VINEYARDS ESSENTIAL TIPS WHEN BUYING A BORDEAUX VINEYARD

VINEYARDS ESSENTIAL TIPS WHEN BUYING A BORDEAUX VINEYARD Vineyards are commercial businesses Vineyards are not fine country houses, they are comple...
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VINEYARDS

ESSENTIAL TIPS WHEN BUYING A BORDEAUX VINEYARD

Vineyards are commercial businesses Vineyards are not fine country houses, they are

complex agricultural businesses. Unless you have owned or operated a vineyard before you will need a lot of advice. If you are going to pay for the advice do your research and ensure it is someone that you can communicate and work with throughout your purchase project. If you are going to work with an agent ensure that they know that you are committed to them so that they in turn commit to you rather than you going to the bottom of their list of things to do. If they are (Bordeaux) vineyard expert agents they will be in demand since there are only a very small number of experienced experts.

Beware of “consultants” that take a retainer and then claim a fee from the broker upon successful purchase – these are typically small companies

trying to break into the vineyard market and rarely do they know as much as the top brokers. The top brokers are very wary of working with them since many vineyards are highly confidential, therefore they will hold back from revealing the most interesting products when “consultants” are involved.

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Are Bordeaux Vineyards Chateaux? Bordeaux vineyards are often called chateaux,

but this does not necessarily mean that they have a grand building or castle on the property. For example in the 5,000 hectares that make up the AOC of Saint Emilion vineyards there are very few chateaux that have impressive houses. Whilst they may only have somewhat ordinary homes their wines are far from ordinary and in many cases are world class, grown from outstanding terroir. In the Medoc (the left bank) vineyards are typically big (more than 50 hectares) and the geography is quite different (being mainly flat) than the right bank. The Medoc will tend to attract existing wine professionals that have distribution networks in place and strategic reasons for purchasing a large estate in the Medoc region. The majority of the right bank is made up of the ‘Entre-deux-Mers’ region. This is a vast area sitting between the Dordogne and Garonne rivers both of which are tidal hence the reference to “mers” or seas. This area is the Tuscany of France. Rolling hills, beautiful villages, an interesting social life and a wide range of vineyard sizes.

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What is Terroir (pronounced Teahgrwaah) ? Terroir is not just soil it is a notion. This notion

is the collection of attributes, that when working together, combine to form terroir. Soil is one of those attributes and it would be analysed based on its chemical composition, acidity and mineral content. The gradient of the land, if it is well drained, sloping, if its aspect is to the south, north etc. Position; is it exposed, well ventilated, sheltered, adjacent to trees, what kind of trees, in a valley, near a river and susceptibility to high winds? History; was it a riverbed once, how deep is the top soil, subsoil and bedrock? Some people also include the winemaker in the notion of “terroir,” who if skillful, will be intimate with all of the above aspects of terroir and will conduct a symphony of decisions to maximize the results from the chosen “cépages.” Above, Michael Baynes (vineyard expert at Maxwell-Storrie-Baynes) teaches how to identify the Merlot grape. It is distinctive because the grapes are more loosely bunched with small gaps between each berry.

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Cépages (pronounced Sehpaages) Unlike many other wine growing regions of the

world Bordeaux has always blended its wines rather than focusing on one grape variety or another. For example in California or the Napa Valley it is not uncommon to have a Cabernet Sauvignon wine or a Merlot. These grape varieties become their brand. But in Bordeaux, Bordeaux is the brand and in the vast majority of cases it is synonymous with a blend. A typical blend on the Right bank would be 60% Merlot, 30% Cabernet Sauvignon and 10% Cabernet Franc. On the Left Bank it might be 60% Cabernet Sauvignon and 40% Merlot. Cabernet Franc, Malbec and Petit Verdot may be used in small quantities on both banks. The process of blending takes a great deal of skill and typically the owner of the vineyard, his chief winemaker and an oenologue will get together for several days to agree upon the cépages for any given vintage. They are tasting wines that will “drink” quite differently when they are ready to be consumed perhaps 4 to 10 years later so they will be projecting the acid, tannins, alcohol, smoothness, minerality and bouquet while actually tasting a rather raw fermented grape juice on a cold winter’s day.

