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Money, money, money (Appraising Wines and Vines, part 1)

One of the toughest problems facing any successful business is raising or freeing-up capital. Whether through a loan, equity capital, sale or joint venture, a critical step in the winery finance romance is the valuation of the winery or vineyard. In this article we will concentrate on the approach taken and required by the conventional lender - your banker.

Whether you approach a lender directly, or, more commonly, through a finance broker familiar with the wine industry, you are immediately faced with a daunting mountain of paper. Your life's work is to be reduced to documents, forms and figures.

These days John Q. Lender is very cautious, but the traditional tenets remain:

* That there is security for his loan (so that if the worst happens he could sell the property for more than the loan balance), and

* that you can afford the loan payments, preferably from the business proceeds alone, but possibly supplemented by other income sources.

If you've kept good accounting records, and every year for the last five years has shown a steadily increasing profit, then you're already ahead of the game. But if this isn't the case, DON'T PANIC, you're not alone, and this is where the professional abilities of the loan broker and the appraiser can make a dramatic difference. While John Q. Lender is no expert on wines and vines, he does see a whole cross section of businesses, and knows that real life successful businesses do not always show increasing profits and do not always have pristine accounting.

Our job is to present an unbiased and accurate assessment of the value and likely performance of your winery, its market appeal and marketability. Show us your pluses: your strong distributor network, your gongs and glowing reviews, the magic and appeal of your beautiful winery and setting - and tell us how you are dealing with the problems: the slow payers, the duff wine that's occupying valuable cooperage, the vines that are no longer profitable. After all, if you didn't have these problems, you probably wouldn't be looking for finance.

John Q. may never visit your winery, but will rely on our valuation and on our description of your winery to help him make his decision. The days when an appraisal was merely a file stuffer are long gone. Today the appraisal and financial reports are thoroughly studied. John Q. is neither a moralist nor a romanticist, but extensive research has shown that he is human. And as such reacts positively to the well-presented, the visually attractive, and the easily understood. That's our job.

What's the Security?

Vineyards grow vines, wineries make wine. It's that simple. A vineyard is an agricultural investment in land and permanent plantings. A winery is a production plant, a light industrial type of use. Unlike many other light industrial uses, its location and design make it usually incapable of supporting any other type of production.

The business of producing wine is a unique function of the property and buildings. It is often combined with supporting and ancillary uses. These can be by vertical integration of vineyards, or retail sales through a wine tasting room, and by horizontal integration, such as a rural residential estate, entertainment facilities, and custom bottling.

Location, Location, Location.

Different vines make different wines, and different locations suit particular varietals. More on this later.

A winery is normally located near the vineyards that are the source of its grapes. This is not only because of the critical time factors involved in harvesting and crushing, but because of the perceived value of association with a particular viticultural appellation. Thus location of the winery as it relates to the appellation is a significant valuation factor.

The appeal, popularity, prestige, and international recognition of the Napa and Sonoma County appellations and wines has led to an escalation of prices paid for wineries and vineyards in these viticultural areas. The wineries in these areas are much more than production facilities in the buying market's eye; they are statements of a lifestyle, the rural chic of the California coastal region.

It is this marketing value that has driven prices in much of these two regions well above the actual productivity value of the vineyard or winery acquired.

Many winery establishments in the North Coast counties acquire much of their grape product from less prestigious viticultural regions. They have also moved to establish winery facilities in other, more affordable locations, which are nevertheless capable of producing a quality wine of notable appellation distinction. They look to use the resultant crush both in their existing label wines, and to create a name for these newer appellations. But let us not digress too much.

What Creates Value?

There are four components of value in an integrated vineyard-winery property:

* Real Estate

* Equipment

* Inventory

* Goodwill

Let's look at these one by one:

Real Estate

This can be further divided into underlying land and improvements. Remember that vines constitute a permanent planting and thus add value as an improvement, just the same way as almond trees, or apple orchards. Some lenders do not understand this, and are concerned that if the owner of the property defaults, the planting value will disappear. We are careful to thoroughly explain that vines can be, and frequently are, contracts managed by outside firms rather than by the owner.

The value of the underlying land is driven simply by what can be done with it, now or tomorrow. Owning vineyard land in the Napa Valley is rather like having a prestige address: it can give you a toe in the door by association, and this is the cause of much of the underlying land value differential between the different appellations.

Let's face it, you own your land, and you can't move it elsewhere; that's the nature of land, it just stays where it is. Clearly the historic crop yield, the varietal, and the per ton price paid will be major factors in the improved land value. What you can also do is develop a land management plan, improving the land through irrigation, resilient root stock and more profitable varietals, and maintain that value through good estate management. Sometimes this sounds like a Catch 22: you want to borrow the money to do these improvements, but you haven't done them so the value isn't there. But give yourself a fighting chance. If you can present us with a detailed plan, and it smacks of sound management (providing your projections aren't out of star wars) it imparts an air of confidence and planning.

The winery is first and foremost a manufacturing facility. If your winery looks like Versailles, that's a marketing factor, and straddles both real estate and goodwill. To the extent that we feel a winery buyer would pay a premium for your stone griffon cornices, we will add it to the real estate value. To the extent that it helps sell more wine is a gray area, and to the extent that it is a personal whim (along with your fine art collection), we will consider it an over-improvement of the real estate and you're on your own.

If your winery has a permit for retail sales, we will give this value. If you have a restaurant or hospitality suite, we will give this value. Some of these uses are symbiotic, and augment the value of the whole greater than their individual value elements. But equally if you happen to lease a corner of your estate to the village store, this is merely rental income, and will be treated as such.

Equipment

This is typically valued on a "value in use" basis. Without going technical on you this is rather more than its value as if sold under the hammer, and less than its replacement cost new. While you will have depreciated your equipment for tax purposes, this tax depreciated figure is just that, and may or may not be close to the value in use. What we are trying to get at is the price that a buyer of the winery, in operation, would pay. Normally one of the biggest equipment items is cooperage, and stainless steel has a good long life. A detailed equipment inventory, with the price and date acquired, goes a long way to helping us recognize all and every item of equipment. Breaking it down into vineyard, winery, office, retail store, etc. is also a great help.

Inventory

Once more two categories: wine and non-wine inventory. First the bad news: wine in cooperage is valued at the lower of cost or value. However, wine in the case is valued based on the distributor case price. We don't peer into each vat, nor sip from each bottle, but we do check your production, inventory and sales records to see if they tally.

Non-wine inventory is rarely a big item - it's mainly bottles, closures, labels, and sundry supplies. Again a detailed list makes everyone's life easier, but it's not a category to lose much sleep over - unless you're stuck with 100,000 jeroboams.

Goodwill

Is it real or is it Memorex? In the next article we will talk about our methods of valuation, and how we value this component of value. It's probably moot, because nobody lends against goodwill in and of itself, and if you are selling out (or raising equity cash) it's wrapped up within the whole package.

Meat and Potatoes

All this analysis may seem like fancy footwork, but it helps any investor or lender, and this includes you the owner, to understand how the asset strength of the winery is composed. The number of lenders who understand wineries is limited but growing, and much of the credit for widening the field of potential lenders must go to the finance brokers. Even if John Q. will only lend against the real estate, the value of this is so much tied to the unique product that is produced - your wine - that it is invaluable for him to have a full understanding of the total operation.

(A. Clive King is president of A. Clive King Associates, Sausalito, leading appraisers of wineries and vineyards throughout northern and central California. Next month: The Valuation of Vineyards and Wineries.)
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:King, A. Clive
Publication:Wines & Vines
Article Type:Evaluation
Date:Jun 1, 1991
Words:1694
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