Bordeaux vineyards and their wines are famous the world over and the brand “Bordeaux” eclipses all others except arguably its smaller sibling further north – Burgundy. But despite the brand and despite its history, the valuation process does not follow the practices adopted in most other business sectors. When valuing most businesses the historic revenue stream is of paramount importance. Underwriters will look at the past several years of accounts, usually going back 5 to 7 years, and then based on risk in that sector apply a capitalization rate to a net operating income that is established by this analysis. In this way the goodwill of the target company is its major asset and the hope of the investor is that the future will at least mirror the past.
At www.MaxwellStorrieBaynes.com, our vineyard clients are often surprised to learn that in establishing a value for a Bordeaux vineyard no account is given for the “goodwill” of the business. The valuation consists therefore of the addition of the assets that make up the property and operation. In practice we, as vineyard valuers, will conduct a valuation with almost no analysis of the accounts. This is a slight exaggeration, of course, as the assets are listed on the balance sheet, however, even then it can be misleading since the depreciation rates can lead to inaccurate values for machinery for example.
The first step is understanding the AOC location within Bordeaux. Since there are 57 different AOCs covering all of the Bordeaux vineyards it is important to establish which AOC a given Bordeaux vineyard lies within. The next step is an analysis of the precise location within that AOC. Thereafter we will place a value on each hectare of vines dependent on its aspect, microclimate, height above sea level, position on a slope or valley, proximity to trees, drainage, plant density, plant age, soil type, grape plant variety and its agricultural type, and whether, for example, it is organically farmed. Each AOC will have a range of value from low to high and depending on the qualities of the vine parcels we will establish a value towards the top of the range, mid-range or bottom. This then needs to be supported by comparable evidence for transactions in the same AOC.
The next step is the valuation of the building assets. There may be a house or several houses on the estate. These will be valued individually on a per-square metre basis with values supported by comparable evidence in the market based on location and condition. Other buildings such as vat houses, barrel storage warehouses, bottle storage, and equipment garages will all be valued on a per-square-metre basis using a discount to replacement cost as a methodology.
Finally, we value the equipment, which is rarely ever new at the time of valuation. Therefore, we apply a discount to replacement value based on age and condition and our knowledge of the secondhand equipment market.
The addition of all of these assets makes up the valuation of the Bordeaux vineyard. Stock is never or at least very rarely included since it is always changing and therefore would render the valuation inaccurate within a few weeks. For this reason also, Bordeaux vineyards are rarely priced with stock. We will look at how stock is valued in another blog post.
When analysing a vineyard therefore, reviewing accounts helps in understanding the running costs and expenditure, however, for valuation purposes it is limited since vineyard owners have little or no incentive to show revenue growth and positive cashflow which are organized carefully so as to ensure business stability and tax efficiency.