What is the Legacy of Your Winery?

The oldest bottle of wine I ever consumed was a 1928 Bordeaux purchased by a friend at auction. Besides the price tag; the bottle came with a unique history. It had been passed down from the grandfather to son and then to his son, to be opened at a ‘special occasion.”

The economy took a nose dive and in 2009 the grandson was more desirous of the intrinsic value than the sentimental value. It was placed at auction and sold. Unfortunately for the seller, the bottle realized a price much less than anticipated for a number of reasons, reasons which can provide a parallel to succession planning for winery owners.

As you consider the future of your winery, you may see the need for a formal succession plan or exit strategy. The grandfather had a plan; to save this bottle for generations until the right moment presented itself when it would then be consumed. His plan did not come to fruition.

Perhaps if Grandpa had a formal written plan, the bottle would have been preserved and consumed according to his wishes. I do not suggest a trust for a single bottle of wine, however I do assert though that your winery is more deserving.

The first reason the bottle did reach its full potential at auction was the lack of proper provenance. Instead of proper climate controlled documented storage,  this bottle existed in a myriad of non-ideal places for decades. For a wine to be considered an ideal example precautions must have been taken years in advance.

This is a good time to mention that the low price for the wine was justified as its contents were not very good. A successful transition or sale of a business requires that the business has implemented certain measures long before the actual time of transfer. Your exit strategy of choice will be more financially rewarding if the planning is done sooner than later.

Businesses (hopefully) grow and require decisions along the way: how to take income from the business, how to pay less in tax within the four corners of our tax code, and how to accumulate wealth through the business.  The decisions we make today can have a profound effect on the ‘net” at the time of transfer, sale, death, or all other forms of exiting.

The second reason the 1928 Bordeaux sold at a low price were the market conditions at that time.  But the grandson needed to raise money because times were tough. Unfortunately, this is a case of ‘things are bad all over.” The wine market was down as well and the demand just wasn’t there. The biggest culprit for family businesses no longer staying in the family is forced sales due to poor estate planning or lack of financial security through asset diversification. The plans we make, or lack of planning today can become the recipe to ensure the family business does not stay that way.

While all the strategies to accomplish these goals are beyond the scope of this article, there are a few steps we recommend to begin the work that we all know must be done.

1) Get Motivated: From a recent poll, 70% of winery owners looking to transition ownership within 10 years have yet to adopt a plan. This inertia is a wine owner’s kryptonite. Start by trying to visualize your ideal exit strategy.

2) Communicate: As you consider the transition, have meaningful conversations with those that your ideal plan will affect. The last thing you want is to leave a business to someone that does not want it, or as the bottle of Bordeaux example taught us, even afford to own.

3) Seek Professional Guidance: They are many complicated moving parts in wealth accumulation and business succession. You undoubtedly have multiple goals and they need to work together and not against one another. A team of professionals such as an attorney, a CPA and a wealth manager/financial planner should be working together to help you reach your goals. They will help you answer:

• What form of business entity works best for my future plans?

• Are there any gaps in asset protection and limited liability?

• How do I accumulate increased equity in my business?

• Do I want to accumulate increased equity in by business?

• How do I effectively draw income from the winery?

• Do I establish a qualified plan and if so, which type?

• Am I managing risk efficiently?

• Do I diversify way some assets from the winery and if so, how much?

• How much will it cost you and the winery to retire or slow down?

• What is my Plan B?

4) Have a plan B:   As the saying goes, ‘We make plans and God laughs.”  As you begin the work to realize your ideal exit strategy, circumstances may not go as planned. Whatever ends up being the actual exit strategy, it should still be as profitable for you and your family as possible. Keep in mind that all good plan Bs should not detract from your overall wealth planning and accumulation but more so aide and increase your wealth. Business owners are afforded some of the most generous planning and tax savings opportunities avaialble and many can be used to accomplish many goals at once.

I hope our wine bottle story helped provide an example to help winery owners begin to think about their long-term succession planning. We all want our ideal situation to come to fruition, but it is much harder to make that a reality when we do not necessary know what that ideal situation is exactly or how to put a plan in place.

Jordan Jacobs is the Director of Wealth Management at Estate and Trust Advisors in Northfield, Illinois.  He is an avid wine lover he enjoys being a resource to winery owners to help them succeed in the ‘Art and Business of Winemaking.” Mr. Jacobs can be reached at Jordan@etaadvisor.com or by calling 847-441-4600.