| It's nearly impossible to page through any wine trade | | | | want to close the sale until its regulatory approvals |
| publication these days without encountering a story | | | | are issued. Additionally, the selling winery will need to |
| announcing a winery sale. Whether it's the latest in a | | | | find a new facility where it can continue its |
| long line of acquisitions by one of the mega-winery | | | | operations, and transfer its permits and licenses |
| conglomerates, or the late blooming of a wine lover's | | | | there. A very convenient solution for the seller is to |
| lifelong dream, these outwardly different transactions | | | | have the buyer become a "host winery" in an |
| trigger a similar set of esoteric regulatory | | | | alternating proprietor arrangement, and allow the |
| requirements. | | | | selling winery to become a "tenant winery" at the |
| The compliance part of the story doesn't make the | | | | facility it just sold to the buyer. |
| news, but it is important -- perhaps more important | | | | Sometimes the seller wants to retain some or all of |
| to you -- than a lot of what does make headlines. | | | | the inventory of the winery for later sale, but has no |
| "Paperwork happens!" In fact, like death and taxes, | | | | plans to continue to produce wine. Without continuing |
| winery transfers are virtually inevitable at least once | | | | production, the seller cannot legally retain its winery |
| in every winery's history. Your winery may not be | | | | permits and licenses. This scenario requires that the |
| for sale, but an unsolicited "offer you can't refuse" or | | | | seller apply for and obtain different regulatory |
| an unplanned change in family circumstances may | | | | approvals on the wholesale or retail level before |
| require you to become a sudden expert on the | | | | taking possession of the inventory at the new |
| regulatory requirements of transferring your winery | | | | location. Providing in the purchase agreement for a |
| to new ownership. Or maybe you'll find yourself on | | | | delayed "purchase" of the retained wine can permit |
| the other side of the negotiation, when it's time to | | | | the winery transaction to close without waiting for |
| expand and you discover that it's easier to buy | | | | the seller's new licensing to issue. |
| another production facility than it is to increase the | | | | The option of selling a brand but keeping the winery |
| use permit on your current one. | | | | Recently it has been popular to purchase a successful |
| Even the use of common estate planning tools such | | | | brand of wine, but not the producing winery. The |
| as trusts or family partnerships requires that you | | | | selling brand owner could be a winery or even |
| know the basics of winery transfers and changes of | | | | negociant licensed as a wholesaler. Sales of just a |
| control. Changes of ownership or control can happen | | | | brand may include the existing branded inventory but |
| even though the winery stays in the family. The | | | | rarely involve the transfer of a winery's other assets, |
| most common scenario of this type occurs when the | | | | including its permits and licenses. Merely the brand |
| stock of a corporate-owned winery is placed into a | | | | name and its trademark or other rights are sold to |
| trust or gifted to the owner's children while | | | | the buyer. |
| implementing an estate plan. A change in control also | | | | Often in these transactions, there is a request that |
| occurs when some type of asset protection entity | | | | the Certificates of Label Approvals (COLA's) for the |
| such as a family LLC or limited partnership is created | | | | brand be "assigned." COLA's do not create property |
| to hold the stock of the winery entity. Even | | | | rights and are not assignable. A COLA is simply a |
| incremental stock transfers, as little as 5% a year, | | | | regulatory approval to bottle wine with a certain label, |
| will someday add up to a change in control, when the | | | | and the approved COLAs are part of the production |
| majority of ownership finally shifts. These types of | | | | records of the bottling winery. If the new brand |
| entirely "internal" transactions, while not typical sales, | | | | owner is concerned that the winery that formerly |
| frequently create technical transfers which need to | | | | produced the wine will continue to use the brand |
| be reported much like a sale to a third party. | | | | name, the new owner should simply insist that the |
| Good housekeeping | | | | producing winery remove the bottling trade name |
| Any realtor will tell you that tidying up your house is | | | | from its permit and surrender the existing COLA's for |
| one of the most effective ways to make your | | | | labels containing the brand name. Appropriate |
| property more appealing to a buyer. Well, good | | | | paperwork should be filed to notify TTB of the new |
| compliance housekeeping is also important when | | | | ownership of the trade name involved. Ideally, even |
| selling your winery. Potential buyers will often do their | | | | the brand name itself should be added to the new |
| "due diligence" on your licenses and permits, either | | | | brand owner's TTB permit as a trade name. |
| before making an offer or at least before closing the | | | | What about label approvals? |
| transaction, so it is prudent to check whether your | | | | In a complete sale of the winery assets, the buyer |
