Winery Valuation: The EBITDA Fallacy (Part 1)

“There are lies, damned lies, and statistics” – Mark Twain

There is often talk in wine business circles about the “EBITDA multiple” describing the valuation of a company after an acquisition is announced.  However, this multiple may be irrelevant with respect to what drives the final transaction value when negotiating an actual sale between two parties.  Commonly a 10X EBITDA multiple is talked about as “average” in today’s market.   So, if you own a winery with “Earnings Before Interest, Taxes, Depreciation and Amortization” equal to $1MM, your company will sell for $10MM, right?  Maybe, but probably not. [i]

Here are descriptions of three brand-only transactions negotiated by GWP:

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So clearly in this data set, a standard earnings multiple was irrelevant.  How is the value of a winery business determined during an actual sale process?

  • The most important factor is whether the brand/winery you are selling is EXACTLY what the buyer wants or needs for their strategic plans. If you are lucky, you will have more than one motivated buyer, in which case you have negotiating leverage, which drives up the final sale price.
  • Once you’ve met the hurdle of having an interested buyer, the other aspects that drive valuation include such things as sales growth, scalability from both a sourcing and distribution standpoint, intrinsic profitability, and your product category (e.g. Pinot Noir when Pinot’s a hot product category.)
  • By intrinsic profitability we mean that a wine brand’s established bottle price relative to the acquirer’s production and selling costs are at or above normal profit levels. In the examples, above, Seller A had strong to normal profitability in their current operation, and would continue to do so for the buyer, so this EBITDA multiple was in the “normal” range.  Seller C had abnormally low profitability due to high costs, but the brand profits would be normal for the buyer, who had significant economies of scale and underutilized capacity.   The transaction valuation (driven by strong growth) in relation to Seller C’s low net profits therefore skewed the EBITDA multiple higher.

So why all the talk about EBITDA multiples in describing winery transactions?  To begin with, we all prefer to simplify complex situations.  Furthermore, this is the valuation metric frequently referenced with respect to publicly traded companies, so it’s a more common and familiar metric across the whole economy.  But the wine merger and acquisition market is largely made up of privately held companies selling to privately held companies.  This is why a multiple of earnings is a less reliable predictor of what the price of a seller’s brand will be in an arms-length transaction when the money changes hands.


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Napa Cabernet Sauvignon Wine Vs Grape Pricing

cabAs we wrap up the 2016 harvest, wineries and growers begin to settle up for grape deliveries. What determines grape pricing and how does this pricing affect wine pricing?

Because Napa grape costs are the highest in California, virtually all red wine made with Napa grapes must be retail priced at $40 or more per bottle for the winery to receive a reasonable profit. The majority of Napa’s production is from two Bordeaux varieties, Cabernet Sauvignon (43%) and Merlot (11%).  When the other three Bordeaux varieties, Cab Franc, Malbec and Petit Verdot are added, production totals 59% of Napa’s grape crop.

Napa’s lower priced grapes are dominated by white varieties, Chardonnay and Sauvignon Blanc, representing approximately 25% of Napa production.

Since Cabernet Sauvignon is the dominant variety in Napa, let’s focus on the economics of its production and pricing. For a winery to experience a reasonable profit, grape costs should not exceed 25% of the wine’s selling price. As a consequence, the tonnage grape to retail bottle price ratio should range from 100 for lower priced Napa Cabernet Sauvignon to as high as 140 times for more expensive Cabernet.

The attached winery profiles show the economics at various wine pricing levels. In each of these profiles, the winery realizes a profit equal to 15% of sales. Most Napa Valley wineries sell a mix of retail and wholesale through distributors. Traditionally, sales to distributors are at 50% of the retail price. As the wine price goes up, generally a higher portion of wine is sold retail, so while wine production costs increase in absolute terms, they will decrease as a percentage of sales. Offsetting this increased gross profit are higher selling and administrative costs per case due to the combination of lower sales volume, a higher percentage of retail sales and a lack of scale.


Bottom line, if Napa Valley wine is retail priced outside of this 100 to 140 times grape cost to bottle price range, the economics don’t work for the winery.

Timing The Market : When To Sell Your Winery

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veraison 2016


A lot of quality transactions have been announced in the last 18 months.  All the big players:  Gallo, Ste Michelle, Jackson Family and many more have acquired high-profile brands.  This naturally raises the question in the minds of winery owners:  Is this a good time to sell?

Most winery owners believe that the most important factor when considering a sale of their winery is market timing, i.e., timing a transaction to occur when the market for wineries is favorable.  This sounds good in theory, but it requires predicting the future, which of course is fraught with peril.

In the many years that our firm has been engaged in selling wine companies, we have operated in every type of market.  We launched a sale effort of a prestige company when the winery M&A market was at a high point and the bidding resulted in a record- breaking price. Due diligence was then completed and the closing was scheduled for October 31— which unfortunately fell just after the financial meltdown of 2008.  As a result, the buyer pulled out and the sale did not close.

