Valuation of Winery Brands and Operations. James A. Andersen, CPA/ABV, CFF, ASA

Transcription

1 Valuation of Winery Brands and Operations James A. Andersen, CPA/ABV, CFF, ASA

2 Table of Contents INTRODUCTION INDUSTRY OVERVIEW VALUATION PROCESS

3 HOW DO YOU MAKE A SMALL FORTUNE IN THE WINE BUSINESS

4 START WITH A LARGE ONE!!

5 Key Stats in the U.S. Wine Industry Apr 2017 Revenue Profit $21.0 billion $2.5 billion Annual Growth Anticipated Growth % 1.00% Exports Imports $1.7 billion $7.0 billion source: IBIS World, Apr 2017

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8 Industry Consolidation Consolidation among the grocery chains is driving consolidation in distribution and production. Grocery Chains Distributors Producers top 5 grocery chains 46% other grocers 54% top 4 distributors 60% other distributors 40% top 3 wine producers 51% other producers 49%

9 Real Property Considerations Vineyards Location (AVA, District, Access) Water source and reliability; soils; drainage Quality, age, and condition of vineyard Winery Facilities Permit Tastings and Tours? Permitted production capacity Location Quality and Condition of Buildings and Infrastructure Equipment

10 provided by Tony Correia, ARA

11 provided by Tony Correia, ARA

12 provided by Tony Correia, ARA

13 provided by Tony Correia, ARA

14 provided by Tony Correia, ARA

15 Vineyard Values Average Grap Price SLO/SB; District 8; Values vs. Grape Prices $62,000 $3,000 $52,000 Pinot Noir $2,500 $42,000 $2,000 $32,000 $1,500 $22,000 $12,000 Chardonnay $1,000 $2,000 Cabernet provided by Tony Correia, ARA $500

16 Vineyard Values Thousands $40 $35 $30 $25 $20 $15 $10 $5 $0 Vineyard Values vs Average Grape Prices - Districts 11 and 17 - Lodi/Delta District 17 District $750 $700 $650 $600 $550 $500 $450 $400 $350 $300 Average Grape Price provided by Tony Correia, ARA

17 Vineyard Values Thousands Average Grape Price $30 District 13, Fresno-Madera $400 $25 $20 $15 $10 $5 $350 $300 $250 $200 $ $150 provided by Tony Correia, ARA

18 Business Considerations Brand Identity Sales Channel for Access to Market Stability of Sourcing and Production Retail price-points Varietal emphasis Origin of sourcing Three-tier wholesale distribution Direct-to-consumer (DTC) Key to building scalable brand Consistency in quality Quality of Management Core management key to growth Management dictates direction & results Business Model and Capitalization Asset heavy vs negociant Growth capital Debt structure

19 Financial Statement Adjustments Accounting of Net Revenue Excess and Non- Operating Assets Extraordinary and Owner Discretionary Expenses Normalizing Adjustments Account for DA s, discounts, etc. Awareness of pricing strategy Excess cash, marketable securities Lifestyle toys (e.g., private jets) Non-recurring material expenses Add-backs must be credible LIFO adjustment Depreciation methods and useful lives of assets

20 Valuation Methodology Levels of business value: Enterprise Value (all inclusive value of assets) Equity Value (enterprise value excluding debt) Asset Approach Market Approach Income Approach (DCF)

21 Asset Approach Description Summation of value of each individual asset Used to value wineries that lack cash flow or earnings Strengths/Benefits Appropriate for valuing asset intensive business (investment or real estate holding company) Value lies more in underlying assets than in income generated by assets Weaknesses/Shortfalls Does not capture value of intangible assets for strong cash flow business with minimal hard assets Approach often used to define low-end or floor of valuation range

22 Land: Assets Acres Value $/Unit Total Value Estate Home and related building site ,000 $ 1,500,000 Vineyard ,000 3,000,000 Plantable Acres , ,000 Ancillary Land , ,000 Subtotal 60.0 $ 5,070,000 Improvements: Assets Sq. Ft. Value $/Unit Total Value Residence 2, ,000 Winery Building 6, ,000 Other Site Improvements 500, ,000 Subtotal 8,000 $ 2,100,000 Equipment and Inventory: Assets Value $/Unit Total Value Equipment 400, ,000 Inventory 3,000,000 3,000,000 Miscellaneous / Trademarks 100, ,000 3,500,000 Total Value of Assets: Total - Land, Improvements, Equipment and Inventory $ 10,670,000 Total - rounded $ 10,700,000

