When it’s time to sell the dreamBy
Winery sales often lengthy and complex
There are 259 wineries in Virginia producing 511,000 cases of wine annually. The industry has achieved dramatic success in both growth and reputation since the first tasting room opened in 1975.
Today, the quality and repute of Old Dominion wine is recognized nationally and around the world. Last year, Steven Spurrier, a renowned international wine authority said, “Virginia is a solid competitor in the global wine industry.” Such high praise is a commonly heard refrain.
And yet, there is an anomaly to the sanguine picture of a robust and healthy wine culture: Few wineries are profitable and most are difficult to sell.
Indeed, notwithstanding advances in vineyard plantings and winemaking skills resulting in a commensurate increase in the production of fine wine, it still remains a challenge to actually make money in the business. If a winery isn’t turning a profit, potential buyers can be hard to conjure up.
With many of the state’s winery owners entering their retirement years, it is expected an increase in properties will go up for sale, especially if adult children do not share mom & dad’s dream. But selling even a marginally profitable business is a challenge. Typically, it takes three years or more to find a qualified buyer.
Rick Walden, owner of Virginia Estates, a Charlottesville real estate firm that specializes in selling farms, estates, vineyards and wineries says, “I’m just about the only guy in the state handling winery sales. How many are making money? I’m gonna go for zero.” He bluntly points up the narrow margins earned in a difficult business.
“There are probably thirty wineries for sale in the state but a lot of people do not want it advertised. They think its hurts their business. Last year, I wrote every winery in Virginia asking them if they were interested in selling,” says Walden. “I got twenty-five responses and now have $100 million in winery listings. I expect to sell five wineries in the next few months.”
While that prognostication seemingly runs counter to Walden’s profitability assessment, it does speak to the romance and lifestyle attraction of the business.
Others well placed in the industry, however, would disagree with his assessment and even plain speaking Walden later acknowledges some wineries do turn a small profit. “I had one guy call me and wanted a 20% return on his investment but from what I’ve’ve seen it’s more like one percent.” Other knowledgeable sources put the figure in the 5% range.
But profitable ventures are in the minority, with most industry observers saying less than fifteen percent of state’s wineries are making money.
When asked about the difficulty of growing wine grapes in Virginia, Walden responds with a quick, “Do you have a few days?”
“First, owners are biting their nails that bud break happens before a late spring frost comes along, like this year (2013), and cuts them off at the knees. Then, the stuff that survives gets beat to death by endless rains, and whatever does survive is ravaged by raccoons, turkeys, bear and deer.
“This year all of those animals were hungry because their food got frozen by an early frost so they came in and ate every last thing. The crop last year was hardly anything.”
Indeed, it was a tough 2013 harvest with frost and animal depredation taking its toll. But wineries across the state are making wine and it promises to be a decent vintage.
Walden closes with, “I don’t want to be a doomsayer, but buyers need to be aware of the real situation or sell $100 bottles of high quality wine.”
Romance, lifestyle & hard work
For anyone visiting a winery, the lure of owning one is understandable. Verdant vineyards framed by mountain or lake views and decks on which to enjoy the serene settings. Such scenes are alluring to buyers who hail from congested urban areas.
In reality, potential buyers must pony up at least a million dollars—at a minimum—and then commit themselves to an inordinate amount of work to grow the fruit and make the wine. Perhaps the most demanding part of the business is hospitality. Weekends are spent greeting customers, pouring wines and extolling the virtuous aromas and flavors in the glass.
When reality clashes with the dream, the property goes up for sale.
Stephane Baldi, owner of Hume Vineyards in Hume, placed his winery on the market early last year after only three years in operation. His wine is produced off-site, a process known in the industry as “custom crush”.
He’s asking $2 million for his large home, a vineyard and a tasting room. It doesn’t include his small inventory or brand name which would need to be negotiated separately. At 44, Baldi is among the younger owners in the industry.
“I grew up in the Loire Valley in France surrounded by vineyards and wineries and I am a huge wine fan. I saw what was happening with Virginia wine and thought it was the right time to make a move and open a winery.
“But my wife and I still had full time jobs in DC. Then, two years ago, we had a child and the winery is now more of a constraint,” he says. “The challenge of living in Hume is difficult. I run two businesses—one based in DC—and need to drop off our child at daycare every day. It really doesn’t leave us time to do anything. We are still young enough and we’d like to have a life but it seems we spend our entire life in the car.
“This is something we wanted to do at a point in our lives. Now, it’s time to move on.” He admits he has not gotten much interest in the property, saying, “The bottom line is nobody knows how to sell a winery.”
Bob Schenkel, owner of Altillo Vineyards, runs a small operation in southwest Virginia, and is asking $1 million for his winery that opened in 2010 and produces about 700 cases a year. “I’ve invested about $1.4 million but I’m selling it for a million. We have never shown a profit. It’s an inordinate amount of work. I think there is going to be a lot of turnover in the industry. A lot people would like to sell.
“The profit seems to be in events and entertainment. Many of the wineries that seem to make a buck are doing events. There is an ocean of wine out there but down here the quality seems to be a race to the bottom,” he laments.