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The Bordeaux vineyard industry is massive The city became a powerful merchant trading

area in the 14th century focusing on its strategic waterways and the natural port with its access to the Atlantic. By the 19th century it was at its peak as a centre of European trade; wine of course dominating its core export to the world which in 1875 was 1.5 million hectolitres (it is only 1.8 million today). Bordeaux is the world's largest wine regionthere are approximately 110,000 hectares of vines here. There are about 13,000 chateaux marques (labels) emanating from just under 8,000 chateaux producers with annual revenue for the industry of €14.6 billion. The influence of wine and vineyards in Bordeaux has been and continues to be very significant. The extent of the Bordeaux wine infrastructure is so extensive that it is unmatched in the world today with respect to wine expertise, knowledge and support industries.

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Plant Density Perhaps it is counter intuitive but as plants, vines

need to suffer. To this end the higher the density the more the vine has to struggle for resources. Its roots will drive downwards and in some cases will bury down 10+ metres into the soil. The deeper they go the more sophisticated and complex the wine borne of the fruit from that plant. Depth is also typically associated with age – that is, the age of the plant. The older the plant the less fruit it produces. This is why vineyard owners mix the fruit produced from different parcels and blend their wines. The young vines providing fruit and volume, the older vines providing complexity, minerals and structure. But plant density has a downside – cost. Each plant needs attention and care throughout the growing season right through to harvest. For this reason it is unusual to see high plant density in AOC regions outside St Emilion, Pomerol and the prestigious parts of the Medoc where the high sale prices for wine can support the costs associated with higher density.

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Who are the SAFER? The SAFER is a quasi-governmental entity

part funded by the private sector. SAFER stands for Sociétés d’Aménagement Foncier et d’Etablissement Rural and they are charged with the task of overseeing any rural land being purchased of over 2500 square metres in size and can, if they choose, offer to purchase it at the agreed price. The motive, using their right of preemption, most commonly is to reconnect land parcels that have been orphaned in historic sales. Their review usually takes two months although there is a fast track option that can cut that down to one month for about €300.00. The second procedure is getting approval for the new vineyard owner to exploit the land. If you engage the SAFER as your inspector and review body for your due diligence they will automatically give you the licence to farm. This latter function would attract a cost that would be in lieu of transaction Stamp Duty. We often recommend it, even when a buyer is purchasing the shares of the existing company since a due diligence package is undertaken and their work comes guaranteed.

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Why do people buy Bordeaux vineyards? The answer to this question is price sensitive. In other words, under 10

million Euros tends to attract buyers that are not making their sole income from the vineyard. They may come from another industry altogether or they may have several vineyards and a commercial wine distribution business. Over 20 million Euros will attract buyers that are investors in many sectors and are purchasing a vineyard as an addition to their portfolio. Such vineyards will be organized from an accounting point of view much like any other business in the world of investment. Smaller vineyards, by value, however, will be much less likely to have accounts that reflect the business’s strength – therefore the accounts should not be used as a valuation tool. As a general rule, vineyards are not a strong performing business asset class; there are certainly many investments that perform significantly better. Returns of between 3% and 8% are the norm and many vineyards make little or no profits quite intentionally since they are vehicles designed to support the owners’ lifestyle rather than cash returns leading to an exit strategy. Finally and perhaps most obviously, the main reason that people purchase vineyards has to do with the value they perceive from the lifestyle and association with a fine wine. Being a part of a wine making process is very rewarding and the mixture of sophistication and rural tranquility is highly attractive to people who would like to put a bottle of wine on the dining room table with their name on it. Of course there are numerous investment motivations such as diversifying assets.

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Learn how to read a Relevé Parcellaire One of the most important documents you will need not only when buying but throughout your ownership is the Relevé Parcellaire (or CVI). Starting on the left and moving rightwards across the top of the page below - here is what it means:

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Produit susceptible d’etre Revendique: The AOC that the plot sits within Lieu dit: The precise local sub address Reference Cadastral: This is the official title number of the plot of land Cépage: Means the type of grape on this specific parcel Superficie Encepagee: This is the precise size of the parcel of land Camp de Pl: Date that the parcel was planted. e.g. 2425 means that it was planted in the "campaign" year of 1924 and 1925 Porte Greffe: This refers to the rootstock that is coded to indicated which rootstock is on the parcel Ecart, Pied, Rang: Density of the parcel. The first number e.g. 100 is the distance between each plant within a row and the second e.g 130 is the distance between each row. Multiply them together and divide into 10,000 for the density per Ha. Etat: Confirms that this parcel is in production Mode de la faire valoir: This refers to the legal holding of the property by the entity that is exploiting it. Proprietaire/Direct=the land belongs to the company, Fermage=there is a lease existing between the estate and a company that owns the land

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How to purchase a Bordeaux vineyard Purchase Process Here are the most likely steps for the purchase of a Bordeaux chateau. Please note that there are a number of choices that may differ for different chateaux – what follows below is therefore an outline example and should not be regarded as a template for every vineyard purchase.

