How winery owners can preserve legacy, fairness

SANTA ROSA -- Wineries in transition from founder to children can be rife with highly emotional, charged conflict that can threaten to rip the family apart and wreck years of business cultivation. When the owners of a mid-sized winery decide to retire, what should they do?

“Identify their goals for the business and personally, and what they want for their children,” said Jay Silverstein, a partner who works primarily out of the Moss Adams office in Santa Rosa, with his focus in the wine industry. “Then implement a plan to help them reach those goals and objectives.”

[caption id="attachment_100000" align="alignleft" width="214"] Jay Silverstein, Moss Adams partner[/caption]

Mr. Silverstein, who practiced as an attorney for a dozen years before joining Moss Adams for the past 13 years, did business transaction and estate planning from a legal perspective.

“What do the parents need, from a cash flow perspective, if they’re about to exit the business?” Mr. Silverstein said. Transition internally to family members is common in the wine industry.

He looks for qualified or capable family members who could run the business successfully. Then he looks for ways to divide equity among children. “This is particularly true in the wine industry,” he said, “where we have very valuable assets that may not be producing a steady cash flow.”

The winery owners may not have many other assets outside their interest in the winery and vineyard. “How do you get the owner the cash flow they need in retirement? How do you transition management and ownership of that business in a way that the business will survive?” he said.

Usually some of the children want to work in the wine business, while others don’t. “What I often see is people spending a lot of time in their business, growing their business, but not enough time planning that transition to the next generation,” Mr. Silverstein said. “It’s human nature, a combination of mortality and a sense of urgency. People just don’t tend to want to deal with those things.”

Such delay can spoil the winery transition.

To establish a climate of fairness inside the family, Mr. Silverstein may go to other industry sources to establish a range of salaries for a particular function in a winery or vineyard operation. Then he might pick a number in the middle of that range as a way to place a value on work performed by children who work in the family business. That way, there’s an objective way for siblings who don’t work in the business to understand why their brothers or sisters are being paid a certain salary. “Paying somebody what they’re worth, you can solve that problem,” he said.

“There may be a way to get a steady stream of cash to those kids who are not in the business,” Mr. Silverstein said. What if one child, who doesn’t live in California, owns 25 percent of a winery or vineyard that produces little profit, but the property is worth millions of dollars? “How do I solve that dilemma?” Mr. Silverstein said.

For comparison, Mr. Silverstein describes an auto dealer who owns the land under the dealership. One child wants to be in the business; another wants nothing to do with auto sales. Such a business often produces a steady stream of cash. That cash flow can be directed to the child in the business. Ownership of the real estate could be granted to the outside child, who might collect rent.

He might structure such a deal so that the business acquires a long-term lease, allowing the real estate owners to sell the property without affecting the business expense structure.

For the children involved in the business, “their income is more subject to the volatility of the business,” Mr. Silverstein said.

“There are emotional issues you have to work through on both sides,” he said. “If you can achieve that and have all the children on board, it’s a really good result.”

“When are the parents going to back away, and when are the children going to take over?” Mr. Silverstein said. “That’s another emotional issue. The parent generation is not ready to step back and let the children lead.”

Or when the winery owners leave, the children are left leaderless, grumbling among themselves. Some siblings may hire lawyers and tie the whole estate up in litigation for years. Mr. Silverstein sees such conflict especially in the cousin generation, more than in the immediate offspring of the winery owners. “The ownership gets diluted, and the relationships get diluted,” he said.

Winery owners often want to preserve their legacy in a graceful way. “If mom and dad have enough to be comfortable when they exit the business,” Mr. Silverstein said, “the real question is, if I’m going to transition this business to some or all of my children, how can I do it in a way that’s going to preserve the value of the business, and preserve the relationship that I want my children to have? You may create a situation where you preserve neither.”

Sometimes sale of the business results in a better outcome. “I rarely tell a client, ‘You ought to sell,’” Mr. Silverstein said. He sets that out as an alternative and lets the client arrive at that conclusion.

A decade ago, more winery owners aimed to keep the business running and transition it to their children. In the wake of the economic downturn in 2008, more owners consider outright sale of the business as the best succession plan. “It has flipped,” Mr. Silverstein said. “More are looking at a sale as a viable exit strategy.”

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