Page 8 - Grapevine JanFeb 2022

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

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