“South of Charlottesville, the wine is abysmal. It’s sweeter and cheaper. Wineries see that it sells at festivals and they cater to younger folks who simply want to get a buzz and listen to a rock band. I’d like to see a better effort to improve the quality and the reputation of Virginia wine. The state talks a good game but their actions are tearing down the long term reputation.”
Strong words from an owner who has been unable to make it in the industry.
Schenkel goes on to say, “Rick Walden is my agent but most of his buyers are interested in the Charlottesville or Northern Virginia area. I’ve had next to no selling activity. Only one person has looked at my property and it was not a serious inquiry. They knew nothing about winemaking.”
Schenkel’s lack of enthusiasm that he will soon find a buyer is understandable. Mark Malick is a real estate agent in Leesburg that focus’ on winery sales and is co-owner of the winery, Maggie Malick Wine Caves, in Purcellville. His wife Maggie is the winemaker.
“Less than one percent of the population can afford a winery costing a million dollars or more. And what percentage of those people are actually looking for one? It’s a tough sell. Not many of these businesses are profitable.
“I try to talk people out of buying a winery before I talk them into it. I always try to get them to come out and see my winery and let them see everything that’s involved before we proceed. I basically try to pre-qualify them.”
Malick believes the number one factor in selling a winery is the owner’s age. The sellers “realize it’s time to move on, that it’s consuming them in both time and money.”
It’s common knowledge that virtually every new winery will labor for five to seven years before it begins to see a profit. But if committed and hard working owners stay the course, eventually some modest return on investment will likely emerge.
The Virginia viticulture extension service states two people can operate a five acre vineyard on a part-time basis. “Technically that’s true,” explains Malick. “But they will have to work every weekend during the growing season.” And that does not include making or selling the wine.
Over time, the emotional glow of plump grapes hanging heavy in a vineyard can begin to fade.
One model that has a better than average chance for failure is a multi-million dollar operation that opens its doors and immediately begins making tens of thousands of cases of wine a year. Finding a home for such exuberant growth is not easy.
Two over-the-top examples of this wine hubris were the Kluge and Sweeley estates. Both ventures envisioned producing vast quantities of wine and selling it quickly. Both ended in foreclosures, costing the owners tens of millions of dollars.
But even businesses that have grown slowly and produce good quality wine are not ripe for a quick sale. Naked Mountain in Markham was on the market for over a decade. The owners eventually got $3 million—the original asking price—but patience played a role in finding a qualified buyer.
Malick explains successful people start small and grow slowly. “A lot of people bootstrap their winery, doing things as cheaply as possible and buying used equipment. They do all the work themselves in the early years,” he says.
Malick cites Fabbioli Cellars in Leesburg as a model for success. Doug Fabbioli is a respected vintner and consultant who built a small, thriving business producing quality wines. His success was the result of his winemaking skills and his understanding of the industry and sound business practices.
“If owners stick with the business and get above 3,000 cases a year, then they will begin to see profitability,” says Malick.
Chris Pearmund and John Delmare have several decades of combined experience in the wine industry. Pearmund owns Pearmund Cellars in Broad Run and Delmare is the proprietor of Rappahannock Cellars in Huntly. Both wineries are profitable.
In trying to understand why a large percentage of the state’s wineries struggle to make money, Delmare’s analysis helps lift the veil of confusion. Start with the basics: 259 wineries statewide producing 511,000 cases.
“I estimate the top five producers together are making 200,000 cases. The next twenty wineries bottle an additional 150,000. That leaves 234 wineries generating some 160,000 cases, or an average of about 700 a year each,” says Delmare.
Conventional wisdom says it takes 3,000 to 5,000 cases to operate in the black. When you consider the financial investment, hard work and time the wine business consumes, those numbers are “frightening for the smaller producers” says Delmare.
If a small owner decides to back away from the business and sell out, he or she is faced with the hard reality of marketing a profitless business.
Last year, Pearmund tried unsuccessfully to sell his winery for $5 million but took it off the market. Today, it is back up for sale at for $4.5 million. Sotheby’s, a luxury real estate firm, is handling the sale. “The winery has been profitable every year it has been opened,” says Pearmund. Nonetheless, no buyer has yet come forward.
When asked how long it typically takes to sell a Virginia winery, Pearmund humorously replies, “It takes three bites to get to the center of a tootsie pop.” So how many bites does it take to get to the center of a cluster of grapes and see a buyer pop out?
Even when a serious prospect does step forward, it doesn’t always go smoothly. A case in point is Pearmund’s sale of the Winery at La Grange in Haymarket to a Chinese corporation.
The sale was valued at $5.6 million but was a rocky real estate deal.
Shortly after the June 2012 transaction, Pearmund said, “My experience at La Grange has been the most difficult of my professional career. I devoted six years to its success and have little to show for it.”
He estimates that today, there are ten wineries for sale. “In Virginia, I would guess 95% or more of the wineries opened since 1980 are still opened, how fantastic! What other business category has that track record?”