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Having found the desired property an offer is presented in the following format: Dear Maxwell-Storrie-Baynes Re: LETTER OF INTENT for The Purchase of Chateau XXXXXX This is to register our interest in the purchase of 100% of the shares of the holding company of Chateau XXXXXXX, together with the brand names, wine making equipment and the stock. We understand that there is approximately XXX0,000 75cl equivalent bottles of wine in both bottle and unbottled. We………..(insert the name of the people or company who will be buying) …………………………………………… Would like to make an all cash offer of ……………………………………………………………………… euros for Chateau XXXX (the company shares, real estate and business) and XXX for the stock in bottles and XXXX for the unbottled stock. Our total offer therefore is XXXX. We do not intend to finance the purchase ………………...…………………. (see proof of funds statement attached) We are in a position to put down a 10% deposit on ……….(date)…………………………. And could envisage completion of the sale on …………………….date ( 3 – 4 months later)……………………… To complete our investigations we request a 21 day exclusive period during which time the seller agrees not to accept an offer from any other buyer. The 21 day exclusive period will begin upon the date of the acceptance and agreement of this letter of intent. This offer is valid until ………………(date)………………………. (Names of interested parties)……………………………………………………… Address: …………………………………………………………………………… Date:……………………….. Yours Sincerely (Signature of interested parties) Company Stamp or Registration No.

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A typical purchase time line might look something like this: Month One •

Collect significant documents.



Review sales plan for the wines in targeted markets and establish a distribution model for the product.



Engage notaire/lawyer.



Employ accountant.



Get an opinion from the selected accountant regarding the accounts and discuss costs, employees’ contracts and potential problems. Also ask the lawyer how long it will take to get the farmer’s licence in the event that the SAFER are not engaged for due diligence. It is important to have a plan prepared for getting the farmer’s licence as early as possible.



Get an opinion from the lawyer/notaire regarding the company statutes and purchasing the shares of the holding/ownership company.



Draft a letter of intent on the basis of purchasing the existing shares of either the ownership company or the assets from the ownership company. This would be drafted (usually) in English, then translated into French.



An ideal time to purchase is between October and November of any given year. The accounts for vineyards typically close around November 1st however, there will be very little significant expenditure on the following vintage between November 1st and December 31st. This means visiting in January/February with a view to being able to choose and negotiate in time for signing the purchase contract in April/May.



Open discussions with your identified management team.



If not engaging the SAFER, have an inspection carried out on the equipment.

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If not engaging the SAFER have an inspection carried out on the vines.



Review core investigation information and then the valuation with MSB – and decide on an opening offer – see example of LOI offer above.



Agent presents the letter of intention with an opening offer in writing for the property and business and stock per 75cl of un-bottled wine and per 75cl for bottled wine. This would then create a total offer price (preferably) with no debt contingencies.



Proof of funds is attached together with the LOI.



Expect this opening offer to be rejected. But in France you would not expect to keep negotiating for too many rounds of offers before reaching agreement.



Increase your offer for the real estate only but leave the stock offer unchanged. This would be a strategic/cultural discussion that we would have with you at the time.



Sellers complete the diagnostic inspections for the house (at the seller’s cost). These include, lead, asbestos, termites, insulation and electricity.

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Month Two •

Seller may disclose an existing atmospheric inspection or have one done to demonstrate no risk to the wine from PCP’s. If you are using the Safer for your due diligence they will usually undertake this test.



This is when 99% of all the negotiations take place. There may be some small adjustments later but the main agreement is completed at this time.



Seller agrees final terms with buyer and signs the Letter of Intent. This in turn is then given to the notaires/lawyers to begin drafting the purchase contract for the shares of the company.



21 day exclusive period begins.



Accountants continue their due diligence reports and full analysis of the accounts.



Your notaire starts analysis of the property title and can alert you to any unusual findings or problems.



Review of traceability, drainage and sewage.



21 exclusive period ends.



Purchase contract signed. (Transfer of ownership typically 3 to 6 months later).



At the same time as signing the contract the buyer pays 10% deposit to their notaire who in turn transfers it to the seller’s notaire.



Buyer’s notaire opens contract with SAFER – the government agricultural oversight organization.

