THINKING ABOUT SELLING YOUR WINERY DISTILLERY OR BREWERY

THINKING ABOUT SELLING YOUR WINERY, DISTILLERY OR BREWERY? Some Things to Think About Al Hudec, Farris LLP 2020

NOBODY LIVES FOREVER • Boomer generation is retiring - many for a second time • What are their exit alternatives? – Die in their boots – Inter-generational transfer – Serendipitous sale – Orchestrated sale process – Receivership sale

NOW IS A GOOD TIME TO SELL • Strong sale activity - Culmina, Liquidity, Road 13, Wild Goose, Unsworth, Sea Star, Terravista, Time/Encore • Supply of high-quality vineyard land in the valley is nearly exhausted • COVID has accelerated trends that enhance profitability - tastings by appointment and internet sales • Unprecedented 10+ years of economic boom; but with storm clouds ahead • High price earnings multiples and low interest rates

THINKING ABOUT VALUE • Pricing is as much art as science • Price is ultimately what the buyer is willing to pay • Basically, there are two ways to value a winery – If it’s a profitable business, price at some multiple of adjusted EBITDA – Or asset pricing using the appraised value of vineyards, depreciated book value of buildings and equipment and accounting cost of inventory • Many things can be important to a buyer – Scalability and growth potential of the business – Size and quality of the land base, varietals planted – Strength of the brand

THE EUREKA MOMENT • Running a winery is difficult - you need to be a farmer, a manufacturer and a marketer • Fourth dimension - you need to be a businessperson focused on profitability • Most small wineries track revenues but don’t try to track margins by sku and sales channel - so lack the data to perform the analytics necessary to maximize earnings • Wineries are currently selling at 10+ times earnings – Adding $100, 000 to earnings can add $1 million to sale price • How to maximize earnings needs to permeate every decision made - what varieties to grow, skus and pricing points, sales channels, growth and preservation of wine club members, development of an internet sales channel, etc. • Whether or not the decision is ultimately made to sell, this change in focus will lead to a more profitable operation

HOW TO GET STARTED • Talk to your accountant – are there possibilities of reducing tax through a pre-sale reorganization – is there a preferred sale structure (share or asset sale) • Hire a deal broker – Accounting firm experienced in the sale of private companies – Real estate agent • Hire a lawyer knowledgeable about sale transactions in the wine industry • Gather summary financial and operating information need by to prospective buyers determine pricing

THE SALE PROCESS • Site visit with owner • Financial and operating due diligence sufficient to determine indicative pricing • Letter of intent • Due diligence period • Definitive purchase agreement – limit conditionality to enhance certainty of closing • Employment agreements, non-compete, specific conveyances • Closing

DUE DILIGENCE ISSUES • • • Encumbrances on title Phase 1 environmental report Health of vineyards Agricultural land reserve Availability of water – Water Sustainability Act Heritage Resources Act - artifacts

CLOSING THE DEAL/POST-CLOSING ADJUSTMENTS • Final inventory count • Working capital adjustment • Surviving representations and warranties/indemnities • Indemnity caps/survival periods

CONTACT INFORMATION Al Hudec Cell: 778. 886. 9356 Email: ahudec@farris. com Farris LLP Vancouver/Kelowna