But the statistic also points to a pending wave of winery sales as original owners approach their late retirement years and may have lost both the passion and energy to continue.
John Delmare believes the commonwealth’s industry is maturing beyond something more than a hobby. “As long as we are hobbyists, there are no sale opportunities per se. There is no business rationale for buying a winery,” he states.
He observes that many sold to date have been distress sales, sold for pennies on the dollar, such as Kluge and Sweeley. “It’s hard to point to sales that were true market transactions. Some sales are really real estate sales. The buyer simply wanted the property, not the winery.”
Delmare states his business is profitable but doesn’t believe a buyer would purchase it solely on its financial return. “There is a quantifiable return in buying a winery that is an emotional return on top of a modest financial one that makes such a deal worthwhile.”
He goes on to explain wineries have always been that way regardless of where they are located. He cites California as an example. For years that state’s wineries have had a 5 to 6% return on assets. “That’s a lot of risk for just 6% return. If you take fully loaded costs—not an owner working for free—I’ll take a stab and say maybe ten percent of Virginia wineries are legit businesses.”
In addressing the issue of Virginia wine being expensive, he says, “When someone comes out and buys a $30 bottle of wine you have sold them an experience. They are buying more than the wine. We are selling experiences in our tasting rooms. If we were just taking orders, we would all be in trouble.”
Moving on to the more controversial issue of hosting events, he says he doesn’t share the disdain some people voice over the practice even though he does not pursue that type of trade.
Often weddings, parties, fundraisers and the like are what enable heavily mortgaged wineries to make a profit. Some larger businesses have weddings booked three years in advance, ranging from twenty to over seventy a year. Given the significant capital investments in these wineries, entertainment and hospitality are important revenue streams.
Delmare thinks many of the larger operations think their wineries are worth $8 to $12 million but he doesn’t see buyers out there to command such prices. “We are just starting to scratch the surface on having a market that produces those kinds of sales.
He underscores that aging owners wanting to move on will be especially hard pressed to find takers. “True legitimate buyers are hard to find.”
Delmare thinks a bank would be skeptical fully financing a potential buyer of his own winery, even though he has not personally had a problem securing capital. A bank may look at the borrower’s capability to service and pay back a loan outside of the actual business itself.
Inventory and equipment loans are not that difficult to get, he states, with banks lending up to 80% of their value. For example, if he were to sell his winery, a borrower might be able to secure an 80% loan based on the underlying value of the land, wine inventory and equipment but may still have to come with a substantial amount of cash, upwards of 50% of the total purchase.
“If a winery is making a five percent return on assets, but the bank interest rate is six percent, you are losing money on your loan,” Delmare explains. “In addition, the higher the loan-to-value goes you get to the point there is not enough cash in the business to support the loan.
“In today’s market, a 6.5% loan is typical. A 75% loan-to-value will result in every penny the business is making going to service the loan. Banks won’t loan that way. Banks look at asset value—collateral that secures the loan. Then they want to know ‘Where is the cash coming from to pay us? If you are making $1 a year, we want your payments to be 75 cents so you have a little cushion if things don’t go well,’ ” says Delmare, explaining how banks think.
He goes on to say, “Any business is similar, and in some ways a winery may be easier to finance because it is so asset driven. We have a lot of real estate, a lot of inventory and a lot of equipment; all things a bank can use to secure their loan.”
The banking discussion brings into relief that in addition to growing grapes, making wine and entertaining guests, potential buyers should have a custom fitted green eye shade hanging in the winery office. Sharp pencils are as important as sharp palates in this business.
With the current growth rate of wineries, it is projected within five years there could be more than 400 tasting rooms dotting the Virginia landscape. While such proliferation seems questionable given the challenges of opening one, it also speaks to the intense romance and lifestyle involved.
Creating flavorful wines and earning accolades from guests while living in picturesque rural areas is a powerful draw to pursuing a less than viable business. But romance is not a bedmate to logic and numerous winery owners would not trade their chosen endeavor for a conventional business.
More future owners will likely follow their lead. Delmare underscores the increasing challenges ahead. “When I started my winery in the late nineties, it was the sixty-second one in the state. I paid $2,000 an acre for land that today is going for $10,000 to $20,000.
“My business grew twenty to twenty-five percent a year initially. Today, it’s about seven percent. It’s only gotten harder. Everything is more expensive and the barrier to entry is harder.
“There is both a looming grape and labor shortage. All of these things will make entry a little higher. Small operators will be scared out of it so growth will maybe slow in the next five years,” he says.
One path to sustainability for his winery is securing permanent control over his grape supply. To that end, he is working toward purchasing and planting additional vineyard acreage. “I’m not doing it to grow but to secure the future of my winery.”
“Construction costs and getting wine into a bottle are fifty percent higher today than when I started. I hit it at the right time when I got in.”
Perhaps the legendary Dale Carnegie unknowingly summarized the pursuit of the Virginia wine business when he said, “When dealing with people remember you are not dealing with creatures of logic but creatures of emotion.”
And a cadre of emotional winery owners may be in Virginia’s best long term interests.
Published in the Winter 2014 edition of the Piedmont Business Journal.