Category: Archived Articles

By Brian D. Kaider, Esq.

Many early stage wineries market their products via tasting room sales, wine clubs, direct-to-consumer shipments and, to the extent permitted, self-distribution to local restaurants, grocery stores, and wine stores. Eventually, winery growth will necessitate working with a distributor, a relationship not to be entered into lightly. A distributor becomes an ambassador for the winery’s brand and, once retained, the supplier may have little control over how its wine is marketed. Further, these relationships can be difficult or financially impossible to break once established.

Supplier/distributor relationships are governed by franchise laws in many states. In the absence of franchise laws, the relationship is defined entirely by a distribution agreement between the parties. But, even in franchise states, the distribution agreement can play a critical role, particularly in the termination of the distributor relationship.

Too often, however, wineries accept a distributor’s “standard” agreement and when the relationship sours, the supplier finds that they are stuck with no viable option to terminate. The best practice is to engage an experienced attorney to negotiate the terms of the distribution agreement. While even the best attorney cannot evade state franchise laws (which generally prohibit a distributor from waiving its rights), there are ways an attorney may help bring balance to the supplier/distributor relationship. Some of the key terms to negotiate include termination, territory, brand scope, and exclusivity.

Termination

The most critical section of the agreement sets forth the manner and circumstances under which a supplier may terminate the distributor. In a franchise state, the law typically says that a supplier may terminate for “good cause.” If good cause is defined in the law, it is paramount that the distribution agreement mirror the language of the law, because in many cases, a contract that contradicts the law will be held invalid, leaving the supplier in the position of effectively not having an agreement at all.

For example, the Virginia Wine Franchise Act states that good cause includes “failure by the wholesaler to substantially comply, without reasonable cause or justification, with any reasonable and material requirement imposed upon him in writing by the winery.” Further, the Act provides, “good cause shall not be construed to exist without a finding of a material deficiency for which the wholesaler is responsible.” Tracking that language, a distribution agreement in Virginia should clearly define the distributor’s obligations, such as meeting certain performance goals, as “material requirements” and explicitly define certain actions, such as mishandling of the product, as “material deficiencies.”

When the law does not define good cause, and in non-franchise states, it is essential for the distribution agreement to do so. The contract should clearly set forth the distributor’s requirements that are critical to the business relationship and for which failure to perform will be grounds for termination. Examples of common requirements include: meeting specified sales and marketing goals, maintaining appropriate records and reports regarding inventory and sales, transporting and storing the product under specified temperature and lighting conditions, exercising adequate quality control measures to ensure product freshness, and paying invoices within a specified time frame. It is also common to include termination rights if the distributor is declared bankrupt, enters a voluntary petition for bankruptcy, enters into a compromise or agreement for the benefit of its creditors, or fails to maintain in good standing all Federal and State licenses and permits necessary for the proper conduct of its business.

In some cases, sale of the distributor or even a change in the ownership structure may be justification for termination. For example, if an acquiring distributor has a much larger portfolio, especially if some brands are direct competitors, the supplier may have grounds to object to the acquisition. While not always allowing a supplier to terminate the distributor, this period during which a supplier may object can provide an opportunity to negotiate with the new distributor to sign a more favorable agreement.

In some franchise states, a supplier must compensate the distributor for the lost business even if the supplier is able to terminate for cause. Sometimes the law simply says the supplier must pay the distributor the “fair market value” of the distribution rights. There can be an expensive battle just to determine that compensation if fair market value is not defined in the distribution agreement. Often, the value is defined as a percentage of the prior year’s case volume multiplied by some dollar amount per case. The “standard” contracts pushed by some distributors can be very severe in this section. In the beer industry, it is not uncommon to see values set at an entire year’s worth of profits times a multiplier that can range from 1.5 to many times higher. In practice, often a new distributor will buy out the distribution rights from the old distributor, but if the supplier wants to return to self-distribution, this buy-out provision may be cost prohibitive.

Territory

Depending on the size, experience, and reach of the distributor, there may be an opportunity to creatively carve out different territories. Territories are most commonly limited to certain states. However, a supplier may be able to limit a smaller distributor to certain counties or even specific types of establishments (grocery stores, but not restaurants, for example). One of the clearest breaches of the distribution agreement, that may constitute good cause for termination, is for a distributor to make sales outside of its contracted territory.

The growth of direct-to-consumer (DtC) sales is one of the biggest threats to the distributor’s business model in the wine industry. According to the 2017 Direct to Consumer Wine Shipping Report (www.dtcreport.com), the 2016 volume of direct-to-consumer wine shipments increased by 17.1% to 5.02 million cases. To mitigate this risk, it is becoming increasingly common for distributors to seek limitations on such sales within their territories in the distribution agreement. Since small wineries make up the fastest-growing segment of these DtC sales, they should carefully evaluate the business case for this type of restriction.

