Robert Nicholson is president of Healdsburg-based mergers-and-acquisitions sell-side advisory International Wine Associates.

He will be part of the mergers and acqusitions panel at the Business Journal’s Wine Industry Conference on April 28. He talked with the Journal about the trajectory of West Coast deals recently and what they mean.

What do recent acquisitions tell us about wine M&A?

ROBERT NICHOLSON: It is more buoyant than it has been at any time in the last 15 years. And the reason for that is that the wine market is strong and growing in the U.S.A. We’re now the largest wine market in the world — 335 million cases, up 2 percent-plus annually and increasing at a higher percentage at the higher price points.

The reason M&A is as strong as it is that medium-tier companies and large companies are trying to find ways to improve their position. For example, if you have been a company that is focused on the below-$10 in the past — that’s your sweet spot historically — then where you want to be in the future is the area that is growing the most. And that would be above $10 retail and in certain cases above $15.

If you have focused your business heretofore at under $10, you need to find a way to get into the above-$10 category. Sometimes, it’s easier to do that through acquisition that to create your own brand organically. Nothing is easy.

Do you see examples of that in recent acquisitions?

NICHOLSON: Absolutely, I think it’s very clear, certainly with the transactions that have happened so far this year, The Prisoner and Chalone, and many of the transactions that happened last year. But not necessarily are all companies pursuing the same strategy.

Some are pursuing the brand-only strategy, where the asset base is smaller or nonexistent and they’re using existing assets as homes for their increased needs of production capacity. They’re not buying vineyards. [Constellation Brands’ purchase of Huneuus Vintners’] The Prisoner is an example of that.

An example of the other type of acquisition is [E&J] Gallo, where they’ve been buying businesses with assets — brands with assets. [Gallo’s purchase of] Talbott [Vineyards] would be an example of that. Very big asset base: 525 acres of vineyards, sizable growing brand and a winery.

What types of buyers are looking for deals in the North Coast and elsewhere?

NICHOLSON: There are a number of kinds of buyers. There are the big, large corporates, the Constellations, the Gallos, The Wine Groups of the world. They are examples of transactions done in the last year in the North Coast.

Also there are middle-tier wine companies from in the area and out of the area. Then there are some private-equity fund activity and some high-net-worth individual activity. There is a little bit of everything.

Has that pool of prospective buyers changed from other years?

NICHOLSON: Still there are the large companies in the wine industry bolstering their positions through acquisition. Other small companies are making acquisitions as a way of getting into a new type of business, for example, acquiring a Russian River or Napa Valley vineyard or winery because they may not have been heretofore into pinot noir or cabernet. There is not necessarily a larger group of different buyers.

What types of deals are in demand?

NICHOLSON: Vineyards values are firming up, because the market is strong and [vintners] need to protect their supply. That is happening with higher-priced wines — over $20-$30 a bottle. Wineries are committing to an increased level of supply from owned vineyards, as opposed to depending on third-party vineyards for their best-quality wine. They want to control the vineyards from the growing cycle.

From a financial perspective, as the vineyard prices increase, if you’re a winery, you get two bites at the apple with the margin. You get the vineyard margin, but you also get the bottle-price margin. So therefore the reason for the relative firmness in vineyard real estate values in the higher-quality AVAs [growing regions] is because more wineries are deciding to increase their share of supply of their higher-quality wine from their own vineyards.

[Winery production] capacity is tight generally, so there are number of deals that have happened on the basis of securing capacity for their own purposes. One of those was Gallo’s acquisition last year of Asti, where we represented Treasury Wine Estates, a very big, 35,000-ton [annual crush capacity] facility with proximity to Gallo’s vineyards in the North Coast.

There is a need for more capacity. As the wine markets are growing and more vineyards are being planted and have been planted in the past 10 years, capacity is constrained.

We’re not seeing a lot of buying into minority-share relationships. Vintners want to be in control, where they control a majority of the equity in the estate. Sometimes, the [proprietor whose name is tied to the brand] is kept on board in a minority position.

