Divesting or Investing in a Canadian Winery

 The acquisition market in Canada remains elevated for wineries and wine businesses. In late September 2021, the Canadian Chapter of the International Wine Law Association (AIDV Canada) hosted a timely and topical webinar on the Sale and Purchase of a Winery in Canada.[1]

The panel, consisting of Al Hudec of Farris LLP, based in British Columbia, and Lara Nathans of McCarthy Tétrault LLP, based in Ontario, covered a wide range of legal, practical and business issues for any Canadian winery considering selling, and any investor considering purchasing or investing in a Canadian winery.

This post is not a legal review, and does not constitute legal advice! It is intended to report the principal considerations discussed by the panelists (a draft of this post has been reviewed and edited by them), and to offer my own interpretation of the present British Columbia setting.

Scene Set

The market convulsions and dramatic distribution channel pattern changes of the Canadian and North American wine industry during the COVID-19 pandemic (and accelerated shifts of some long-standing underlying factors) are translating into a lively time for mergers & acquisitions activity. From large winery transactions like Ste. Michelle Wine Estates (sold for US$1.2 billion to a private equity firm in November 2021) and Duckhorn Wine Company (previously owned by a private equity firm, which then took it public in March 2021) in the United States, to new majority owners at JoieFarm Winery and Wild Goose Vineyards and Winery in British Columbia’s Okanagan Valley, the panel agreed that there is a fluid market with plenty of opportunities if you’re a prospective buyer.  However, if you’re a seller, you need to do some homework to attract a buyer willing to pay your preferred price.

Who is selling, and why?

From the seller’s perspective, there are myriad reasons to sell your winery:

·       To unlock an inter-generational wealth transfer (when children are not taking over the business)

·       To alleviate financial pressure when the present ownership is having difficulty making ends meet (a distressed sale)

·       To cash in when a buyer knocks on the door with a large cheque (an opportunistic sale)

·       To receive a cash infusion and keep running the winery with the resources to take it to the next level (a new investment)

Who is buying, and why?

The universe of buyers is perhaps wider now than it has been at any previous time:

·       The entry of private equity into the Canadian wine industry is underway, although somewhat under the radar so far, typically as medium-term investors

·       In jurisdictions where it is permitted (including Canada), distributors have become investors in wineries

·       Similarly, some restaurant and hospitality groups have acquired wineries (with certain restrictions, to comply with “tied house” rules in applicable jurisdictions)

·       Wealthy families or groups that seek a career change and the romance of owning a winery

·       Last but not least, large wineries, to secure vineyards and position in the market with flagship brands

Structure of transactions

Wineries considering selling should first determine whether they wish to sell the assets of the business, the business itself (i.e. the shares of the operating company) and/or the real estate.

·       A share sale may be preferred by the seller from a tax perspective but the buyer will be taking on all assets and liabilities of the company

·       An asset sale allows the buyer to purchase only certain assets and assume only certain liabilities, but involves the complexity of conveying each specific asset

·       Is the business being sold as a going concern, or is the buyer purchasing only specific assets such as the vineyards?

Preparing for a sale

The panelists discussed some of the preparatory steps a winery should take before beginning the sale process, which are also some of the issues a buyer should consider as part of the due diligence process. These are factors a buyer will be looking for when doing due diligence: 

·       Review tax and estate planning structure (for before and after the sale): is a corporate / tax reorganisation advisable prior to the sale?

·       Review the state of corporate records: Are transactions like shareholder loans settled? Are the minute books current as to resolutions and corporate filings?

·       Consider a litigation search. Is the company involved in any legal proceeding that could impede a sale?

·       Are the founders/sellers to remain in an advisory capacity post-sale? For how long?

·       Are there shareholder agreements (e.g. with rights of first refusal) in place, and do they include rights or restrictions that might impact the timing of closing?

·       What contracts are in place, e.g. for grape supply, equipment leases etc.? Will any consents or notices be required to assign the contracts or sell the business?