Brands

Generally, when a distributor is hired to carry a winery’s brand, it has the right to all of the products in that brand. But exactly what constitutes a “brand” is unclear both in the statutory language of most state franchise laws and in many distribution agreements. For example, Boordy Vineyards, the first commercial winery in the State of Maryland, sells three “series” of wines, a Landmark series, a Chesapeake Icons series, and a Sweetland Cellars series. The labels on the first two series includes the Boordy Vineyards logo (the name in gold lettering in a black rectangle), but the Sweetland Cellars wines do not (see below). In fact, the only indication that the Sweetland Cellars wines are made by Boordy is a statement to that effect in small print on the back label.

The question is whether the Boordy wines are all a single brand, two brands (one that includes the Landmark and Chesapeake Icons series, since they both carry the Boordy logo and the other being the Sweetland Cellars series, which does not), or three separate brands. Since Maryland does not have a franchise law with respect to wines, the parties are essentially free to define the brands as they wish in their distribution agreement. Failing to make an explicit definition can leave open to interpretation whether the agreement covers the winery’s entire repertoire of products or only a subset. That vagueness can be costly if a dispute arises between a winery and distributor. For what it’s worth, all of Boordy’s wines are managed by a single distributor, though it does hold back a few of the Landmark series wines for sale exclusively through the winery.

Maryland does, however, have a beer franchise law and while “brand” is not explicitly defined, the law appears to favor the distributor in terms of brand scope. Specifically, section 105 of Maryland’s Beer Franchise Fair Dealing Act prohibits a brewery from entering into a beer franchise agreement with more than one distributor for “its brand or brands of beer” in a given territory. One might argue that the language “or brands” means that the first distributor has the right to all brands of the manufacturer in a given territory. In fact, that very issue was litigated in the 1985 case of Erwin and Shafer, Inc. v. Pabst Brewing Co., Inc. and Judge Couch, writing for the panel of The Court of Appeal of Maryland, disagreed. The court held that if a brewery retained a distributor to handle one or more of its brands within a territory, it could not then contract with a second distributor within the territory for those same brands. It could, however, contract with a second distributor to carry a different set of brands.

How far the court would take its interpretation of what is a “brand” is unclear, however. In the Pabst case, the first distributor was given the right to distribute Pabst brand beers, but Pabst later merged with Olympia Brewing Company and gave the second distributor the right to sell its newly acquired Hamm’s brand beers. Whether the court would have allowed the brewery to contract with one distributor for Pabst and another for Pabst Extra Light it did not say.

Exclusivity

Even if rights under a distribution agreement cannot be divided by brand (as in the case of the beer franchise law in Maryland), some states may nevertheless allow a supplier to contract with more than one distributor within a territory. If permitted in their state, a winery should ideally enter into all of its distribution agreements for a given territory simultaneously, providing notice to each distributor. At a minimum, the winery should ensure that the first agreement entered into is explicitly designated as non-exclusive. Otherwise, the distributor may view the agreement as giving it exclusive rights to the territory and could sue the winery for diminishing the distributor’s business if it were to engage a second distributor in that territory.

Final Thoughts

Whether a winery is in a franchise state or not, it is critical that it review and negotiate its distribution agreements carefully, with the assistance of an experienced attorney. It is also important to remember that the supplier’s diligence does not end when the agreement is signed. No matter how well the terms of the distribution agreement are negotiated and drafted, they are effectively useless if the supplier cannot back up its claims for good cause. Accordingly, thorough documentation is essential. If a distributor is not meeting sales goals, mishandling product, or failing to provide adequate reports, they must be given written notice of those deficiencies each time they occur.

There are great distributors out there who become essential partners in a winery’s business. But, sometimes those relationships can turn sour and signing an agreement without anticipating complications down the line can make it virtually impossible to sever those ties. A little forethought and planning and a lot of diligence will go a long way toward a successful termination of a bad relationship.

Brian Kaider is a principal of KaiderLaw, an intellectual property law firm with extensive experience in the craft beverage industry. He has represented clients from the smallest of start-up breweries to Fortune 500 corporations in the navigation of regulatory requirements, drafting and negotiating contracts, prosecuting trademark and patent applications, and complex commercial litigation.

bkaider@kaiderlaw.com
(240) 308-8032

By Angela Faringhy, Innovative Lease Services, Inc

Metal tanks in a row inside the winery factory

Let’s talk about money. In order for your agricultural and wine business to grow – sufficient funds are needed to take on projects, making purchases and expanding your operations to become more efficient and in turn make more money. It sounds so simple, right?

