Succession Planning: For Wineries and Vineyards

By: Kevin Martin, Penn State Extension Educator

A succession plan can be fairly difficult to navigate.  By some measure most farm succession plans end in failure.  Much of that can be attributed to an unfair definition of failure.  Take John D. Rockefeller as a primary example.  Standard Oil, his flagship company, was broken up in 1911.  His 200+ heirs and related trusts have equity interest in Exxon-Mobil, ConocoPhillips, BP and Chevron.  Despite that equity interest, his son Junior went on to become not an oil baron but a real estate baron.  The oldest surviving grandson, David, is a former CEO of Chase.  If you do not count David, the average net worth of a Rockefeller now stands at an estimated $34 million dollars.  This is deemed a failure by most succession planning consultants.

A successful succession plan may not necessarily guarantee that a business stays under family control, it may not guarantee lasting wealth either.  The plan should allow the senior generation to live as comfortably as possible and facilitate any passion of the junior generation.

Employee Based Succession Plans

Poor estate and succession planning can result in the failure of a winery.  For some, that can be an emotional loss.  Employee based succession planning allows a senior generation to select a passionate successor with shared interests.  This is not always the case for familial succession plans.  Expanding the scope of what succession means and how to define successful succession can be helpful.  Building a relationship with an individual, even if they’re outside of the family can be rewarding.

A non-family succession plan can allow the farm business to transfer to the next generation, gradually, despite the lack of family interest.  It can also allow a senior generation or even a spouse that is passive in the operation to stay more involved for a greater period of time.  That benefit can improve satisfaction and the quality of life in “retirement”.  It may come at a cost, of course.  The sustainability of a business will often require a non-family member to be reimbursed in salary as well as stock.  It may reduce the overall size of the estate for children.  Weighing the priorities of the senior generation and their business goals for their later years and beyond can help guide the practicality of a non-family succession plan.

This type of plan also has the opportunity to improve the business operations.  An employee with the opportunity to obtain equity interest allows a winery or vineyard to recruit better talent with greater expertise.  Such an interest can increase productivity, critical thinking, and innovation.  If done gradually enough and early enough, this type of plan could improve profit margins to the extent that the value of the estate increases.

If only one spouse is involved in the business, it is recommended that the other spouse would divest himself from business ownership upon the death of the involved spouse.  The only financial tool that can really help with divesting to a junior generation is a sizable life insurance.  Given the cost of life insurance, divesting can also be partially funded by surviving spousal financing.  In this situation a buy out clause would require the junior employee(s) to make payments to the surviving spouse, rather than a lump sum payment upon death.

Family Based Succession Plan

On farms, we have seen that the next generation growers have increased in number since the last recession.  I expect that trend may follow in many family owned businesses.  It appears to be an economic function, rather than a long-term pattern.  Significant economic growth and an expansion of middle class wages could undermine this trend.  As we now are at the tail end of the recession, when wage growth begins to recover, recruiting junior generations to take over family businesses may prove to be difficult again.  The interest that next generation growers have shown is almost universally practical.  A growth in operational capacity is typically necessary for the temporary support of two full-time owners, rather than one.  For wineries with an average bottle price below $20, it typically means pushing case sales up near 10,000.

The size of a vineyard operation is a bit more difficult to define.  There is quite a bit more variation in vineyard management practices that growers can use to manipulate profit margins.  On one extreme, bulk Concord growers need to work toward 300 acres to support two full size families.  On the other end of the spectrum high-yielding Riesling growers may not receive the highest prices per ton but their net revenue per acre is among the highest.  On a farm of 40 acres net revenue may be as high as a Concord vineyard of 300 acres.  On the other hand, low yielding vineyards looking for higher prices per ton typically see net revenue per acre fall.  It may fit very well with the marketing plan of the winery, but expect to increase acreage by at least double.  As an alternative to size, one member can supplement income with off-farm labor.  Highly leveraged operations that expand quickly, for example, may temporarily rely on this method to mitigate financial risk.  It is important to structure and time growth in ways that work with the financial realities of the operation.

While the analysis of business health is particularly important, personal finance cannot be overlooked.  Median household income in Pennsylvania is $51,400. Wineries and vineyards often build businesses with net revenue that regularly exceeds median household income.  Doing so, however, takes considerable capital and time.

The personal financial health of the senior generation varies considerably.  Not only do businesses have varying levels of success, personal financial decisions and retirement goals also vary greatly.

Asset recommendations vary from advisor to advisor.  A typical long-term retirement will require assets of approximately 25 times earnings.  Business owners may gradually phase into retirement, potentially working much longer than typical retirees.  Even so, assets at retirement age provide a great deal of flexibility in succession planning.

Management Transfer Plan

Building a healthy winery business that supports the goals and expectations for net revenue is just one step toward success.  Another critical element is a management transfer plan.  Most family operated vineyards are run as a sole proprietorship.  Even an LLC, S-Corp or C-Corp is typically run with one individual exclusively holds all titles and responsibilities above day laborer.  A division of that management structure, along with a planned out evolution is necessary for success.

There are two temptations, mostly based on grower personality, that are important to avoid.  Some business owners like to shut down the stressful parts of the job and prefer to give up all control and responsibility immediately.  In this scenario, the next generation is thrown into the deep end without a life jacket.  On the opposite end of the spectrum, a senior generation may be unwilling to give up any decision-making.  The junior generation is a day laborer with an equity interest.  Eventually he to will be thrown into the deep end.  With the senior generation unwilling to give up control of management decisions, it happens too late.

A management transfer plan should first capitalize on the strengths of the junior generation.  Whether it is computerized payroll management and fiscal analysis of operations or it is soil health analysis, the junior generation needs to be slowly empowered in a way that maximizes success and confidence.  Eventually he will have to master all aspects of the business and any relative weaknesses should be addressed.  That may involve working closely together on certain aspects of the business.  It may also involve outside training.  While it is important to have both generations involved in management, it is also important to cross train.  For the long-term sustainability of the business, undue reliance on an individual’s skill set is not usually a good solution.

Planning For The Unexpected: Buy-Sell Agreement

There are a number of different tools and techniques to plan for the unexpected and to mitigate risk.  One element that should be included in any transfer plan that involves a period of joint ownership should include a buy-sell agreement.

This type of agreement allows a partner to exit the business in the event of an unexpected change.  Such an agreement spells out the timeline for closing.  It either spells out a methodology for valuation or a predetermined valuation.  When family is involved, a predetermined discount on the percentage of valuation to prevent the purchase from undermining the farm business.  If it is anticipated that finances for all parties will allow a less than immediate payout, an installment plan, rather than a discount, would be another appropriate tool to prevent the buying partner(s) from becoming overleveraged.

Succession planning can often be a complex endeavor.  The value of expertise should not be overlooked.  While it is important to control costs, devoting some monetary resources to succession planning can be an excellent investment.  However, for free information, more detail, or specific questions please contact the author, Kevin Martin (, 716-792-2800).

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