When you need a friend, winery M&A w/ Erik McLaughlin, Metis

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Eric, welcome to the show. Thanks for having me, Peter. For those who don't know you, can you give us a brief overview of your background? Sure, I started a Wine M&A firm about 10 years ago after a long career in the wine industry, and so I came at this as being an operator. We were fortunate enough to sell the winery that I was involved in to the Crimson Wine Group about almost 11 years ago, and after we went through that process, had a lot of friends from the industry called me up, and we're curious, like, how did you do that? Like, how does that work? Who do we call? And these aren't things that the winery owners talk to each other about until somebody's gone through the process. And so I realized there was a real opportunity to be of service to my friends and colleagues in the industry and started the firm. And so I spent the first 20 years of my career working in the wine trade, and now the last 10 years of my career helping other people both get in and get out. And did you just do that one transaction before you started this, or did you do a bunch of M&A in your career prior to this? No, no. I had bought and sold a few businesses, but always as the operator, never as a transaction advisor. So I had never worked as an intermediary prior to, well, when we started the firm, I actually started a division, a wine division at an established investment bank. I didn't have enough experience or credibility or frankly confidence to just go out and start my own firm. So we originally started as a wine division at a bank called X-Fear, and that just went extremely well, and we worked out a deal with them to be able to spin it out, create its own practice, and now we're fully independent. Got it, got it. And for those who aren't that familiar with what a wine investment bank does, or I don't know if you call yourself an investment bank, or an M&A firm, or what not, can you just give us an overview of what that is, what medicine is, what it does, and what differentiates medicine from the other people on the field? Sure, sure. Yeah, a lot of people liked in the industry, in the M&A transaction world, liked to call ourselves investment banks, and when I was first and started out in this practice, people would say, "Oh, what do you do?" And I'm like, "Well, I'm an investment banker for the wine industry, and then everybody asked me for money." And we're like, "No, no, no, not that kind of bank." Where are the type of bank that helps people transact in businesses by and sell and merge businesses? And so that's what we do. But now at cocktail parties, when people say, "What do you do?" I say, "Oh, well, I help people buy and sell wineries." There's more to it than that, but in simple speak, that is what we do. We help people acquire and divest, and sometimes merge wineries. We work as an intermediary for that. We don't take direct investment in the wineries. We don't purchase them ourselves, but we work as the transaction advisor both for owners, as well as for buyers. Yeah, I kind of tell people sometimes it's kind of like a real estate broker, but for businesses. Yeah, I think in simple terms, that's the case. And it's a little bit different because you actually have to ride a prospectus and have a business plan or like a memo that has a lot more information in it than a real estate transaction would have. I think the big difference, and we have a real estate division as well that handles pure asset transactions. The real difference is whether or not there's value in the going concern, or it's just the stuff. So real estate is focused on the sale of assets. Mergers and acquisitions has incumbent assets, but it's really focused on the business that animates those assets, and oftentimes has value in excess of the value of the underlying assets. So you're really selling and underwriting to a business, not just the stuff, or the real estate. And there are several players in your space, a number of them. What do you think differentiates all the different players? Well, I think the first thing is whether or not somebody is a specialist or a generalist. So there's a lot of M&A firms that are generalists. Most M&A firms are generalists, and generalists will do any type of business. When we started our practice, we started as a division, as a focused, wine focused division, at a generalist firm. There are a couple of other players that are focused on the wine industry like we are, and then there's the whole world of generalist firms. What we have found is that the wine industry, there's so much specific knowledge, and it's a rather insular industry. People in the wine industry think only other wine people understand things. And to a certain extent, that's true, but in to a certain extent, it's also just kind of like a closed loop system. So it's very challenging for generalists to come and serve the wine industry. It's quite rare to see a generalist actually sell a wine. It's not rare to see him try, but it's rare to see them actually transact. And then there's a small number of us that focus in the wine industry. We focus exclusively on the wine industry. There might be one or two others that do, and then there are a few that focus on wine and other similar products, alcohol beverage, or consumer goods, or food products. But the specialists are the ones that develop the industry-specific knowledge for it. I think what makes us different from the other specialists is that our team is comprised of people that were all operators first. That all came from the industry. And so we have an operator's bias, not a finance person's bias or an investment banker's bias. We all have the financial chops to do the work because I kind of came from the business side of the industry, but we have an operator's bias. And that I think allows us to see and understand the potential of each individual opportunity and help buyers understand what they're going to be able to do with things. So that's kind of our secret sauce is that we've been in the shoes of the sellers. I sold the winery that I was involved in. Kristen Marquesi, my right-hand person, she sold her family winery. So we've been through it ourselves in a first-person standpoint, as well as we've run winery. So that's the key. I get to see that as being very helpful in some cases where people have buyer or seller due diligence consultants or other people with that exact intent, which is understanding what they can do with it. Right or how it could work. And if you can help them see them more clearly, maybe they can reduce their costs around some of those things. Well, and it's understanding what are the things that are important, what are the things to focus on. We've done a lot of transactions with financial institutions and private equity, and