Business owners, both small and large, often go to banks for financial assistance. While banks are one avenue for support, they are not the only establishment. I am here to share with you the most common types of financing you’ll come across and whom you can get them from.
As commercial financing experts working in the industry for over 30 years, we would like to share with you the most common and beneficial financing programs out there on the market for small to medium sized businesses. From cold cash to needing to purchase equipment to restocking inventory and supplies – discover which financing product closely matches your business’s needs.

Equipment Financing and Leasing
– How to get New Equipment

When the situation arises where your business needs to purchase equipment, you don’t have to pay cash to buy it outright, you can finance it. Tractors, stainless steel tanks, destemmers, computer systems and items like table and chairs are all examples of equipment that doesn’t need to be updated frequently and therefore can easily be financed, under the product name, Equipment Financing.

The entity supplying the funding (also known as a Lender) basically purchases the equipment from the supplier and rents the equipment back to the Lessee (your business) for a low monthly fee. At the end of the lease the Lessee has the option to purchase the equipment for as little as $1 or start a new lease for the latest and greatest equipment models. Leases range from 12-72 month terms and can include seasonal payment provisions to help match the cash flows of your business.

By leasing your equipment you also preserve your cash and pay for the equipment over the life of its use. Example a new high producing destemmer costs $40,000 or three new oak casks will come in close to $55,000. It’s hard to fork over the dough when your business is tight on funds. With Equipment Financing you can invest your saved money into other facets of the business or keep safe for future endeavors.

Where to get Equipment Financing: Shop Private Lenders or local credit unions for best programs.

Working Capital Loans
– How to get Cold Cash

Loans are one of the most common forms of business financing. The Working Capital Loan is designed as a short-term solution for those businesses in need of money to help run operations on any scale.

Whether you need to meet routine expenses or pay for new business endeavors, the Business loan is essentially a cash infusion into your bank account that can be used for literally any business expense.

Most commonly working capital is used for growth, debt and inventory (just one or a mix of all 3).

Growth – Utilize capital to expand operations, create a new product line or launch a marketing campaign to drive more sales.

Debt – Use funds to pay delinquent taxes or pre-pay taxes, cover payroll needs, or pay off any other form of high interest debt the business has collected.

Inventory – Stock up on goods that contribute to your bottom line such as; brand new bottles, yeast, boxes, oak barrels, supplies, wine club swag etc.

Where to get a business loan: Lenders, banks and the SBA (application process to qualify).

Invoice Factoring
– Also Known as the Cash Advance

Having seasonal cash flow fluctuations can be a major issue when trying to grow a business. What I mean by this is if a business invoices a customer and in turn gets paid weeks after services are rendered or goods are shipped, there is a lack of consistent cash flow or immediate exchange of money for services. That business will still have to pay up front for supplies and labor, but the valuable cash flow is tied up in invoices leaving the bank account empty. One effective way to solve the cash flow crunch is with Invoice Factoring.

Invoice factoring is simple in how it works:

1. You sell your invoices to a factoring finance provider (like ILS).

2. Factoring provider advances you up to 95% of the invoice amount in 24 hours or as quick as same day.

3. Factoring provider collects full invoice amount from your customer(s).

4. Once your customer pays the factoring company (1 week- 6 months etc.) You get the remaining balance (minus a small factoring fee).

Many companies that often invoice other businesses have found invoice factoring to be an effective and consistent financial strategy for their business – keep reading to learn why.

Unexpected Expenses

Just about every business faces the surprise and stress of an unexpected cost and there isn’t enough cash on hand to manage. Invoice Factoring allows a business to quickly cover those unexpected costs.

Extension of Billing Department

It is common for back offices to struggle with keeping up on billing and collecting from customers. Or if your accounting department isn’t effective in making sure payments are received on time. Many Invoice Factoring partners act as an extension of your billing department so you can eliminate a headache of chasing down payments and focus on other things.

Essentially a cash advance, it’s your money you are just getting it faster!

Where to get Invoice Factoring: Specific Lenders whom offer Invoice Factoring Programs

You may be wondering what about investors, angel funds, cash advances, lines of credit, etc. We have not listed those as we find our customers often come to us in distress after taking on this type of obligation. There are many setbacks with giving away a portion or selling your soul to investors. Also, opening up to many business lines of credit (credit cards), can be a very dark hole to try and climb out of.

