C. has a lot to offer for lifestyle.
An onsite residence may be important to some buyers. A pleasing location with good consumer traffic is a definite plus. Too much land or too elaborate a winery may limit the market for potential buyers due to cost.
2. Cash Flow
Nothing magical here: people like to see credible financial information that clearly shows a consistent history of strong, positive cash flow. Strong cash flow is good evidence of a strong brand and that is something you can charge a buyer for. On the other hand, a winery that has inconsistent results or has struggled financially will generate questions and uncertainty. This leads, at best, to a lower offering price and at worst, to no offers at all.
It’s true some buyers look for under-performing businesses that they can turn around, but you will never get top dollar from such a buyer.
Good results can sometimes be hidden by poorly presented information. Consider getting qualified assistance to produce a professional offering document. Assurance over the numbers presented by a qualified third party accountant is also a plus.
3. Brand
Brand is really a catchall word for the intangible asset value built up over the years. A strong brand means your customers clearly understand what makes you unique and what you stand for. Perceived benefits exceed the perceived cost. This is called value.
A strong brand is the sign a business is past the start-up stage. It is not easy to develop, so it’s something most buyers are willing to pay for, and all investors are looking for.
4. Transferability
It may seem odd, but one of the best things you can do to prepare your business for sale is to make yourself redundant. Who will want to buy your winery if you are critical to its success? A smart buyer looks for a business with a great team already in place who are going to stick around.
The exception to this rule might be where the winery is being purchased for consolidation with a larger group and an existing team; however, buyers still looking to acquire talent, so a knowledgeable team who will stick around after the purchase is always a plus.
A lifestyle buyer with no wine industry experience will definitely be attracted to a business with a strong already team in place that they can retain. A seller can help by agreeing to stay on as a consultant, but this is usually a less than ideal situation unless they are being bought out over time.
The good news is that many of these factors that make your estate winery business attractive to a potential buyer or investor are the same things that make it profitable while you own it. You need to work on these factors well in advance to realize maximum value when you want to sell.