First published in New Zealand Winegrower magazine, October/November 2010 (vol 14 issue 2).

Sale or Succession?

In these unpredictable times it seems a little ironic to be discussing changes in the management and owner of business by succession when more probably the context is sale.

An American survey in 2007 established from family owned respondents that most of those proposing succession were unprepared.

Similarly sale, which is often a default position on account of failure of a succession plan and/or other circumstances, is undertaken without adequate provision.

The cause for more focus on succession and/or sale is undoubtedly the World Financial Crises and is exacerbated by supply seeing demand, the reduction in grape prices and the resulting market mayhem with the fragmentation of the marketplace a proliferation of brands and discounting (the list is not exclusive). These cumulating circumstances impact on the profitability of the industry and pressure brought upon leverage, cash flow and servicing costs.

Making a good wine is no longer good enough "in a marketplace that requires a world differentiating brand strategy and appropriate sales and marketing plans". Gone are the days when the mere mention of your name, your wine and wine spectator as "best buy" or "best choice" are you inundated by international calls for all you can produce.

The American research is of interest to us because it deals with wineries presently in business which were formed subsequent to 1975 and largely the conversion of businesses as growers turned winery owners, initially cottage based with an emphasis on cellar door sales, grape supply contracts done mainly on a handshake and distribution other than at the cellar door on a similar basis.

Given the circumstances of this industry lifecycle the prevalent issue driving succession is the mechanism by which change of control can be achieved.

However, without planning, current ownership is assuming both significant financial and execution risk that will translate into an inability to pass ownership to a next generation and/or realise the most advantageous terms in a third party sale. Whilst this is a motherhood and apple pie statement it is nevertheless important because effective succession and estate planning can take between 5-10 years. The sale process on a "leave it and see what happens" philosophy is inappropriate, thus planning is imperative for both succession and sale. There are nine fundamental requirements to this planning process (pre-requisites with both legal and financial consequence):

  1. Cleaning up financial records and practices;
  2. Taking steps to build more profitability into the business;
  3. Direct management emphasis to staff and brand reputation;
  4. Realigning strategic and non-strategic assets against a plan, for example some business assets may be separated from the assets of sale and/or be passed on to a successor);
  5. Reviewing key arrangements (grape growers, distribution, consultants);
  6. Confirming banking arrangements (loan arrangements, covenants);
  7. Tax;
  8. Licensing;
  9. Real estate issues (such as portability of resource consents, in particular discharge permits and easement arrangements through other properties).

Clearly communications are the key to succession and ascertaining what members of the family aspire to and the use of non-family resources in order to achieve that.

With both a sale to a third party and proposed succession the business needs to be prepared for due-diligence.

It is proposed in a review of the legal handbook Guide to New Entrants to the Wine Industry about to go online with New Zealand Winegrowers to include a due diligence checklist that provides the form for this together with a draft terms sheet for any agreement required for the purposes of succession and/or sale to a third person.

In all of this confidentiality is critical as obviously an intention to sell either to a third party or within the family can impact on sensitive arrangements, including distributor staff suppliers such that premature news of a pending state of sale can severely impact current prices and sales on the availability of raw materials. Confidentiality agreements in the context of these processes are not unusual.

A matter of particular concern in relation to the likelihood of sale to a foreign person is the requirement for an Overseas Investment Act approval from the Overseas Investment Office. Such applications require the identification of "national interest" which previously in the context of the wine industry has been restrictively interpreted.

Special/Sensitive land triggers can spring surprises particularly in relation to water courses such that in the preparation of a due diligence title searches defining the status of the land for the purposes of the Overseas Investment Act ought to be obtained in anticipation of any such application.

In the next article I propose to look at the mechanism of succession within a family of several siblings, all of whom wish to be involved in the family business to a greater or lesser extent.