Equipment Financing, Working Capital Loans, and Invoice Factoring all have some commonalities and that is they each save your business thousands in capital, apply and receive funding as quick as same week, and most importantly save you from some serious financial mishaps that you may not be able to recover from.

Given that every business is unique, make sure to first consider all of your needs and options. We are a commercial lender and provide custom Equipment Financing Programs, Working Capital Loans and Invoice Factoring Programs. We are available for a free consultation to help you discover what financing product fits your business needs.

For more information visit
Innovative Lease Services, Inc.
online at www.ilslease.com

By Angela Faringhy, Innovative Lease Services, Inc.

Financing Versus Equity Financing

Banks, Lenders, and Investors (oh my!) all exist because we fellow businesses need them. They sometimes can be the fine line between succeeding and closing the doors for good. Each of these entities, holders of large sums of money, provide capital.

In order to build new wineries, buy new equipment, develop new products, and upgrade information technology, businesses have to have money.

Banks, Lenders and Investors each have different financial structures and costs associated with using their money – also known as their “cost of doing business”. The beginning of the year is a popular time for companies to seek out financing assistance due to restructuring or restrategizing operations. No matter the goal, preparation and knowledge is the key to success.

Money Comes with a Price

Money is what we use to buy goods and services. There are many forms of monies in the world but here in the US we use the US Dollar. Not every dollar is treated equal. As a matter of fact every dollar, depending on where it comes from has its own price tag.

The cost of capital refers to your cost of making a specific investment and what you make in return. The basic formula for Cost of Capital is:

the amount of money (cost) and capital (cash) or
another infusion of equity into your business =
your businesses expenses and how much
you pay for it

Generally, business owners will not invest in new projects unless the return on the capital investment is greater than the cost of the capital. The cost of capital is key to all business decisions.

Continue to read up on the two most common ways a business can acquire money; Financing versus Equity Financing.

Equity Financing

Equity in business is the portion of the company’s assets that belong to the owners or stockholders. If a company uses funds provided by investors, then the cost of capital is known as the cost of equity.

Investors, angel funds, venture capitalists etc., all fall under the equity financing umbrella. In summary a business gives up a piece of their company’s equity to purchase cash to expand business and operations, essentially giving up a portion of ownership stake. These investors don’t actively participate in the daily management of the company, but they are active in strategic planning in order to reduce risks and maximize profits.

A popular example is the hit television series Shark Tank. Startup and established businesses alike come on the show seeking financial help, and are willing to negotiate a percentage stake of their business for a monetary investment from the “Sharks.” This is actually the most expensive form of financing. Here is an example why.

Let’s use John’s Packaging, a startup product packaging business. John needs about $100,000 for additional equipment and expenses to really get his business going. John finds an investor willing to provide the $100,000 in return for 20% stake in the company. Let’s fast forward five years, and John’s Packaging is a success valued at $5 million dollars. The 20% stake has grown to a value of 1 million dollars. That is a 1000% return on investment, great for the investor, not so great for John. In conclusion, John received all of the money he needed initially but later down the road realized the true value of what he had given up early on in the game.

Equity Financing is a top choice for a startup who is not necessarily pulling in monthly income quite yet and needs financial assistance to get operations up and running.

Financing

Referring to the cost of capital, Financing is known as cost of debt in the financing world. The word debt gets a bad rap, but it really shouldn’t always be considered a negative. Debt is when the borrower is required to repay the balance by a certain date. Good debt is an investment that will grow in value and generate long term income.

Equipment Financing and Leasing, Working Capital Loans, Cash Advances, and Invoice Factoring are the main products under the financing umbrella.

Financing is provided by lenders and banks. The cost of debt is the interest rate paid by the company on the financing amount. Interest rates are determined by a combination of elements; the current state of the market, how long a business has been operating, risk factors, credit scores, bank history and amount needed. An advantage is the fact that interest rate expenses are tax deductible and therefore more tax-efficient than equity financing. This form of financing is also able to provide services to a broader range of businesses across all industries with a variety of financial histories.

Financing differs from equity financing in that a business may acquire capital without giving away any portion of the business and essentially is utilizing a line of credit. Financing programs are structured to have fixed monthly payments over a 2 or 5 year horizon. You always know going in what your cost is going to be.

John’s Packaging, an 8 year old company needs capital to pay for replacement equipment costing $100,000. John qualifies for an Equipment Financing Program from a Private Lender, whom will provide all $100,000. In return John makes monthly payments for 24 months (also known as the terms) until the $100,000 is paid off. At the end of the term John owns the equipment and still owns 100% of his business.

