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Vine Notes

Katherine Philippakis is a partner with Farella Braun + Martel LLP and chairs the firm’s Wine Industry practice group. She is based in the firm’s St. Helena office.

Karen Yuen is a partner in the Business Transactions practice and is based in the San Francisco office.

Vine Notes (nbbj.news/vinenotes) is a regular column by Rabobank, Farella Braun + Martel and Heffernan Insurance Brokers on wine business topics.

Having decided to sell your winery, you have hired a broker or adviser to help you market the property, circulated marketing materials to prospective buyers, and invited those buyers to submit an expression of interest. Having received various letters of intent, you have chosen the best offer and perhaps you have negotiated the terms. Now having signed a letter of intent, you decide it is time to call your lawyer to help you with the sale documentation. Right?

Unfortunately, this scenario is not unusual, but it does put the seller at a disadvantage in the sales process. A number of legal issues should be investigated and addressed prior to marketing a winery. If not addressed and corrected before the sales process begins, they can have a number of negative effects: a lower purchase price, less favorable terms, purchase price holdbacks, and sometimes even a failed transaction.

For this reason, we have compiled seven of the most common issues we have encountered over the years in our wine practice. Each of these potential problems should be addressed and corrected early in the process — and certainly before you take the property to market.

1. TITLE

Before you do anything else, obtain a preliminary title report from a local title company for your property, and have your attorney review it. Check to make sure title to the property is in the correct name; if there have been mergers, name changes or other changes in ownership, consider what impact these might have on your ability to convey the property to a buyer.

In addition, you should ensure that there are no outstanding liens or any recorded deeds that should not be on title. If anything of this nature does appear, take the time to have the issue investigated and work with the title company to see if it is possible to have these items removed from the title report. Sometimes this may involve negotiating with a third party, or even initiating legal action to clear title. But whatever the resolution, it will almost certainly be easier to fix the problem before you put the property on the market.

Similarly, if there are any questions as to access to the property or the location of boundary lines, you should consider having a surveyor do some initial work to determine whether the improvements on the ground match the recorded legal descriptions. If you learn that your vineyard encroaches on your neighbor’s land, or you are missing an easement for a piece of the road leading to the winery, these issues are generally more easily negotiated with neighbors before the deal process begins.

2. INTELLECTUAL PROPERTY

Just as you should make sure that your ownership of the land is clear, you also should attend to the ownership of any intellectual property associated with the winery. If you have trademarks for your brand, you should verify that these trademarks are owned by the wine business and not by individuals or other related parties. Often, you will want to have all of the winery’s assets owned by the wine business itself; this means that individuals or other owners do not have to be parties to the contracts.

That being said, if the brand and the other assets are in different ownership, you will want to consider how to apportion any proceeds from a sale between the two in the most favorable manner. Whatever the ownership of the brand, you should consider the impacts of this ownership on the sales process.

Vine Notes

Katherine Philippakis is a partner with Farella Braun + Martel LLP and chairs the firm’s Wine Industry practice group. She is based in the firm’s St. Helena office.

Karen Yuen is a partner in the Business Transactions practice and is based in the San Francisco office.

Vine Notes (nbbj.news/vinenotes) is a regular column by Rabobank, Farella Braun + Martel and Heffernan Insurance Brokers on wine business topics.

Also take the time to run some internet searches on your brand to make sure no one else is using your name. If there are infringements on your trademark (whether past or present), then you should work with your attorney to resolve those infringements if possible. To the extent that they cannot be resolved, then you should catalogue that information, and any related correspondence with the infringing parties, and have it ready to disclose to your prospective buyer early on in the sales process. Nothing is more detrimental to a successful sale than a last-minute unpleasant surprise that the wine brand a purchaser is buying might not be as valuable as he or she thought it was.

Finally, you should attend to your label design. If someone else designed the label for you (such as a graphic designer), did you obtain an assignment or release from that person to demonstrate that you now own the design? If not, it is better to get this documentation yourself now, rather than to be presented with some complicated form by a buyer’s lawyer and told to have it signed. Again, the more you control the process, the better for you.

3. KEY EMPLOYEES

Next, you should review the winery’s employees and consider which employees are critical to the success of the business. If those employees need to stay in place and be willing to work for the buyer in order for the business to be marketable, then you should consider putting into place an employee incentive agreement with each of them.

