Page 8 - Grapevine JanFeb 2022
P. 8

In The Winery

               single day — might be looking at an exit strategy                  Understanding Value
               right now. But, as you might imagine, exits can be
               more complicated than just a simple sale when a        Regardless of what an owner chooses — either
               family is involved.                                  handing over the business to their children or sell-
                                                                    ing it to someone else — any transaction requires
                             Planning is Essential                  the company to have a fair market valuation.

                                                                    Federal and state tax authorities will demand it,
                 First and foremost, an owner should start planning  so selling the business to family for a dollar will
               a “harvest strategy” well before they are ready to   not work. This valuation will look at all aspects of
               pull the trigger. To paraphrase Benjamin Franklin,   the company to determine its worth, including its
               failing to prepare is preparing to fail. A harvest   financial performance, assets, inventory, real estate
               strategy is a much more detailed plan than a “kitch-  holdings and even the brand’s value. Qualified
               en table” document.  It goes into great detail on    appraisers are the professionals that will under-
               the owner’s goals when they will exit the business-  take this task and will use different techniques and
               es. It tells the financial and operating story that the   methods for the equity and/or underlying assets.
               next owners need to know. It does not hurt that      Sellers should note that having a valuation support-
               after more than a decade of quantitative easing,     ed by a third party can help minimize pitfalls during
               historically low-interest rates and a multi-trillion   deals, like overvaluing an asset, which can cause
               dollar government spending plan, there is plenty of   potential buyers to walk away or not engage in
               cash in the system fueling record M&A activity.      negotiations.

                 There are various factors that need to be consid-    Appraisers can use a few different methods to
               ered in a well-constructed harvest strategy, and it   calculate the value of the company’s real estate
               is essential that these succession plans are commu-  holdings. However, putting a price on a business is
               nicated to all stakeholders, both in the family and   more nuanced than selling a single-family home. A
               with the company’s vital employees or managers.      typical technique would be to look at comparable
               Talking things through will illuminate potential pit-  sales of similar properties in that area and base the
               falls, such as the owner’s children not wanting to   valuation on the transaction price. This method
               continue with the business or being unprepared       would take things like the size of the property into
               to take on potentially substantial operational chal-  account, but not necessarily the cash flow potential
               lenges. Key employees might want to purchase the     of operations, including the production of grape-
               operation or refuse to continue working with a new  vines.
               owner. Understanding these dynamics will help
               when it is time to put the plan in motion and limit     The value of the land and the grapevines depend
               any unpleasant surprises. Planning ahead may also    on several factors, ranging from the variety of the
               allow time to employ tax mitigation strategies.      plant, age of the vineyard, plant density, produc-
                                                                    tion per acre, and the presence of pests like vine
                 The harvest strategy provides detailed instructions  mealybugs (VMB) and Virginia Creeper Leafhoppers
               on how the business is managed, including all the    or diseases like Grapevine Leaf Roll. Other improve-
               different procedures and systems used in the busi-   ments to the land will affect its price, including trel-
               ness. This document becomes increasingly vital as    lis systems, irrigation and frost protection systems.
               owners age because of life’s unpredictable nature.   An appraiser might estimate the fair market value
               An owner could become incapacitated or worse,        for this asset by calculating how much revenue the
               and the company might not survive without their      land generates based on projected demand, grape
               critical knowledge. Owners should revisit the har-   price trends, and the yield the land produces. A
               vest strategy frequently for updates. Plans made     discounted cash-flow analysis could also be used to
               today could be vastly different in five or ten years.  factor in variables like projected cash flows, indus-
                                                                    try cycles and general economic trends. Of course,
                                                                    an appraiser could use a combination of all these

               Page 6                          The Grapevine • January - February 2022                             877-892-5332

          Grapevine Main Pages GV111221_Layout 1-1  copy.indd   6                                                   12/16/21   3:29 PM
   3   4   5   6   7   8   9   10   11   12   13