| ownership records are up-to-date with the regulatory | | | | should request that it be able to keep the winery's |
| agencies before putting your winery on the market. | | | | registry number. TTB routinely grants this request |
| In a surprisingly high percentage of the winery | | | | and it is helpful to ensure continuity, especially in |
| transactions we handle, we find that past changes in | | | | labeling. The existing COLA's of the winery may be |
| key personnel or ownership interests of the selling | | | | valuable to the buyer. |
| winery had not been reported to the regulatory | | | | Although in the past, buyers of wineries would |
| agencies. These types of unreported changes will | | | | routinely request and be granted "adoption" of the |
| probably add significant stress and delay your | | | | seller's COLA's, TTB has started to time limit these |
| transaction, because the regulatory agencies are likely | | | | adopted COLA's, posing a problem for older labels |
| to want the overlooked changes reported and | | | | that are no longer approvable under current labeling |
| approved before approving the transfer. | | | | policies -- for example, a brand name based on either |
| Another good housekeeping tip is to make sure all of | | | | varietal type or geographic name. A time-limited |
| your production reports and excise tax returns have | | | | adoption would cause the current COLA's, which |
| been filed. Before issuing a new permit to your | | | | could otherwise be used indefinitely, to lapse. |
| winery's buyer, TTB will want to close out and | | | | Fortunately, there is a way for a winery buyer to |
| discontinue your permits. But first, TTB will review | | | | simply inherit the predecessor's COLA's without a |
| your records to make sure there are no deficiencies. | | | | formal adoption process. If the buyer maintains the |
| While TTB has made great strides in catching up on | | | | winery's trade name, registry number, and address, |
| its workload, you might be unpleasantly surprised to | | | | TTB has taken the position that no label adoption is |
| hear about a missing return or report that had not | | | | necessary. We recommend avoiding label adoption if |
| previously been noted or requested although the | | | | possible so as not to lose or sunset any valuable |
| error occurred several years ago. | | | | "grandfathered" labels. |
| If you are thinking of selling, you may wish to | | | | How TTB handles a change in ownership of a winery |
| contact your winery's specialist at TTB's National | | | | Strictly speaking, TTB does not "transfer" winery |
| Revenue Center to find out if they are up to date in | | | | permits from one owner to another, but provides a |
| reviewing your records, and if not, to specifically ask | | | | process for the buyer to use the seller's permit while |
| them to determine whether there are any | | | | the buyer's new permits are being approved. This |
| outstanding items that you need to address. A tax | | | | user-friendly procedure allows for a smooth transition |
| deficiency is much easier to resolve without the | | | | of unbroken operations in any winery transfer, |
| pressures of a transaction creating an emergency | | | | whether it is an asset purchase or stock purchase. |
| situation. | | | | In order to take advantage of this procedure, TTB |
| Small producer credit issues | | | | requires that applications for the new permits be filed |
| Another kind of good housekeeping is essential for | | | | within thirty days of the change of ownership or |
| wineries in the "small producer" category. Your | | | | control of the winery. The thirty-day rule is not a |
| reduced tax rate is dependent upon producing at | | | | mere policy; Federal law provides that if an application |
| your winery each calendar year. If you sell your | | | | is not filed within thirty days of a change of control, |
| winery before crush -- which is easy to do, since | | | | the seller's permits terminate automatically. But if |
| crush doesn't occur until the middle or end of the | | | | applications for new permits are filed within the thirty |
| third quarter each year -- you may end up not | | | | days, then the seller's permits continues in effect until |
| producing at your winery the last year you operate | | | | the buyer's application is acted upon. With enough |
| the winery. That can have serious tax consequences. | | | | advance planning there is no reason the buyer's TTB |
| In that case, TTB will be forced, under its own | | | | applications cannot be filed upon closing the sale or |
| regulations, to retroactively recalculate your taxes for | | | | even before, but even if the parties delay finalizing |
| the entire calendar year, and assess you at the full | | | | certain aspects of the transaction until the close, |
| tax rate, disallowing all the small producer credit | | | | thirty days should be long enough to complete and |
| claimed. | | | | file the TTB applications -- if you're diligent. |
| This risk exists for any type of change of ownership | | | | TTB implicitly recognizes that the new owner is |
| that eventuates in the issuance of a new permit, | | | | operating under the seller's permits during the |
| including changes in business structure for asset | | | | transition. Excise tax returns and monthly reports of |