Financing is a top choice for businesses who are in operation and can make the monthly payments.

In Summary

Partnering up with an investor is expensive, however investors can also provide invaluable industry expertise that may not be available from other resources.

Financing on the other hand is a shorter term investment to help boost business without restructuring or including more hands in the profit share.

The take away is for each and every business to spend time evaluating its true needs, and the potential cost of bringing an investor into the mix or taking out a line of credit.

Innovative Lease Services is a commercial lender and provider of custom Financing Programs.
Visit www.ilslease.com
or call 800-438-1470
for more information.

By Angela Faringhy, Innovative Lease Services, Inc

With majority of business processes automated – payment plans are more readily available than ever before. This includes business goods, services, and consumer goods – almost everything under the sun can be financed.  With that being said it is crucial for a business to offer payment plans for products and services to keep up with competition and most importantly grow sales and increase revenue.  Commonly, a customer that wants or requires a finance option is often not going to share that with whom they are purchasing from. Keep in mind, 100% of your customers that pay cash are already doing so. So suppliers offering a financing option have the chance to convert more existing prospects into buyers.  As a private lender in the B2B space, read more to discover why one of the biggest mistakes a supplier or wholesaler of equipment can make is not providing alternative payment solutions to customers.

Customers will go to Competitors

When a business is greatly in need of business equipment and does not have the funds for it, they will always opt for an affordable option or a supplier whom offers payment plans.

A simple example: a winery’s 7 year old sprayer has given its last spray. The winery simply cannot afford not to get another sprayer immediately. Bugs, fertilizer, amongst other factors contribute to a ruined crop in a very short amount of time. And with no flexible budget to purchase a top of the line brand new machine outright – the winery will seek a supplier who provides some sort of payment plan because they cannot take the hit of such a financial burden at once, so unexpectedly. Next, the winery finds a supplier who lets them make small monthly payments for 24 months. This particular supplier whom offers payment options reaps the benefits of both worlds, selling to those businesses who cannot pay in full and those who can!

Customers Will Buy Less, When They Could Buy More

A grape grower is shopping for a new ripper in order to replant a diseased section for upcoming seasons. The grower is a repeat customer of S.C. Agriculture Equipment & Services, and wants to buy the same model ripper previously purchased. They have the money and are ready to pay in full. However S.C.’s Equipment offers financing now for all equipment and takes the opportunity to tell the grape grower about their new line of premium rippers. The premium line has new technology for better more efficient soil results. These rippers start at $5,000 more than the growers past model. However with payment plan options the grower can now afford one of the premium rippers! They decide to finance in order to upgrade to the higher end ripper. S.C. Agriculture Equipment & Services increased profits on an already secured customer.

Making all equipment affordable by different means of payment arrangements makes room for upselling and in turn more profit!

Common Concerns

Most commonly a business supplier of equipment will not have the financial resources to provide products upfront without being properly reimbursed at the time of transaction. Or typically the business does not want to take the risk of providing payment plans, which can have complications including; customers defaulting on their payments which leads to having to chase down the customer to get the equipment back, or taking further legal action. Thank goodness for collections!

Commercial Lenders and Equipment Leasing

This is where 3rd party Commercial Lenders come into play. A Commercial Lender is a financial institution which provides Financing programs that help support and increase the sales of their Vendor partners. These plans are commonly known as Vendor Financing, In-house Financing, White Label Financing, etc. Here, the lender acts as the de-facto financial arm for the Vendor and provides financing to its customers.

This becomes a real win-win-win for all three parties involved in the transaction. The Vendor gets to make the sale, the Lender gets to gain a new customer, and the end-user gets the equipment they need at the monthly payment that fits their budget.

Customers will experience significant benefits when financing with an independent lender, including speed of approval, limited or no financial information required, and the ability to structure custom payments and terms. For companies that have less-than-perfect credit, an independent lender is often the best solution as the credit windows are often significantly larger. What does this mean for the equipment supplier? Fast transactions and happy customers!

The typical Vendor Financing Program utilizes an Equipment Lease. The entity supplying the funding (also known as a Lender) basically purchases the equipment from the supplier and rents the equipment back to the Lessee (customer) for a low monthly fee. The lease can include cost of equipment, tax, shipping, installation and training. At the end of the lease the Lessee has the option to purchase the equipment for as little as $1 or start a new lease for the latest and greatest equipment models. Leases range from 12-72 month terms and can include seasonal payment provisions to help match the cash flows of the business.

For a customer that wants to own the equipment, most Independent Lenders will provide an Equipment Finance Agreement (EFA) whereby the customer is the owner of the equipment at the onset and the Lender is a Secured Party.

