Revisiting "Divesting or Investing in a Canadian Winery"
Since the number of wineries for sale in British Columbia’s Okanagan Valley remains elevated, it is an unfortunate but appropriate time to revisit the legal framework around the sale of a wine business.
With the assistance of business and merger & acquisition (M&A) lawyer Al Hudec of Farris LLP, I have updated some of the key points discussed in a webinar he co-presented to AIDV Canada* members in September 2021. (Original post on the topic: “Divesting or Investing in a Canadian Winery”.)
Structure of transactions
Wineries considering selling should first determine whether their winery is saleable as a ‘going concern’ or whether they should cease production, sell down their inventory and then sell their vineyards and equipment separately. If the winery is profitable, selling it as a going concern should garner a better price.
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, including the risks of a tax reassment and undisclosed liabilities.
An asset sale allows the buyer to purchase only certain assets and assume only certain liabilities, and also to step up the cost basis of the assets purchased, but involves the complexity of conveying each specific asset.
Preparing for a sale
Some of the preparatory steps a winery should take before beginning the sale process 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:
Historic and current financial statements, descriptions of the owned or leased documents, by acreage and varietal; detailed lists of machinery, equipment and other assets; product description, monthly sales volumes, prices and sales channels; etc.
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?
Are the founders/sellers willing to remain in an advisory capacity post-sale? For how long? Are they willing to sign a non-compete or are they wanting to remain in the industry?
What contracts are in place, e.g. for grape supply, equipment leases, sales agencies, vineyard management, 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. Consider as well your website and any social media accounts. Do you have systems in place to ensure that your business is compliant with privacy and anti-spamming legislation?
Regulatory considerations: are you compliant with the rules and policies of liquor regulatory authorities? Are you compliant with the new requirements under B.C.’s Water Sustainability Act to register ground water 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 and structures, the equipment , and the inventory.
The land and structures: “market value” as established by factors such as comparable proximate transactions and market prices for the grape varietal(s) planted.** If your home is on the property, this may make it harder to sell unless you find a unique buyer looking for a home as well as a business.
The equipment: The equipment will be valued at depreciated, caring cost on your books, except perhaps, for items like tanks that don’t really depreciate.
The inventory: Is it in bottles, barrels or tanks? What varietals and vintages? All will be valued at the carrying cost on your books. Expect the buyer to do taste tests and lab tests for hints of smoke taint.
“Goodwill” (roughly, reputational value of the business) counts, but is negligible if the winery isn’t profitable. If your winery is profitable, evaluation based on an 8 to 12 times multiple of earning may give you a value in excess of the sum of the asset values.
Other legal considerations in the contract of purchase and sale:
Representations and warranties: Representations made by the vendor about the business and ownership of the shares or assets, regulatory compliance, accuracy of the financial statements, etc.
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 may be longer and have higher caps.
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. There may be a financing condition if the buyer requires financing.
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
Al has three further bits of advice relevant to current market conditions:
1. It is a buyers market. Sellers need to be realistic as to asking price. Buyers will not be willing to put in the time and effort to investigate your opportunity if they sense that your pricing expectation is not realistic.
2. At today’s interest rates, bank financing is expensive and buyers will be attracted by seller willingness to offer a vendor take-back mortgage.
3. If you are having trouble selling, consider selling down your inventory and equipment, going out of business and entering into a long term lease of your vineyards.
***
*Disclosure note: Al and I both serve on the board of directors of AIDV Canada (International Wine Law Association, Canadian Chapter).
**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 crops in 2020, 2021 and 2023 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. Similarly, many knowledgeable industry participants regard the currently high vineyard prices as unsustainable.
If you wish to receive all WineDrops posts, please join the mailing list here: https://winedrops.ca/contact.