Conversely, shortly after that transaction terminated, but now at the depths of the “Great Recession” — the low point for winery sale transactions — we launched another sale process.  This winery sold at a very high price, despite the terrible market timing, first because the business was a successful operation at a strategic inflection point with great future potential, and second because, before the sale effort was launched, the winery was fully prepared for sale and therefore positioned for maximum value to the buyer.

In both examples, the results occurred despite current market conditions – not because of them.  The lesson from this consistently inconsistent pattern in history is clear – sales are made, not timed.

The length of time required to decide and prepare to sell, conduct a sale process, find a buyer, negotiate and close a transaction is such that the market conditions at closing are almost always different than at the beginning, or even the middle of the process.

On the other hand, there is no bad time to plan and prepare to sell, so that you’re ready when the time comes to launch a sale process.  Proper preparation is critical to success and takes time – much more than one usually imagines. This preparation includes considering the best timing for the individual circumstances of the winery and its owners, which is far more important than more general market considerations.

There are certainly bad times to launch a sale effort, which more often depends on a winery’s individual circumstances. While the current transaction market reflects robust wine sales and buyer optimism, the only thing that we can predict about the transaction market tomorrow is that whether for better or worse, conditions will change.

Sparkling wine – it’s not just from France anymore

sparkling glassesBubbly, Champers, Sparklers, Fizz – when consumers are looking for sparkling wine, they are no longer simply being offered French Champagne. Other country’s products, like Italian Prosecco, Spanish Cava and US Méthode Champenoise are flooding the market.

In April, I gave a presentation at the 2016 Sparkling Wine Symposium in Oregon and here are a few of the interesting details from that presentation.

According to the Organisation of Vine & Wine (OVW), France accounted for 22% of the sparkling wine production for 2013 with Italy and Germany close behind at 20% and 16% respectively.

The category, has seen an increase of 40% since 2003 to 200M cases annually in 2013 representing 7% of global wine production.chart captureNot only is more sparkling wine being made – more wine is being drunk.

In the US, sparkling wine consumption has doubled from 2003 to 2013. A report from the Wine Institute states that in 2014, 80 California producers shipped 9.4 million cases to US markets alone. In 2013, for drinkers in foreign markets, Germany lead with 34M cases and France and Russia followed with 23M cases each. Overall, from 2003 to 2013, sparkling wine consumption has increased by 30%.

rose sparkling1For producers & winemakers, there are some barriers to entrance in this market – most notably production costs (especially for Méthode Champenoise) & global competition but sparkling wine lovers now have more options by price point, style of wine and country of origin than ever before. Cheers to that.


Wine and the Con Artist

A friend of mine and I were exchanging e-mails a few weeks ago about the mounting financial difficulties of Robert Dahl, the winery owner who became famous last week for murdering one of his investors in a vineyard just south of where I am sitting. My comment then about the people who create these types of financial disasters was, “it’s sometimes hard to distinguish between the stupid and the corrupt.” I think we have our answer now with regard to Mr. Dahl.

There is no shortage of crooks and con artists in the American business landscape, (see CNBC’s ‘American Greed’ – Napa Valley addition coming soon) but I do think that there are some special aspects of the wine industry that make it particularly attractive to the type of person who prefers to take money from others rather than trying to earn it. First, these are communities with a lot of wealth, populated by many people who have come from other places. A stranger showing up with a story of financial success is not unusual here. Then there is the allure of owning a winery. For a con artist to separate experienced investors from their money, they need to have (or create) a circumstance where normal caution might be set aside. A beautiful winery in a bucolic setting, alcohol and good food can certainly set the stage.

As an advisor to winery owners selling their companies, I have developed an instinct for identifying a con, in order to dismiss them as a prospective buyer. Here are some of the hallmarks of a person not to be trusted:

  • Name dropping
  • Comes with a story of success and spins a tale of fantastic opportunity
  • Appears wealthy
  • Wants to use other people’s money (or property)

In the world we live in today, avoiding being taken in really only requires a healthy skepticism about the stories strangers tell us and access to the internet.

For example, in the depths of the wine industry downturn caused by the financial crisis, I was working with the owner of a winery and vineyard that had been on the market for some time.  He called me one day to say that he had been approached by some “investors” interested in leasing the property. A simple Google search turned up an SEC indictment of one of the parties for investor fraud. Tellingly, they had perpetrated a scheme involving a leased property. Conversations with real estate brokers throughout wine country revealed that these investors were talking with everyone who had a property that had been sitting on the market.

We usually think of a con artist as someone who operates on a personal level with small targets like little old ladies, not sophisticated business people like ourselves. The truth is that sometimes a crook can engineer a multi-million dollar fraud. For winery owners and investors alike, the old adage, “if it sounds too good to be true, it probably is,” should always stay at the back of our minds.