Sunday, March 21, 2010

Wineries and Return on Investment or ROI

Why are there so many wineries for sale (very secretly I guess - I can't find them on the internet - certainly no multiple listing - 111 in Napa and Sonoma and not so much as a hint on the internet)? It might be that wineries have a very poor ROI and are just waiting for a sucker to show up on the front doorstep with a suitcase full of cash.

How do you figure ROI. It is really simple, although brokers and real estate agents want you to think it is very complex. Simple take your gross income, subtract your expenses and you have gross profits. Gross profits should be7% of the value of the business for a good investment. It helps pay the mortgage if you have to take out a loan to buy a winery.

Here is the problem. A fictional winery has land, buildings, and equipment worth two million dollars, but a typical winery of that size may only return $100,000 per year gross profits. That means that the ROI for that winery is only 5%, so working the equation backward, the selling value of the winery is $1,428,571. How many winery owners want to sell their winery for $575,000 less than the equipment and land are worth.

The second problem is that if the winery has been in business for years, the value of the equipment, although depreciated to zero (the real estate guys will say it has no value because it is depreciated), may be worth more now than when purchased because the price of stainless steel has increased dramatically and the US Peso has fallen against the Euro. This means that the junk value may exceed the ROI value. In other words, if the winery owner wants to retire, it might be more beneficial to sell off inventory and equipment and simply go out of business. Then the land can be sold simply as real estate. We may see a lot of wineries just 'going out of business.' It beats the hell out of dying in a tank.

The third and really final problem is with the family winery. The investment is two million, and the return is $100,000. The winemaker and his wife live quite nicely on this money, although it is not nearly as much as they would have made had they stayed in the city working two jobs. The life style is great and you can hobnob with the rich and famous even though you are neither. But wait, the husband and wife work full-time managing the winery and making the wine. A professional manager at $50,000 a year and a winemaker at $50,000 a year make the ROI for the winery zero. The family winery has no investment value at all! Most family wineries are worthless! Overpriced real estate with a built-in headache.

Psst. Does anyone want to buy a winery? It's secretly for sale. Contact me, but I guarantee you it won't be sold for ROI. You need more dollars than sense to buy a winery.

3 comments:

  1. Gayle,
    You make several valid points...if only winery sellers were this straight forward in their thinking. However, you left out a significant factor: the hybrid nature of a winery business involves real estate equity that often involves a very nice residence, landscape improvements, and, yes, lifestyle value that is driven by supply/demand. How many businesses/professions do you know of where a significant business is literally on site with the owner's residence? And if that business/residence is located in a place like Napa or Sonoma, where parcel splits are not allowed, you have a hybrid product that is part living/part business. MOst buyers see the residence as having no value, and therefore, want/require the numbers of the winery and vineyard assets to pencil out on the residence's mortgage as well. In many cases the residential component is equal to the winery/vineyard component. Unless a lifestyle buyer comes along and wants the whole enchilada a winery seller ends up taking it in the shorts after about 3 years of bucking the system. When it comes to lifestyle buyers, let's face it, if they've got an extra several million to spend on a winery, chances are they have more residences than they need. And folks with that kind of money have very specific preferences on home styles and architecture. So unless your "farmhouse with the quaint wrap around porch", or your "Mediterranean villa" matches their style, a winery seller's buying pool just shrunk to the category of needle in a haystack. I've been selling confidential, lifestyle wineries for 10 years and have seen it all. I even coined the phrase "lifestyle winery" in an article i wrote for Wine Business magazine in 2001. The keyhole math formulas you mention don't even come close to describing the many challenges of selling wineries. It's more like threading a fine-hole needle with an overcooked strand of spaghetti. Katie Somple, WineryX Real Estate, St. Helena, CA

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  2. Thanks for the comment. It is very true. In Yakima County, I was able to separate the "English Tudor-style" house from the winery on to its own 1.7 acre parcel - just for that reason. So now, you can buy a winery or a house. But as you say, it remains a 'lifestyle' winery, not an investment that has a simple ROI.

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  3. What about a Negociant wine label? No land vineyard, buildings, Machines, etc.
    What would the value of a label be that sells 25000 cases with a net profit of $125,000.is there a typical multiple of ebita for such a wine business.

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