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Month Three •

Accountants finalize their review based on the closed annual accounts plus any supplementary accounts prorated for the months since accounts have closed.



Review recommendations of the accountants and consider their advice with MSB.



Notaire seeks confirmations that the vineyard conforms to current legal standards and checks the following government departments



“Commission de Structures” – this is the organization that gives the farmer’s licence – they are also the slowest (4 months). If you engage the Safer you will get this automatically. • Company registration (if you are forming a new company). • Mortgage public register. • Urban planning – from the Mayor. • CVI – Casier Viticole Informatiser (part of the French customs) – confirms the plot sizes. • INOQ – formerly INAO: Institute National des Appellations d’Origine. To confirm that the property is in the specified AOC area • QUALI- Bordeaux for the certification that the vines conform to the rules of the Cahiers des Charges (the AOC rule book)

The costs of these organizations are included in the fees to the notaire so there are no additional costs.

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Month Four •

Audit of the stock. Tasting of the stock will also be carried out by a certified wine broker to ensure that it is “Franc de gout” which means that it is of saleable quality.



Final signature of purchase – this is the same contract that you already signed with some small modifications based on the accountant’s advice and negotiations and also any changes advised by the lawyers.



The title of the shares and the property transfers to the new owner – the transaction is completed.

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Vineyards are Farms In France a vineyard is a farm and as such it fits within

an asset class that is generally given preferential treatment by the French government. As a farm, particularly in the price range under 10 million Euros, owners will often run the vineyard as a family operated business employing children and relatives. The family will run a wide range of costs through the business and owners will strategically seek to minimize tax. As a farm, the function of the business is to produce a crop. The crop is reliant on the weather and therefore the weather is a significant factor year in, year out. In France it is illegal to irrigate which is why vintages from different years have their own personality and character. It is also why Bordeaux is so attractive to those who love “real” wine making. Vines are generally quite hardy plants but to get the best out of them the farmer must be vigilant about pests, fungus and diseases. This is where the understanding of local agriculture is essential since poor decisions can seriously damage a crop. Thankfully the 1,000 year vinicultural history of the Bordeaux region has developed a talent pool that is second to none. There are therefore excellent resources for the newcomer to Bordeaux including managers, farmers and vineyard experts.

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What should people look for when buying a vineyard? The most crucial aspect for a buyer, whether they

are intimate with the local market and already in the industry or totally new to the industry, is good advice – a vineyard must not be seen as a house with some vines but rather a serious commercial business that happens to be a lot of fun – the extent of the fun will depend on the quality of the advice both before the purchase and after. The approach to the advice is of course different for someone who has their own local infrastructure and staff for their investigations than it is for someone coming from outside France that has never lived in France or owned a farm before. Buyers will need to consider if they are going to buy the shares of the existing holding company or just the assets from the existing company which are then organized into their own new holding structure. Use of the SAFER to complete investigations can also be a strategic decision since their fees can be offset against the cost of stamp duty. Although by no means an exhaustive list, some of the items that should be looked for include;

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Size of existing stock. It is important to purchase the whole stock in addition to the real estate (stock is never included in the price of the real estate – it changes daily) since it is unwise to have two sources (with differing motivations for selling) of the same wine in the market place. Also the new owner will need past stock to keep the business moving until their first vintage is bottled and saleable (perhaps 24 months after the purchase)

Incidence of frost



Status and condition of the winemaking equipment



Prevailing direction of the wind



Thermo regulated vat



Is the vineyard one single parcel or several parcels?



Age of the vat house



Aspect of the slopes as they relate to the sun



Paint conformity in the vat house (PCPs)



Drainage



Conformity of the effluent systems



Soil composition – gravel, clay, chalk, sand, acid, alkaline



Cost of production per bottle



Per hectare sale prices for properties in the same immediate area



Track record of the wine



Press for the wines



Current wine sales – geographic targets



The current oenologist



Bottle labels have up to date registration.



Number of hail storms that have hit the estate in the last 10 years.





Age of the vines



Density of the vines – parcel by parcel



Employees



Cépages of the vineyard parcels



Business plan



Tax structure of the existing holding company

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In summary the 3 most crucial steps in the purchase of a vineyard based on our years of experience at MaxwellStorrie-Baynes are: 1. 2. 3.

Find the right broker advisor Find the right vineyard following a thorough education of the market and choices Do the investigations carefully being guided by your broker and other professional advisors

www.MaxwellStorrieBaynes.com

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