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Defining a Vineyard Financial Forecast: A Delicate but Necessary Exercise Before Investing
5 January 2017
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5 January 2017
What is the role of a certified public accountant upstream of a wine estate transaction?
We often meet investors who want to venture into a wine business but are unaware of the randomness of the production and, therefore, its profitability.
Unlike the overall costs of wine production, which vary slightly from year to year, the volume of grape production depends on many factors that the farmer cannot control: climate risks exposure, diseases, wine quality following maturation, and so on. Therefore, when it comes to profitability, as long as the grapes have not entered the cellar and the wine has not matured, it is not easy to estimate with certainty the turnover that the said vintage will generate in the vineyard accounts.
Upstream of an acquisition, one of our first roles is to allow the buyer to understand the real challenges of this sector. For example, in a hailstorm year, you can lose all or part of the production, and the revenues related to this vintage will be meager or even nil. Furthermore, hail will weaken the vines, affecting the following years’ harvest.
A discerning vineyard buyer should be aware of these hazards and ask the wine accounting expert to anticipate the potential risks in establishing profit and cash flow forecasts with variable production assumptions.
What advice can you provide to a buyer/investor on a wine property of particular interest to them?
There is no accurate methodology to navigate risks for a wine business. In general, we try to assess the buyer/investor’s level of knowledge. Has he ever managed an agricultural/wine-growing activity? What are his motivations for this purchase? What is his knowledge of wine production and marketing?
As wine accounting experts, it is our responsibility to point out to the investor, especially if he is from the industry, the difficulty of determining a unit production price and the risks of establishing linear forecasts. Financial simulations with varied scenarios are most efficient in demonstrating the risks involved.
Although it is not a priority to know if the buyer/investor is qualified to produce wine, it is essential to appreciate his discernment in this activity because once the harvest is in, the wine has matured (and assuming that the wine is good), it will be up to him to sell it!
To fix the selling price of a bottle, you cannot simply take the cost price and apply a margin to it. Instead, the market price, wine appellation, estate’s reputation, etc., will play a significant role in defining the selling price and, therefore, the property’s profitability.
Consider a château that markets two types of wine at very different prices to reflect a recurring difference in quality, appellation, etc. The overall production costs for these two wines are similar because many fixed costs are shared (machinery, labor, winery use, cellar use, etc.), but the unit cost per bottle, depending on the harvest yield, may vary significantly from one vintage to another.
Keeping in mind that the selling price is linked to the market positioning, the margin per bottle will be very different from one vintage to another and can even be negative in low-production years. In wine accounting, it is, therefore, essential that forecasts be established based on different scenarios.
By choosing an accounting firm deeply-rooted in this field of activity, the investor will be assured of being well-advised on the potential of the said wine property and the inherent risks of this type of acquisition.
Owning a vineyard is not always rosy! Even for those skilled in business, separating the romance from the financial reality of producing and selling grapes and wine is not easy. So here is our advice: Entrust your vineyard accounts to a certified accountant highly knowledgeable in the financial entanglements of wine accounting.
Read more: http://www.sagec-experts-comptables.fr/
Contact Information:
Pierre de BOUSSAC p.deboussac@sagec-experts-comptables.com
Sébastien CRUEGE s.cruege@sagec-experts-comptables.com
Article translated FR>EN by:
Nathalie Parent Dumoulin, Translator, NEXT EDITION, WI&NE Nouvelle-Aquitaine
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