Wait…What About Banks?

Keep in mind, most bank loans will come with a requirement for a significant down payment, often as high as 10-20% of the equipment cost. And, bank loans usually only cover the equipment itself and do not include the installation, shipping, tax, and other “soft costs.” Timing is another factor that can greatly slow the process down. Banks can take weeks to decide on a loan approval for customers. Most importantly, a Bank does not lock in the specific Vendor into the transaction the way and Independent can, meaning your customer can take that approval to your competitor. ILS does not recommend sending customers to banks to get financing for business purchases.

Finding a Financing Partner

With many commercial lenders providing vendor programs, it is important to do the homework and research a partner whom can make the process as simple, seamless and speedy as possible. Most importantly seek out a partner that protects your sale throughout the process and does not charge you anything to be a partner – at ILS we call this “a no strings attached partnership.”

At ILS we have found that Vendors who did not previously offer a financing option can increase their prospect conversion rate by over 10%. Remember, most prospects are already sold on your equipment solution but unless they are a cash buyer they may not have the resources. By controlling the financing, you further control your sales.

About the Author:

 Innovative Lease Services, Inc. (ILS) is a private lender specializing in Vendor Financing Programs specifically in the agriculture, winery, brewing, and distilling industries. For more information or to enroll in the Vendor Program please call: 800-438-1470 or visit www.ilslease.com/equipment-lease/offer-financing.

By Jim Offner

Wine and grape brokers insist that their role transcend that of simple intermediary between grower and winery. Some involved in the process go so far as to eschew the term “broker” in describing what they do to bring the parties together.

“I don’t like the word broker; it sounds like a used car salesman, somebody who’s taking advantage of somebody who doesn’t know anything,” said Shannon Gunier, co-owner of Lower Lake, California-based brokering firm North Coast Winegrapes. “I like the word concierge because they help you find your way.”

Gunier, who, along with husband Rick, started her business in 2010, said the couple operates as the “eyes and ears” of their customers. “Use a broker if you’re unfamiliar with the region you’re buying from, you’re new in the business, and you don’t know where to get your fruit or bulk wine,” she said.

What to Expect From a Broker

Whatever the precise term, a broker’s job is multi-faceted, Gunier said. That includes finding the right wine grapes, bulk wines or shiners (finished wines that arrive at a winery unlabeled).

Brokers can also lead their customers through a complicated decision process, Gunier said. “First, make yourself a little familiar with what you’re trying to buy and what flavor profile you want.”

Expertise is stock and trade of the sharp broker, said Jim Smith, owner of Lakeport, California-based Case By Case Wine and Grape Brokers Inc. “Someone like myself who’s been around and has the connections and a third-party endorsement from a proven professional carries a lot of weight with buyers,” Smith said. “I can make a call and tell the winery, ‘If you have time, come up and look at this; otherwise, just go with me on this, and you’ll be glad.’”

A grower “who doesn’t know anybody” might cold-call a winery and try to sell grapes, but that tack rarely works, Smith said. “[A grower will say] ‘You want to take a chance on me?’ [The winery will} say no,” said Smith.

It’s also central to the broker’s job to be on top of all market trends, growing conditions, and supply issues, said Todd Azevedo, domestic broker for Ciatti Co., a global wine and grape brokerage firm based in San Rafael, California. “In any climate or economic terms, we have the most up to date info in today’s wine and grape world,” Azevedo said. “[We know] what’s going on import/export-wise, [and with] supply and demand. We have the most accurate information when you’re trying to sell your wine or grapes.”

Going through a broker isn’t required, of course, said Michael Colavita, owner of Stockton, California-based shipper F. Colavita & Son.  “Somebody can come to California and make a deal with a grower, and whatever product he comes up with, he ships it out.” Indeed, one winery operator who requested anonymity said he doesn’t need a broker. “I suppose there’s a place for it,” he said. “if you’re a bigger winery and you can afford it and don’t want to do a little work yourself, then fine. Or, if you’re going out of the country, you wouldn’t have the knowledge or resources to do it. But, If I’m knowledgeable about anything, why go through a third party?”

On the other hand, there are times when a grower isn’t equipped to or knowledgeable about how to ship their product, Colavita said. Brokers can work with shipping companies like Colavita & Son who have this know-how.

What to Consider When Choosing a Broker

Brokering grapes and wine is, above all, about relationships, Azevedo said. “Especially in the wine business, which is especially small around the world, it’s based on relationships and whom you believe will steer you in the right direction,” he said.

