15 Business Growth Lessons from a Successful Wine Company Exit

15 Business Growth Lessons from the Successful Sellers of a Wine Company...

Despite having no grapes, vats or wineries of their own

Barefoot Cellars, was founded in 1986 by two business consultants with no experience in the wine industry. 

Michael Houlihan and Bonnie Harvey started their company with an unusual beginning (Their first inventory of wine was due to unpaid bill from a consulting customer and they were paid in wine in unmarked bottles).

Despite no cash for traditional million dollar advertising campaigns, they were still able to grow it over 20 years into an international business that was selling 600,000 cases a year.

In 2005, they were acquired by E J Gallo. On 30 March 2021, they shared their lessons from this experience in a podcast we participated in with John Warrillow, founder of the Value Builder System and author of Built to Sell: Creating a Business That Can Thrive Without You, The Automatic Customer: Creating a Subscription Business in Any Industry, and The Art of Selling Your Business: Winning Strategies & Secret Hacks for Exiting on Top.

The lessons for business growth and their quotes from the interview are below.

Lessons in Driving up Business Growth and Value their Own Words

Well I think it started before the first wine went in the first bottle. It was designed to build it up and sell it. From day one…(we just didn’t know, it would take 20 years).

The issue is that all businesses sell eventually, it’s just a question of whether or not you enter it with an idea to sell it.

Our idea was we’re going to build brand equity, and we’re going to monetize that brand equity. We thought we could do it in four years. It took 20. We were only off by a factor of five.

So I have to laugh at these people who say, I never want to sell my business. I feel like saying, Give me 10 years and tell me that or another 20 years.

How prepared are you? What moves do you need to make? That is the real question.

If your goal is to monetize your value, how do you build your value? How do you get your peanut in front of that elephant?

That will affect maybe what markets you go into or what customers you take on and why

Well I’d like to start off by saying you’ve got to have customers man, you’ve got to have reorders. And in order to get those you have to build a good relationship with everyone that touches your product in the distribution management chain.

Our consumer loved this brand because it was easy to remember. It was easy to pronounce the name which was the same as the logo, and it was on the shelf. Now getting it on the shelf and keeping it on the shelf was a real problem. The more we sold, the less we were on the shelf. We sell out on the shelf, well then we can’t sell. So we really had to have a good relationship with the distributors, the distributors’ sales people and the retailers.

Learning those lessons, took a long time, and that’s one of the things that made it essential to get the attention of our acquirer

You have to remember your acquirer wants to take what you have built and scale it. For the acquirer, the real questions are Can this company run on automatic pilot? Is this a scalable company? Does this company have any liabilities that I should know about? What is the potential of the existing chart of accounts continuing to buy?

When we sold barefoot, one of the acquirer owners came up and he did this with his arms, and says,

“I don’t know what I’m buying here? I’m hugging thin air. You don’t have a winery, you don’t have any vineyards, you don’t have any tanks, you don’t have any pumps, you don’t have any trucks, you don’t have a warehouse. What am I buying?” 

I picked up a list and I said, “This is what you’re buying, Bob, it’s a chart of accounts with the probability of reorders for the next 25 years, that’s what you’re buying.”

So that’s the biggest mistake I think that startups make they go out and they buy an office they buy a car they buy a truck they buy a bunch of chairs, desks, videos. They end up building this huge millstone around their neck and then they try to swim across the English Channel. It’s really hard to do. You don’t want to have those monthly bills, breathing down your neck, you want to be as flexible as you can because some months sales are up, some months there’s no sales. You have to be flexible.

What you want to do is you want to outsource, as much as you can, except for cost accounting, sales and quality control. Those are the three things that you cannot outsource, everything else you can outsource.

Quality Control. It’s really important to know how to write and police a contract. The people who work for us, we’re all cops, every one of them was managing a contract, or some outside business that was performing for us. And if they didn’t perform to spec, we wouldn’t pay them. So there’s, there’s a lot of advantages to farming out.

The thing is, wineries are earned by sales, you don’t build a winery, and then have sales. And it isn’t just with the winery businesses, it’s with many many businesses.

Businesses earn bricks and mortar. You don’t invest in bricks and mortar first, you invest in sales and marketing first. And so that’s what we did. We invested in sales and marketing

With barefoot, we didn’t just rebel against the wine industry, but also kind of rebelled against the business industry as well. There were certain things that we did with regard to how we treated our people, how we wrote contracts or how we engaged our suppliers.

We treated our bankers our suppliers and our employees as if they were all stakeholder investors in our company. And so we kept everybody up to date on everything that was going on. I know it’s popular now in Silicon Valley, but this was 30 years ago.

The timing to sell doesn’t really have as much to do with when you’re ready to sell, but rather with when your business achieves the metrics that your acquirer wants to see. And how do you know what those metrics are? For us, with a varietal $5.99 bottle of wine, it was a half a million cases before they will take us serious. Now for other people that maybe had a $90 bottle of wine or a different kind of business, it would be a different metric.

(To discover the metrics)…Take a broker to lunch every year who is selling businesses that are in your category. Ask him questions about the metrics of the deals:

  1. How big was it ?
  2. How many units did they sell? What was the rate of growth from year to year?
  3. Where were they located,
  4. What kind of clients did they have?

 

Get some feel for what the market was looking at, and see if you are ready to sell.

Who are the consolidators in the industry. What are they looking for? Who did their last deals?