How much value related to the deal is related to the seller’s staying with the operation?

NICHOLSON: That depends on how associated the proprietor is. If he or she has been very much the spokesperson for the name and is identified throughout the trade and even with the consumer as the face of the business, then their involvement either through retained ownership or a contractual relationship in a transaction to remain with the business is important.

And sometimes, the proprietor serves the role of soul-keeper. That is the one who helps the new owner retain the image and identity of the estate without changing it in a transaction.

How much does the appellation factor into the value of the sale?

NICHOLSON: Hugely. Look at the difference between a vineyard in Napa Valley vs. one in Lodi or California appellation because you can get a significantly greater price for your wine from grapes grown in the vineyard. It’s an important element in the overall value.

How does that factor into more brand-oriented sales?

NICHOLSON: Sometimes the founding appellation of the brand may not be able to support the growth plans of the acquirer. So under certain circumstances the owner may have to broaden the origin of the wine that goes into the blend.

That’s where the brand owner has to be pretty careful as to how that’s done, because of the image of the brand and the taste profile with the consumer.

Where do you see the money coming from in these transactions recently?

NICHOLSON: There is no shortage of money. There’s good liquidity in the market. Things are a bit tighter, perhaps. Good deals will always find money.

The key is cash flow. If businesses have good cash flow and want to transact, they can find buyers who can get financing for it. We typically do deals with companies that already have the financing already in place.

What trends do you see in acquisition-target valuations and actual deal values?

NICHOLSON: Certain transactions have firmed up values. Multiples are the same that we’ve seen in a while. There are one or two outliers [that were] higher.

A crude valuation is an operating-income multiple, an EBITDA [earnings before interest, taxes, depreciation and amortization] multiple. In the premium wine business, it is typically in the 10 to 14 [times EBITDA] range, depending on the premium position of the brands and what the upside is to the buyer.

The real valuation gets done behind closed doors by the [accountants] taking the discounted cash flow out to 20–30 years and bringing it back to present-day value of future cash flows. The discount rate you use is attributable to risk the buyer believes in the business. Can the buyer achieve the plan put into place to make the acquisition? Can the buyer achieve the scalability?

What are general tips for someone looking at a prospective sale?

NICHOLSON: Preplanning is incredibly important with the deal team: M&A adviser and a lawyer who knows how to do deals.

Keep things confidential — need-to-know basis — to avoid erosion of value. Have a sense of urgency. Clean up the balance sheet. Get unnecessary things off the balance sheet you don’t want to include in a transaction. Improve data collection — sales data, consumer data. Identify family expenses that are not going to be recurring and take them out. Deal with with unsalable, unsettled inventory; right-size the inventory.

It’s important to do estate and tax planning with your CPA and lawyer. Restate the financial statements, which we as M&A advisers help them do with a CPA. Identify assets to be retained. Sometimes, there are certain assets such as a vineyard the family or the owner closing a business wants not to be sold. Those need to be taken out of the business. Make sure key agreements are in writing. Surprisingly, many aren’t — handshake grape contracts. Make sure trademarks are up to date and properly registered. Make sure the permits are up to date. Look at [IRS Code Section] 1031 exchange.

Think about post-closing plans. Do they want to stay with the business? Do they want to leave? Do they want a visitor role? If they do not want to stay with the business, what do they want to do? Do they want to leave the area? Many people don’t think about these things.

How does the deal volume in the North Coast compare with what’s going on elsewhere?

NICHOLSON: The North Coast, probably, is leading the wave geographically, but the Central Coast is pretty buoyant. Oregon and others are pretty buoyant. We’ve done $150 million in deals in Washington and close to $100 million in Oregon.

The great thing about the wine industry is diversity in the portfolio is important. Oregon and Washington have different styles of wines, but they all serve a purpose in the portfolio of wine companies.

What’s happening with the talked-about succession wave in the wine business?

NICHOLSON: It’s ongoing. Succession-planning is important. Some decide to sell instead of managing a succession plan.