you'll hear some of the smartest irrelevant questions of your life when you deal with people from outside the industry that are highly educated and finance. They're asking the wrong questions in the smartest possible way. So having that operator's advantage helps you kind of calibrate what are the things that are important, what are the things that are less important, and you have a pretty good BS detector about what's real and what's not real. That if you've not from the industry, it's kind of hard to sniff out the difference. Do you have a fun example of one of the smartest wrong questions you've been asked? You know, we were selling a large group of vineyards to a private equity firm, and you know, they got the viticultural report back. They were really focused on this one particular block that was planted in 1972 that had disease pressure and lower yields, and so they're like, what is it going to cost to replant that block? And I'm like, why would you replant that block? And they're like, well, because it's low yields, and it has virus, and you know, so clearly that's the first area we need to replant. And I'm like, well, have you looked at the block financials? Did you know that there's 50 wineries on a waiting list to get into that block, because that's one of the most desirable old vine blocks in the region. So just simply not understanding the difference between a vineyard being highly desirable because it was 50 years old and producing some of the best wines in the state versus like, oh, well, it's only getting two tons to the acre and as a virus. Yeah, yeah, thinking about as a commodity versus the end-use product for the end-use might be 100 times, 200 times more expensive than the wine that's made from commodity grapes. Well, in sitting here in the fall of 2026, the wine industry is going through a massive upheaval. There's a lot of M&A transactions, so your industry is busy, which is good, but also quite a few bankruptcies and foreclosures at a high level. What's your view on the strength of the overall wine market? I've been in this industry for over 30 years now, and this is the most challenge time I've seen. So it is a very challenging time for winery operators, and a lot are really over leveraged, and for a lot of them, the cost of that capital is going up very quickly. So most wineries finance their inventory on a line of credit, which typically reprices annually, if not quarterly, if not monthly. And so those interest rates are adjusted very quickly over the last few years. And then a lot of the fixed term notes that they have on equipment and real estate that are generally getting reprised every five years are now moving into being reprised. So wineries have a lot of leverage. That leverage is getting a lot more expensive at a time when demand is softening, and margins are being compressed. So there's a lot of talk about the decline in wine consumption, which is real. But what we're seeing is that it's not simply the decline in consumption. It is that we have other compounding problems that are making that harder to adjust to. So one of which is the simple margin compression is we've had the inflationary aspects from 2021 through now that inflation doesn't seem to be invading and so input costs are higher, tariffs are affecting import costs as well. And so the cost of making wine and the cost of doing business is higher at a time when being able to push price has become much more difficult. So for a long time, wineries were able to ask late price and keep ahead of rising costs of doing business and rising input costs, that's not the case anymore. So wineries are not as able to pass those costs along so they're seeing margin compression, they're seeing the higher cost of capital and then the real issue that is causing things to be difficult to fix is the excess inventory in the system. So when we have a declining consumption in too much inventory and too much supply, it causes even further margin compression as people compete for a smaller and smaller market with too much supply trying to find a path to the market. So that's the struggle, but there's a narrative out there that wine sales are down and in aggregate they are. But if you look at the latest winery health survey from in-event where they pulled wineries across the country and was statistically significant participation level, 29% of wineries are up, 26% of wineries are down, and about 44% of wineries are flat. That doesn't fit the narrative. I mean, we have more wineries growing than we have wineries shrinking, but the wineries that are shrinking, their losses are bigger than the growth. So that's why we never give wineries. So the wineries that are growing are the smaller wineries. Correct. Correct. So yes, in net, the industry is contracting, but we still have almost a third of wineries that are growing and nearly half of wineries that are essentially flat. So the demand problem is real, but it's not the largest issue causing stress and we're on the wineries. It's really margin compression, cost of capital and excess inventory. Yeah. But the demand issue creates the excess inventory and part of the margin compression, and yeah, you make a great point that the cost of capital as well, you have the cost to produce and then the cost of capital and a very capital intensive industry, both going up at the same time. So you have every single factor colliding and compressing the ability for wineries to operate and to make enough money to survive. Right. And then as the inventory is ballooned and the cost of holding that inventory, which most people find on a line of credit is going up. So the financing costs grow as your inventory is grow. And so with all those different factors that we just talked about, would you think differentiates wineries that are able to be sold that you're able to sell and those that are filing for bankruptcy? So the majority of people that come to me looking for an exit, we're unable to help with a sale, right? So it is actually rare that a winery is something that can sell. And this is news to a lot of people that own wineries. You know, I think a lot of people got into the wine industry thinking like, well, this is going to be a great career and for a lot of people that has been and when they get to retirement, they'll give it to their kids or they'll sell it. And sale is just simply not an option for a lot of people because not everybody is built a winery that is of interest to other people. So sometimes they're highly personalized, sometimes they're just not well differentiated, sometimes they're just not strong financial performers. There's a very limited number of buyers, there are going to be a limited number of transactions and there are far more people that wish to sell than there are people that will buy. And so for us, we have to be very selective about who we take on as