| protection or estate planning purposes, as mentioned | | | | operations are filed under the seller's name and tax |
| earlier. It can also happen through the untimely death | | | | I.D. number. To facilitate the preparation of |
| of a general partner or dissolution of a marriage -- an | | | | paperwork it is common for the seller to give the |
| event that may be impossible to predict. | | | | buyer or its representative power of attorney to |
| Fortunately, there is a routine form of "cheap | | | | sign returns and reports during this transition period. |
| insurance" that can perfectly protect your tax | | | | The seller will also request that TTB discontinue its |
| advantages under all conditions. We recommend to all | | | | permits upon issuance of the buyer's new permits. |
| wineries in the small producer category that you | | | | This is where your good compliance housekeeping will |
| keep at least one tank or a few barrels undeclared | | | | facilitate the transaction. Otherwise, TTB will prolong |
| each harvest, and declare them in January each year. | | | | the transition period -- and the seller's period of legal |
| That way, you start the year with production, and | | | | responsibility for its buyer's operations -- while any |
| don't have to wait till the grapes ripen to ensure that | | | | outstanding issues or deficiencies are addressed. |
| you qualify for your small producer credit. It's so | | | | How state agencies handle a change in ownership of |
| simple, there's no good excuse not to do it! | | | | a winery |
| Not all transactions are created equal | | | | In California, the ABC will issue a temporary license to |
| Wineries change hands in a number of different | | | | a buyer who takes over operations of an existing |
| ways. Sometimes the buyer or seller has a clear | | | | winery at its current location, upon the filing of an |
| choice of method; other times, the parties discover in | | | | application to transfer the license. This transfer |
| the process of their negotiations that one or another | | | | application needs to be filed in advance of the closing |
| method has mutual advantages. | | | | of the transaction so that the temporary license can |
| The most common method is the sale of the assets | | | | be issued effective as of the date of closing. Even |
| of the winery to a new owner. This is called an | | | | though TTB does not require the filing of applications |
| "asset purchase." In this case, the buyer does not | | | | for new permits for thirty days after the change, as |
| purchase the entity owning the winery; it simply | | | | discussed above, the California ABC often requires a |
| purchases the land, improvements, equipment, | | | | copy of your TTB applications when applying for a |
| inventory, brands, etc. The seller prefers this method | | | | temporary license, which effectively means that the |
| when the entity plans to keep other assets or | | | | TTB applications should be completed prior to the |
| businesses not included in the sale; the buyer prefers | | | | closing of the transaction. |
| it when the owning entity may have undetermined | | | | When the transaction involves a stock purchase or |
| liabilities that the buyer does not want to assume. | | | | change of ownership that does not change the |
| Instead of buying the winery's assets, a buyer can | | | | named licensee on the license, then California law |
| buy the company. The buyer acquires the winery by | | | | requires that a stock transfer application be filed |
| buying the stock or ownership interests in the entity | | | | within thirty days of the changes. A temporary |
| that owns the winery. Then the entity on the permit | | | | license is not required because the licensee remains |
| does not change, but the people behind it do. This is | | | | the same; only its owners have changed. |
| called a "stock purchase" or "change of control." If | | | | Each state handles the transfer of its winery licenses |
| your winery permit is held by a corporation, the | | | | in accordance with its own internal procedures, and |
| buyer would buy the shares of stock of the | | | | the timing of your transaction will depend on those |
| corporation. If your winery is owned by an LLC or a | | | | procedures. Not every state issues temporary |
| limited partnership, the buyer would buy the | | | | licenses. In some cases, applications must be filed |
| memberships of the LLC or partnership interests. By | | | | long in advance of the transaction close to avoid a |
| this method, the buyer automatically acquires the | | | | break in operations. Consult your state regulatory |
| winery's assets, including the permits and licenses, | | | | authorities or a compliance advisor about timing and |
| and simply takes over leases, receivables, etc., in the | | | | procedures early in your planning stages. |
| absence of special provisions to the contrary. | | | | The ease of the transition is up to you |
| There are numerous variations on these types of | | | | How profitable your winery sale is depends on the |
| transactions, many of which may affect your licenses | | | | deal you can negotiate with your prospective buyer. |
| and permits. For example, let's assume your winery | | | | But the ease or difficulty of the transition is largely |
| has outgrown its present facility and is building a new | | | | up to you. |
| one. After moving into the new quarters, you plan to | | | | The biggest thing you can do for an easy, smooth |