We were interested in selling from the very beginning, and so we started identifying who would be most interested in buying our product from year one, and every year we’d have an annual meeting and share ideas and goals and progress and, and we would further identify not only the individual companies, but the qualities that they have and what they would be looking.

For instance, We didn’t intend on buying a winery or vineyard or opening the tasting room, so we wanted an Acquirer that already had those things in place, and wouldn’t be looking to purchase those, instead they wanted to purchase orders and more sales.

A cost accountant is actually telling you where to sell and where not to sell based upon your budget. So the whole idea of not selling too fast or spreading too thin or selling more than you could service. That all comes under the realm of the cost accountant.

A cost accountant will take a look at the cost of your unit of service or product. He will tell you if you sell that product to this customer, your cost of sales is going to be much greater than if you sell that same product to one over here. So since you’re growing your business and you’re cash flow strapped and under financing, he will suggest you go with the customer that’s cheaper for you to service than the one that is harder for you to do business with and service; because you really don’t have the cash flow to support those sales.

Here’s the bottle of wine, right, everybody knows what the cost of goods sold are right? Forget about it. Let’s talk about the cost of sales.

That’s what’s gonna kill you, because it’s hidden. it’s hidden in the general budget, how much does it cost to take the big wig in New York out to lunch, how much did it cost to fly there, how much to stay in the hotel, etc?

In retrospect, having gone through this, you really need somebody more than just a broker, you need to have an advisor who is telling you what strategic moves you need to make.

Especially when these questions come about growing your business. “Why did you grow it over in South Carolina. Why didn’t you grow it in New York?” That would be a good question. Right. Well the answer might be that it’s easier to do business and cheaper in South Carolina, than it is in New York and the acquirer, who is licking his chops about taking over New York with your product (from scratch), is glad you’re not there.

So I mean these are strategic considerations not necessarily based on cash flow or the books, but you’re starting to make moves that are more political.

However, it’s hard for them (Industry specific brokers) to bite the hand that feeds them, meaning they make a living off selling companies to these four or five consolidators. They can not burn a bridge and push them as hard you would like to on your behalf.

So to get around that we told them the more they sell it for, the higher their percentage.

“if you sell it, if you sell it for x, you know you’re going to make this percentage, if you sell it for y, you’re going to make this more percentage. And if you sell it for z, you’re going to make this much much much more percentage.”

So we put them on our side of the negotiating table. It was to their financial advantage to get the numbers that we wanted to see.

We prefer to keep the sale and negotiations quiet. So it’s just a very few people that know that.

You don’t want your staff to know or they leave the job.

You don’t want your salespeople to know they’ll take their customers to their next job,

you don’t want your buyers to know, they’ll let the purchase order slide and sit back and wait to see what your acquirer comes up with.

You don’t want your consumers to know as they would worry about a change in the price, quality, etc.

1) Silent Auction: Right, well, to address George’s question directly, you hold a silent auction, that’s what you hold a silent auction. Now, a lot of people will tell you, Oh, if you put it out for auction, you know, you’ll get the highest bidder. That’s how you get the most for your business. The problem with that is, like Bonnie says you’re gonna lose your salespeople, you’re gonna upset the market that’s why when you read about a big company that’s for sale that almost always falls through. It’s because they lose what they’re actually selling, what they’re selling again is that chart of accounts and the possibility that they’ll continue to buy from you at that price

2) Dress for Success: Due Diligence Preparation: So how do you prepare, you have a pile of due diligence for the legal department, sales department, marketing department, personnel department, accounting department; and all of these piles of documents are laid out, and when you go to the big elephant and say: “are you guys interested in looking at this. Here it is”, and they see that you are dressed for success, they see that you are very well organised.

3) Implied and Subtle Request for Bid. They know for instance that their own competition could be the recipient of these documents. If they say no. it’s an implied auction.

It’s very subtle. You’re not saying “ if you don’t buy this, I’ll take it to your neighbour”.

No, you’re just saying, without saying anything you get the right of first refusal here, “you guys can look at this for 10 days and get back to us. Tell us what you think” and you tighten them up every time they ask for more time, less time. But there’s an art to that, that’s quite a dance that you play.

Get advice from the entire staff sometimes and do not discriminate

We showed an awful lot of respect for everybody. We treated them like they were stakeholders. We constantly involve them in the decision making process. We had a sales problem in Florida and we asked the entire staff, how would you solve this problem? we didn’t say, “Now you guys are not in sales services so this is none of your business.”

We had 60 days to sell 20 stores 300 cases or we were going to be discontinued. Even worse, they had put us on the bottom shelf.

So then somebody starts laughing and says “well I guess we have to go get the foot traffic” that you know try to make a joke. And then, one of the ladies, says, “Wait a second, that’s not such a stupid idea. Why don’t we have decal footprints, to take people from the door, back to the white aisle and facing towards our wine on the floor and have a sign there that here is barefoot”?

And that works so well that we used it all over the country. Absolutely nobody advertised on the floor…. I’ve got to tell you though this idea came from the receptionist. Now you wouldn’t think to go to your receptionist to get a good marketing and sales idea. But, as Michael said he involved everyone.

The example of Barefoot clearly illustrated the value in preparing a business to sell even from the first day. It was an outlook that guided their business growth strategy and drove up the value and independence of their company. This allowed them to exit at a healthy premium – despite having no experience in the industry in the first place.

They also showed the value of treating everyone (suppliers, customers, distributors) with respect and as stakeholders in the future of their business. The stakeholders came through for them and as a result they have had a successful exit and now enjoy the time and lifestyle they desired.

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