Often called “stay/pay” agreements, they provide that the employee will receive a bonus if he or she remains in employment when the deal closes and, if employed by the buyer, stays on for a set period of time. Putting this sort of agreement into place will require that you tell key employees you are considering selling the business, so you will also need to have a confidentiality agreement with them.

And since even the best confidentiality agreement can sometimes be ignored, you should also consider the impact to your other employees and to your business as a whole if word of the sale were to be leaked. You may not be able to prevent a leak, but you can at least be prepared to respond if it happens.

4. COMPLIANCE

Another part of your preparation should be to gather together all of your local, state and federal permits and licenses and review them to make sure you have complete copies of everything and that your operations are in compliance. We suggest going to any state and local agencies and ordering a complete copy of their files so that you can ensure your records are complete.

Then compare the permits on file with the actual operations of the winery. Does your production exceed the applicable gallonage restrictions? Do you have more employees than your permit specifies? Have you expanded or reconfigured the space within the winery? Are there improvements that have been constructed without permits?

If the answer to any of these questions is “yes” — and it often is — then you should work with your attorney to determine the most effective way to resolve the compliance issues, or to disclosure them to the buyer in a manner that will be least damaging to the sale.

5. CONTRACTS

If you rely on third party grape sources or other outside suppliers, you should review those contracts. As an initial matter, make sure the contracts are in writing, and that they match the actual practice between the parties.

For example, if you have a contract to buy 20 tons of cabernet sauvignon grapes but the contract expired in 2010 and you’ve actually been buying 50 tons of grapes each year, then you should amend the contract to reflect the current terms.

Then check the assignment provision in each of the contracts to make sure they can be assigned to a new owner of the business. If a particular contract cannot be assigned and it is integral to the business, then you should consider what other solutions may be viable.

Could you, for example, continue to be the purchaser of the grapes but then immediately resell them to the buyer of the winery? In such a scenario, think about how long you would be willing to continue to act as an intermediary and whether there are any regulatory issues to consider.

As with all of the issues we have been considering, the resolution may not be easy or straightforward, but it will almost certainly be preferable to resolve it before you enter into a contract to sell your business.

6. AUTHORITY

The question of transactional authority has two components: legal authority to sign transaction documents, and day-to-day decision-making during the deal process.

The first issue is a simple matter for your lawyer to review: who has decision-making authority for the business, and do the governance documents for the business accurately reflect this authority? If not, you should have those documents updated so that they do not cause any delays at the end of the deal.

Note that you will have to represent in the sale contract that the person signing the contract has authority to sell the business, so you will want to make sure you have all of the entity’s legal documents tidied up before you begin the sales process.

The second issue is more subtle. If you have a family-run business, or a business with multiple owners, you should ensure that all members of the business are fully committed to the sale and have an opportunity to raise questions or objections before the process begins. If you begin the process and negotiate a sales agreement with a prospective purchaser, it can be very difficult to extricate yourself from the transaction if one of the sellers has second thoughts.

Similarly, if you have multiple owners of the business, you should consider appointing a single member as the point person for purposes of negotiating and finalizing the deal. During a transaction, decisions often have to be made quickly, and decision-making by consensus can be awkward and time-consuming and can undercut your ability to negotiate effectively.

Discuss with your attorney and with the members of the business what would be most appropriate for your situation from a practical perspective, so that you have a workable strategy in place before you go to market.

7. LETTER OF INTENT

Last but not least, make sure to show any offers or letters of intent to your attorney before you sign them! We cannot emphasize this last point strongly enough. Although letters of intent often state that they are “nonbinding,” California law takes a more complicated view of the process and can sometimes impose on the parties a binding obligation to negotiate in good faith. In other words, you can be stuck with a letter of intent, even if it says it is non-binding.

Thus, the language and terms of the letter of intent truly do matter. In particular, there can be important tax and financial consequences to the way a transaction is structured, so it is important that you know what these consequences are before you sign anything. Whether to sell assets or to sell the company itself, how to allocate the purchase price between the different assets being sold, how to apportion the costs of the deal — all of these are issues that deserve careful consideration. Input from your attorney at the beginning of the process will have a tangible effect on the net proceeds of the sale.

BE PREPARED

With regard to all of the issues raised here, the more you know and the more you prepare going into the sales process, the better the outcome is likely to be. Putting your paperwork in order, preparing for a transaction and determining a structure that is right for you are all integral aspects of a successful deal. As with so many other aspects of life, in the process of selling a wine business an ounce of prevention is indeed worth a pound of cure.