Having “eyes and ears” in “all major winegrowing regions” is a big advantage for the Ciatti Company’s clients. “We have 52 dedicated employees, a network of brokers. It’s up to us to discuss what’s happening in all these realms,” he said. “We’re involved in every region on a day-to-day basis.”

A broker who knows a lot about wine and everything that goes into the growing, buying and selling of grapes, has to be gifted in creating trusting relationships, Smith said. “It’s about personal relationships and trust. And trust is key.”

Integrity and a willingness to build lasting relationships between buyer and seller is a must for a successful broker, Smith insists. “I am very confident in stating we’re probably the most honest, we don’t try to hide anything,” he said. “We like everybody to show up at the vineyard and meet and greet. If you’re as trusted as we are, you can’t put a number to that value. If you’re a grower and have spent $120,000 on your operation, you need that trust.”

Gunier agrees that choosing a broker requires the right fit: “It should be somebody you have a rapport with. This is their biggest expenditure.”

A little research always is helpful, she said. “What they want to do is due diligence. Call them and ask questions,” she said. Test a broker’s efficiency, Gunier urges. “Order a sample of something and see how long it takes to get it,” she said. “If it takes long or they don’t respond, you’ll know. You’re sending money to somebody you don’t know, after all.”

A buyer or seller might be tempted to go with the most prominent brokers, but that’s not necessarily the best route, Smith said. “Of course, I would imagine most people, their first thought is let’s go with the biggest outfit, but if you’re not one of the biggest growers and you don’t have 500 tons to sell, they’ll give you a number,” he said. “Do you have 500 tons to sell? That’s great. They know they’re going to make a good chunk of money. I’ve always been a big proponent of the small to mid-size grower. I prefer to get a little more personal with the small or mid-sized grower and tend to shy away from the 500- to 1,000-ton growers.”

Reputation, not size, is what to look for in a broker, Smith said. “If you ask around, wherever you are, and a broker is not doing the right thing, somebody will know about it sooner or later,” he said. “It’s a small world and tiny industry. We all run in the same circles.”

Colavita said, as a shipper, he offers other advantages to customers. For example, he points to storage facilities that his company owns. “The advantage, since I own my own facilities, my staff can tell me these grapes won’t hold up, so don’t ship them out,” he said. “Let’s call it a hands-on type of operation. Of course, you’re dealing with Mother Nature; you never know what she’s going to do.”

A good broker can help minimize mistakes, Colavita said. “To deal with somebody who’s had a reputation of doing it right is an advantage, so they have confidence they’re going to get a suitable product for their needs.”

Customers anywhere can access Colavita’s services. “My customers are all over the country. I have some smaller California wineries who rely on me for a certain grape,” he said. “But, I have customers from here to Maine and Florida – all over.”

Brokers deal in the bulk-wine, processing and storage markets in addition to the growing sector, and that macro-view is essential, Azevedo said. “I’m trying to lessen the lumps of the economy, so you can go to your bank, investors and family and make wise financial decisions,” he said.

Know What You Want

Choosing the right broker depends on several factors, including whether a winery might be looking to buy “local” grapes, or find a product that isn’t available nearby. “People want to buy local, but they also want to buy Chardonnay, Merlot and Zinfandel because that’s what the market is drinking,” she said. “If the winery is familiar with the market and knows what’s local, they can do those deals direct. There probably aren’t many brokers able to provide that service outside of California.”

Case By Case supplies wineries inside and outside California, Smith said. “I think we’re in 27 states across the country now. If somebody wants a longer-term agreement for out of state that doesn’t have the highs and lows, it will be a little less money per ton, but a long-sure road.”

Brokers can help growers to develop a workable price for their product, Smith said. “There’s another type of grower that tries to take every penny,” he said. “They ask us to get this outrageous price. I try to talk them off the edge. Sometimes, they come in at the 11th hour and say we’ve just got to sell the fruit. They slash their price at the last minute. I’ve told them, don’t go for the throat; go for the profitable long-term contract.”

Contracts: To Do or Not To Do

Rules regarding broker contracts vary widely, Azevedo said. “Everybody is different,” he said. “There are some erroneous contacts where nobody wants the liability. The bigger, the more onerous the contacts get.”

It’s important to examine the so-called “boilerplate” in a contract because one never knows what it might contain, Azevedo said. “As a broker, you need to read through the fine print. Looking for hidden fees or penalties is a big deal. It’s so drastic across the board. I could send you four contacts and all the same price, but you go through the boilerplate it’s all drastically different.”