·       Are the management team and other employees to be retained/transferred to the new ownership? Consider potential issues related to constructive dismissal; whether any individuals working in the business are independent contractors; and obligations to temporary foreign workers (if any).

·       Is your IP (intellectual property) properly registered? If the wines or brands include the founder’s name, consider rights to the use of the name. Is any custom software used in the business? Consider as well the website and any social media accounts and related privacy issues.

·       Regulatory considerations: are your permits and licenses in order, current, and compliant with the governing authorities (provincial and local)?

·       Regulatory considerations: are there public policy or regulatory regimes in place or contemplated that could affect the sale? E.g. B.C.’s Water Sustainability Act, and the new requirement to register wells. Are the buildings and uses of the property compliant with the B.C. Agricultural Land Reserve Regulation?

·       Regulatory considerations: Consider packaging and labelling requirements and any claims made, such as “natural” or “organic”. Do they comply with relevant regulations or standards?

THE question: What is the price?

The three main components of the valuation of the winery are the land, the business and the inventory.

·       The land: “market value” as established by factors such as comparable proximate transactions and market prices for the grape varietal(s) planted*

·       The inventory: What inventory adjustments need to be made? E.g. between vintages, and accounting for case goods at various points in the sales chain, such as on consignment

·       The business: Is it profitable? Is it growing? Is it achieving economies of scale?

o   “Goodwill” (roughly, reputational value of the business) counts, but is negligible if the winery isn’t profitable.

Other legal considerations to the contract

In addition to the contract of purchase and sale specifying how issues that arose during the due diligence process, additional provisions include:

·       Representations and warranties: Representations made by the vendor about the business and ownership of the shares or assets.

·       Covenants: Obligations each party must perform, particularly if there is an interim period between signing and closing.

·       Indemnities: including monetary and time; limitations on claims (typically one to two years and only a portion of the purchase price); environmental, tax and title (longer).

·       Non-competition clauses, other restrictive covenants: What may the seller do and not do after the sale? For how long?

·       Closing conditions: Are any regulatory or third party consents and approvals required? Ensuring representations and warranties are still true at the time of closing, and that all covenants have been performed.

While the above points are a rough checklist of considerations for winery owners considering selling, or investors considering buying, a winery, they are general in nature, and the particulars of your situation will give rise to specific issues and require decisions about the transaction. Specific business and legal advice should be sought.

The B.C. context

Beyond the legal, business and regulatory considerations above, three additional contextual factors are noted (Karen’s opinion):

1.     The skyrocketing price of vineyard land in the Okanagan Valley, particularly the south. Anecdotally, one or more vineyards near Osoyoos changed hands for $400,000 plus per acre in 2021. If you’re a buyer, are you certain it’s worth investing in this part of the Valley?

2.     Environmental considerations (e.g. smoke taint) are becoming a regular risk factor, and will increasingly become priced in to winery transactions. The B.C.-based research on smoke taint (via the University of British Columbia, Dr. Wes Zandberg) is adding a much-needed local resource to the increasingly urgent global research on smoke taint in grapes and wine.

3.     Geography and terroir: Is there a price premium for locating in Sub-GI (Geographic Indication)?  From Europe, we see the implications of GIs for reputation, and the price premiums commanded by wineries in famous GIs. Are we seeing a pattern emerging in British Columbia of a price premium effect, not just on bottles, but on the perceived cachet of the winery’s location as an attractive acquisition?

Finally, the old adage around the wine industry - and wise warning for would-be investors - is applicable here: if you want to make a small amount of money in the wine industry, it’s best to start with a lot of money.

* grape prices fluctuate based on the varietal planted and their availability in the “open” market for grapes. In B.C. there is very little in the way of un-contracted grape supply. With the small 2021 crop in the Okanagan and Similkameen Valleys, the price per tonne for desirable varietals was bid up to levels that many industry-watchers regard as unsustainable.

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[1] Full disclosure: I am a founding board member of AIDV Canada.