23 Market Approach Description Value based on market prices of guideline public companies or comparable transactions Reflects what strategic acquirer may be willing to pay for business assets Strengths/Benefits Provides market-based value reflective of actual transactions Reflects supply and demand for saleable businesses Weaknesses/Shortfalls Rarely are past transactions truly comparable Publicly available data for private transactions can be limited or incomplete Volatile market conditions make application of this methodology more difficult

24 ($ in thousands) Revenue Based Valuation Low High Revenue $ 8,000 $ 8,000 Transaction Multiple Indicated Enterprise Value 12,000 16,000 Less: Debt (3,000) (3,000) Indicated Equity Value $ 9,000 $ 13,000 ($ in thousands) EBITDA Based Valuation Low High EBITDA $ 1,600 $ 1,600 Transaction Multiple Indicated Enterprise Value 12,800 16,000 Less: Debt (3,000) (3,000) Indicated Equity Value $ 9,800 $ 13,000

25 Two types of deals: Brand only Asset Light transactions Fully integrated transactions

26 Brand only asset light transactions Value of the brand plus inventory 8 10 x EBITDA Price points may vary, but current trends are indicative of pricing in the $15 - $20 per bottle range These EBITDA multiples are usually paid by the big boys ; they are purchasing a mid-priced brand and have the ability to exponentially increase volume with economies of scale and lower operating costs. Therefore, they are willing to pay a strategic premium for the brand.

27 Fully integrated transactions Brand plus inventory plus vineyards, buildings, barrels, bottling equipment, etc x EBITDA, depending on quality and reputation These deals are being driven by higher priced estate grown wines. The downside on fully integrated transactions is lack of scalability because of capacity issues.

28 Income Approach Description Present value of projected cash flows (earnings) of business assets Reflects value of future cash flows to a prospective buyer based on required return on investment Strengths/Benefits Takes into consideration future earnings growth of business assets Flexibility to perform scenario analysis by adjusting projections and changing assumptions Weaknesses/Shortfalls Relies on management growth projections Highly sensitive to changes in assumptions (cost of capital, projected growth rates, terminal value, etc.

29 ($ in thousands) Discounted Cash Flows Method Year ended December 31, Year 1 Year 2 Year 3 Year 4 Year 5 EBITDA $ 1,600 $ 1,700 $ 1,800 $ 1,850 $ 2,000 Less: Incremental "debt-free" working capital needs (89) (91) (93) (95) (97) Less: Incremental capital expenditure needs (200) (205) (209) (214) (219) Net Cash Flow to Invested Capital 1,311 1,404 1,498 1,541 1,684 Value Calculation: Present value of future cash flow using a discount rate of 10.0% 5,576 Year 5 terminal value using a capitalization rate of 7.0% 24,779 Present value of terminal value using a discount rate of 10.0% 15,386 Indicated Enterprise Value 20,962 Less: Debt (3,000) Indicated Equity Value $ 17,962 Enterprise Value Sensitivity Analysis: ($ in thousands) Long Term Growth Rate Discount Rate 2.0% 3.0% 4.0% 8.0% 25,370 29,496 35, % 21,676 24,516 28, % 18,908 20,962 23, % 16,757 18,298 20, % 15,038 16,227 17,713

30 Reminders Valuation of winery assets is not exact science Valuation is best expressed as range, not single value point Incorporate multiple valuation methodologies Weight different valuation approaches to achieve range Remember to differentiate levels of value Weighting of valuation approaches varies by situation Profitable negociant brand vs asset-heavy integrated estate winery Enterprise Value Equity Value

31 My thanks to: Tony Correia, ARA, Sonoma CA Matt Franklin, Zepponi & Company, Santa Rosa CA for their contributions to this program