What a contract stipulates might hinge on various factors, Gunier said. “It depends on what you’re talking about,” she said. “If you’re talking about wine grapes, the broker will provide a contract; you make sure you have a contract in place. Ask the broker, ‘Send me a finished bottle of a product from a winery in your area, and I can see what that tastes like.’ I think it points to the fact that you have to have good grapes to have good wine. “

Gunier said she’ll next-day air-freight grapes to a client, but that’s just part of the picture.

“We take pictures all the way through,” she said. “We have people come out and talk to the growers. That’s kind of our niche.” It’s a kind of match-making business, Gunier said. “We try to match the winery and grower, and all that comes in the contract – when we’re going to pick, when we’ll ship,” she said. “How much damage should there be when you get the fruit? What if half is damaged? You have to have all that lined out in a contract.”

Smith said he likes to see “a couple of simple things” in contracts.

“Number one, our contracts are two pages,” he said. “I’ve seen corporate wineries with 14-page contacts. If they have 14-page contracts, they’ve had a team of lawyers that draw that up in their favor. I don’t mess around with those type of agreements. I tell the growers, ‘You make the decision.’” An example of an unfair agreement is one that might stipulate a “brix range,” with a per-ton penalty for anything outside the limits but no clause that reimburses the grower for a loss of fruit weight due to dehydration at the winery. “I won’t be party to that kind of agreement,” Smith said. “By sticking to my guns, 27 years later, I still don’t have to clock in and work for somebody else.” Any deal carries risk, and a broker should be willing to share in it, Smith said. “When those grapes show up like I said they would, I will expect your business every year,” he said.

Colavita said he hardly ever has contracts. “It’s all done through emails and confirmation of orders, that sort of thing,” he said. “The buying end of it, some of it is on a contract basis, some is yearly – it’s all over the board. Most of this business is just word of mouth.”

Negotiations Can Vary

Deal negotiations can vary, Azevedo said. “Any given year it can be different. We deal in a real-time market. This year, it’s strictly a buyer’s market. Demand is fairly low. Supply is steady, but because demand is so low, it feels like there’s a lot of grapes and wine on the market. So, growers at this point are looking for a deal, an offer from somebody to say yes or no to, because of the timing of the situation.”

Timing is crucial, where negotiations go because markets shift capriciously. “It depends on what time of season and where you are, other buyers in the vineyard, the economy, what’s happening on the international market and the bulk-wine market, what’s happening with cannabis, beer, coffee, whatever the preference is in that world,” Azevedo said. “In agriculture, especially, you’re up against time, because grapes are a perishable product.”

Some brokers will work for a basic commission; others don’t, Gunier said. “We don’t work that way; we purchase fruit from growers and sell it,” she said. “We take some of the risk away from growers.”

Larger brokers are more likely to work on a percentage basis, Gunier said. “Those are big guys who can work on two percent selling 80 tons; our minimum order is six tons, which is a third of a truck.”

In negotiations, there are times when a grower needs to have a feel for the right deal, and the wrong one, Smith said. “In a hot market, say Cabernet Sauvignon, I’d say the power leans to the grower,” he said. “His price keeps going up. I’m on the back side of that, and I warn him not to push too hard, or he might lose a long-term buyer. When the market is in the tank, there were grapes on the vine because the tanks were full, growers were offering $350 a ton for their grapes. I was able to go around with a handful of growers we were working with and [find out what] they needed to break even and make a very marginal profit.”

Smith said his company’s customer retention is right at 99 percent, so it’s doing something right. “Working closely with our buyers, understanding what they need and trying to accomplish it – that’s our specialty,” he said.

When are Multiple Brokers Needed?

There may be times to call on more than one broker, but the odds are, a grower ultimately will come to rely on one, Azevedo said. “Personal opinion here: Because it’s a relationship-driven business and you’re building confidence in a person to be a partner in what you’re trying to achieve, it’s probably best to deal with only one,” he said. “As a winery, you’d be doing yourself a disservice if you don’t find out what the market is and what you can achieve. As a producer, I want to make sure I cover all my bases, in order to have all the information. Lo and behold, you’re probably going to go back to the same person who has given you all the information over and over again.”

Whether to work with more than one broker depends on the circumstances, Gunier said. “I think you should work with people who are willing to work with you,” she said. “You have to navigate your way through that.”

Going “local” with a broker might be the right solution in some circumstances, Gunier said. “The guy I’d be concerned about is the guy who can get you anything from anywhere,” she said, laughing.

A large-scale vineyard might bring in multiple brokers, Smith said. “If it’s a 1,000-acre vineyard, you might consider working with at least a couple brokers,” he said. “You might find you like one more than the other.”