| sell your existing facility. One way to orchestrate the | | | | transition and continued good feelings between the |
| transition is to apply well in advance for new permits | | | | parties is to learn in advance what to expect from |
| and licenses at your new facility. This allows the | | | | the regulators involved, and start early on your |
| regulatory approvals to issue before you start to | | | | compliance preparations. You are sure to come under |
| move, and gives you the greatest flexibility in the | | | | their scrutiny and control when your winery changes |
| moving process. In this scenario, you can have | | | | hands, and it's easier to pass a camel through the |
| inventory and even wine making operations | | | | eye of a needle than to sell your winery without their |
| happening at both new and old locations | | | | blessing. |
| simultaneously. | | | | Reading this article is a good start. Then, when a |
| This approach also has advantages to the buyer of | | | | winery sale appears on your horizon, consult an |
| your outgrown winery. Since it leaves your old | | | | expert about exactly how the requirements apply to |
| licenses and permits in place at your existing winery, | | | | your particular situation or set of options. You'll thank |
| you can transfer them to the buyer at the time of | | | | yourself for doing it! |
| sale. Then the buyer may be able to start up | | | | Endnote: A word about escrows in California . . . |
| operations immediately using your permits and | | | | One of the most confusing issues in a transfer of a |
| licenses, rather than wait for their new ones to issue | | | | California winery is whether an escrow is required. |
| (more about this below). | | | | The buyer of any California business may elect to |
| In most circumstances, the best option is to license | | | | use a "bulk sale escrow" for protection from the |
| the new facility with new permits and licenses before | | | | debts of the seller. By giving the notices specified in |
| you are ready to move in. But sometimes moving | | | | the California Uniform Commercial Code, a buyer is |
| existing licenses and permits to the new location is | | | | relieved of any responsibility for the seller's unpaid |
| the better choice; for example, to protect small | | | | debts. This type of escrow is optional when a |
| producer credit if you haven't implemented our | | | | California winery is sold. |
| "cheap insurance" advice (given above) and there are | | | | In some California liquor license transactions, another |
| a lot of tax dollars at stake. However, there are | | | | type of escrow is mandatory. The California ABC |
| geographic limits to transferring licenses, so consult | | | | Code requires that all retail licenses be transferred |
| with your compliance advisor before assuming you | | | | through an escrow. The winery license (Type 02) |
| can transfer the permits and licenses. Also, the timing | | | | does not require an escrow because it is not a retail |
| can be tricky in this situation. It is much easier to | | | | license. But California wineries often hold additional |
| orchestrate with a non-producing type of license than | | | | retail licenses, for example, to permit the sale of |
| with a winery. | | | | wines not produced by the winery, or to operate an |
| (A discussion of all the types of winery transactions | | | | associated restaurant or B&B. Under the ABC |
| affecting your licenses and permits is beyond the | | | | Code, these retail licenses must be transferred |
| scope of this column. For more information on the | | | | through a liquor license escrow. When retail |
| many types of changes to winery permits, and how | | | | businesses are bought and sold, a bulk sale escrow is |
| to handle them, see the authors' article entitled | | | | often conducted concurrently with a liquor license |
| Business Changes That Affect Your Winery License, | | | | escrow, so they are often confused. |
| available at | | | | Even when a liquor license escrow is required |
| The option of selling the winery but keeping the | | | | because the winery has a retail license, there is no |
| permit and licenses | | | | reason to include the winery license or any winery |
| Sometimes, the selling winery will need to keep its | | | | equipment and wholesale inventory in that escrow. |
| permits and licenses, because it will not immediately | | | | You can avoid delaying your transaction by allocating |
| cease operations and has inventory it wants to | | | | a portion of the purchase price to the value of the |
| continue to sell. In this situation, the purchase | | | | retail license and any inventory and furnishings, |
| agreement should state that the selling winery will | | | | fixtures and equipment (FF&E) specifically |
| not transfer its permits and licenses to the buyer and | | | | associated with the retail license, in your purchase |
| the buyer must obtain its own permits and licenses. | | | | agreement. The liquor license escrow can then be |
| There are a couple of challenges involved in this | | | | conducted in accordance with its own statutorily |
| unconventional approach. One drawback is the extra | | | | mandated timeline, which can take up 90 days, |
| time required for the buyer to get its permits and | | | | allowing the rest of the transaction to proceed on a |
| licenses issued. Your winery's new owner will not | | | | quicker timeline. |