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Green in a Sea of Red: Winery Sales Are a Continuing Safe Haven in Rough Waters

October 28, 2022 Articles
Wine Industry Advisor

The U.S. financial markets are down, yet marquee California wineries are attracting high earnings multiples and Wine Country real estate continues to command exceptionally high prices.

The wine industry is unusual and complex. It’s highly fragmented with many brands and a diversity of owners from large public companies to small private operations. Multigenerational families coexist with legacy brands and newcomers to the wine industry from elsewhere. Together, this variety helps create a stable market for winery and vineyard properties.

Who is selling?

Family-run and legacy wineries dominate recent sellers, with fewer institutional investors entering the market. After watching the recent long bull market, many family groups have determined this is a good time to make an exit, prior to any market-wide corrections in asset values. Second or third generation owners may have determined it’s in the family’s best interest to avoid possible infighting and depart at a market high. First generation owners may have come to the conclusion that, without clear succession candidates, their heirs are better off inheriting cash than an operating family business. And honestly, the high values achieved in recent deals may have convinced some owners that “there’s no time like the present.”

The most sought-after wineries are those with a strong mix of assets, including a strong brand with good sales, robust trademarks, and other intellectual property rights. There have also been booming deals for valuable hard assets: wineries and vineyards with good location, wineries with use permits that allow for greater than average events and visitation, and well-equipped production facilities.

Successful sellers know what they have to offer and market accordingly.

Who is buying — and why?

With winery and vineyard prices remaining at elevated levels, buyers need capital. This means professional and institutional investors, as well as individuals with deep pockets from other sources. There continues to be strong interest from European buyers, particularly those already in the wine business. For Europeans facing increased political and economic instability, the wine business remains an attractive option, particularly because California real estate has historically been a wise investment. Adding all these types of buyers together means there’s a relatively large pool of prospects for any well-positioned deal.

Currently, the most successful acquisitions are strategic, where the buyer realizes more than just specific assets. Buyers may want to establish themselves in a different market, improve their wine sales and distribution in the U.S., maximize the productivity of their existing winery and vineyard assets — or some combination of these goals. It’s important for would-be sellers to locate the “right” buyer, for whom their business is especially valuable. This kind of “matchmaking” requires a solid advisory and deal team, but this is where the truly eye-watering prices happen.

Perils and pitfalls

No one wants to buy someone else’s problems, so an ounce of prevention is the key to a smooth process. Would-be sellers should spend time with their advisory team on corporate housekeeping matters before going to market.

  • Is the title to the property clean and correct?
  • Are there minority shareholders and members who need to be apprised of a deal in advance?
  • Can the stakeholders agree to let one person handle the deal negotiations? (Deals with multiple sellers are often hard and expensive to close.)
  • Is the winery in compliance with its permits and licenses? If not, can this be corrected prior to going to market?

During the deal process, it’s important for sellers to focus on the ultimate outcome and not to become flustered by the inevitable ups and downs of negotiations. Emotions can run high, but deals are best handled dispassionately. Having a clear objective — and clear parameters for what is and is not acceptable — will help sellers achieve a favorable outcome. And of course, having experienced advisors is a critical aspect of success. Those who regularly handle winery and vineyard transactions are best positioned to advise and oversee the process efficiently and effectively.

What’s next?

Looking back to the last economic downturn may provide instruction for how to navigate the rocky economic waters of today. During the Great Recession, many expected to see large-scale sales of winery and vineyard properties at discounted values. That never happened.

Instead, we saw the M&A market slow down dramatically: deals simply stopped happening due to a mismatch between seller expectations and buyer valuations. Sellers generally worked with their banks to modify existing debt and most were able to ride out the lean times when sales of luxury consumer goods, including wines, were faltering. In addition to debt restructuring, many sellers used that time to modify their land use entitlements to expand their opportunities for hospitality and increase the value of their assets. Those who did so were well positioned for growth when the market began to improve.

Although the market is currently uncertain, demand for high-quality winery and vineyard properties continues to exceed the supply. Given that dynamic, it appears unlikely the pool of buyers will dry up enough to have a significant impact. More likely, deals will continue apace with wine assets holding their value overall. Although wine deals may slow down if the overall market continues to decline, the wine industry continues to represent a safe haven in turbulent seas.

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