By Tony Schoenberg and MaryJo Lopez-Oneal, Farella Braun + Martel
The wine industry is undergoing a period of contraction that is reshaping the way buyers and sellers approach mergers and acquisitions. Assets that have traditionally appeared on the “plus side” of the ledger may now be viewed as liabilities. This shift can result in larger gap between what a seller believes a business is worth and what a buyer is willing to pay.
What Assets Are Driving Valuation Gaps in Wine Industry M&A?
- Inventory: Buyers may no longer view inventory—including bottled wine and wine in tanks—as a reservoir of future revenue. Instead, inventory may represent increased labor and storage costs, working capital pressure, and uncertainty about whether the product can be sold at its original projected margin.
- Multi-Year and Capital Investments: In a strong wine market, investments such as new barrels, recently planted vineyards, and expanded production capacity are usually seen as valuable assets. But in the current economy, buyers may value these investments as liabilities. For example, given the lowered demand for wine, the buyer may not plan to use its full barrel program, but barrels incur maintenance and storage costs, even if they are filled with water. The same is true for tanks and machines that still require maintenance, even if they are not used in the production of wine. Similarly, while relatively young vineyards are usually viewed in a strong market as an investment that will pay dividends for decades to come, these may now instead represent labor costs to maintain a vineyard whose fruit will not be used to make wine.
- Locked-in Contracts for Grapes and Bulk Juice and Wine: In a growing wine economy, long-term grape and bulk juice and wine contracts can be a strategic asset, helping secure quality fruit and juice, continuity of production, and predictable sourcing. In a declining market, however, these same contracts may obligate a buyer to purchase grapes or bulk wine and juice at prices above current market levels or in quantities that the business no longer needs. As a result, an asset that once increased a business’s value may now reduce it.
Bridging the Valuation Gap and the Risks of Flexible Deal Terms
Confronted with this valuation gap, parties are sometimes tempted to put off agreeing on hard numbers. Instead of resolving disputed value up front, parties may, for example, include references to “market price,” rely heavily on earn-out provisions, or use other flexible mechanisms designed to bridge the valuation gap. In principle, these tools can be useful because they allow the parties to close a deal when present value is difficult to measure and future performance remains uncertain. In practice, however, vague terms may result in an increased risk of disputes in the future.
Using Contractual Guardrails to Reduce Post‑Closing Disputes
But the risk of post-closing disputes can be mitigated by including “guardrails” in the deal. For example, if the parties decide to include a market price provision, they may be able to reduce the likelihood of future disputes by specifying how market price will be determined (e.g., a published index, a broker opinion, an average of third-party bids, or an appraisal by an industry expert). For earn-out provisions, the “guardrails” may include specifying the payment metrics, accounting methodology, allocation of shared costs, and whether the buyer may change pricing, distribution strategy, production levels, or brand positioning after closing. Relatedly, if the buyer is expected to use “commercially reasonable efforts,” the parties can help guard against future conflicts by providing specifics of what will count as “commercially reasonable efforts.”
Even with guardrails, disputes may arise post-closing. Devoting time and care to drafting a dispute resolution framework can help prevent any disputes that do arise from becoming costly and acrimonious. One option is to create a tiered dispute resolution framework where the parties move through informal to more formal resolution processes and/or where the dispute resolution process is determined by the amount at issue. Taking the time to develop a thoughtful dispute resolution structure can help ensure that disputes are settled quickly and that the resolution process is tailored to the nature and gravity of the dispute.
When traditional value assumptions are under pressure, precision matters more, not less. Parties should resist the temptation to “punt” difficult issues by including vague contract language, without providing appropriate guardrails. In a down market, careful drafting can be the difference between a signed deal that works and a signed deal that results in expensive or hostile litigation down the road.
Tony Schoenberg is a litigation partner and MaryJo Lopez-Oneal is a litigation associate at Farella Braun + Martel, a law firm headquartered in San Francisco with a Napa Valley office focused on the wine industry.