clients and that difference really has to do with the probability of somebody wanting to take that over. And that is a combination of the strength of the brand and the reputation. It is financial performance, it is the desirability of the assets, and it is kind of the portability of the business, the ability of that business to be able to be transferred to another person or another entity. Some businesses are very wrapped around the operator and you pull that founder out of it, you know, they're the central dent stake and without them, there's not a business. So all of those things have to be true. You have to believe that it's a business that can carry on once a founder is removed, has to be desirable, generally has to be profitable or be on a strong trajectory towards profitability and generally has to have desirable assets. Yeah, some of the wineries too are so small or founder driven that it makes a decent living for the founder while they're doing it, but they're working their butts off and, you know, and it's like a two person shop or something like that. And the business itself is not an actually sustainable business because it doesn't make enough money to actually hire a team to run it. Right. Right. And there's nothing wrong with that. Right. It makes them non-transactable, but it's a wonderful way to make a living if you have the skill and you have the love for it. So what a lot of people that have small wineries have is they have a job. It's a job that they own and they get to be their own boss and they get to follow their own vision. But they don't have a business that exists independently of themselves. And those aren't really transactable. Unless they are lucky enough to create some super cultish brand and somebody else believes in it. But generally, for these small businesses that require the owner to also be the talent, generally the buyers either have the money or they have the talent. Right. But usually the people with the money don't have the talent and the people with the talent don't have the money. So it makes it very difficult to transact something where. If they have the talent, they can often just start their own wineries, start it from the cells versus needing to buy a different one or one that exists. Right. Or they might take over somebody's assets and start their own or something. But the small ones there where it really is not much beyond the owner as an operation or are really not transactable. Yeah. And we saw with the recent bankruptcy filing of Gunlock Boonshu that some M&A firms, as you mentioned, reject some clients, right? Because it didn't make sense. They're like your debts, outweigh your equity, you're not actually worth anything. So there's nothing to sell here, but they did find someone who took them on and got several offers for that property and it was rejected by their lenders. How common is that and is that becoming more common? It seems like the lenders are getting more aggressive in their stance to the industry and specific wineries. Yeah. I think there are two questions there. First of all, about selecting clients and getting a service provider to take you on. I think that's very real in all of us that do this for a living or thoughtful about what clients we take on. We are particularly cautious because for us, the biggest cost is the opportunity cost and we can only work on so many things at a time. We like to be a small-tight team and we like to have a really, really high success rate. And so that means filter hard upfront and be selective about who you're going to take on as a client. And that means 39 out of 40 people to walk through my front door and come and sit on our couch and talk about their future, we have to tell them that, you know, a wind down is their best option or they need a look for somebody else. So the good firms are going to be very selective. So for some people, they won't find a capable provider. They might end up with a realtor or a general business broker without experience because they don't know better to not try. So I think Gonzaloch Bonschew is, you know, for clarity, like that's not a transaction we worked on. It's a winery. It's a fan of and it think is a really important part of the history of American wine and something that I hope finds a soft landing in a long future. I think that is a really prescient example of what we are starting to see and we'll see more of which is the market giving offers that don't clear the debt. And that's clearly the case in this situation is that their M&A advisor was able to produce offers. They were rejected by the bank. I think banks are in very real time now kind of trying to calibrate their position and figure out, do we hold on and try and do better or do we take what we can get? I think each of the banks are at different stages of that process. But I think the industry has generally, the way banks have generally handled this with the industry over the last several years is just give people more rope. And if you read closely the situations that have happened with Gonzaloch Bonschew and Signorello, that's the case with both of those where rather than making hard decisions earlier and forcing bankruptcy or foreclosure or a sale that may not cover the debt earlier, more debt was written and the whole was dug deeper. I think banks are largely at a point now that unless there's a real clear pathway out, they're no longer giving more rope. They're no longer digging deeper holes. And that's forcing people into either bankruptcy or foreclosure or other sorts of solutions. I think we're going to see more assignment of benefit of creditors. I think we're going to see more of that structure, which is an alternative to bankruptcy that I think more winery should pursue. But we are seeing a lot more situations where the bank is sitting at the table and has a veto power over whether or not a deal gets done. And in the history of my career, that didn't happen until recently, where we never did a deal for the first many years of our careers where everybody didn't get paid. But I think it's very real now that we're going to see more transactions where not everybody gets paid. So you mentioned Signorello and they're being foreclosed and auctioned off. And similarly, that happened to like vintage wine estate a couple years ago, right? So banks have for, it's normal in a distressed situation for banks to take a haircut, right? And it seems like they're trying not to almost more now. But in those situations, how does that differ? That foreclosure sale differ from what you would broker and other deals? So everybody's preference, the bank especially, is that we're going to be successful and we'll force Stola process with that. And that was the case with both Gunlock Bunchu and with Signorello where there was a process run. That process didn't produce an outcome that was acceptable to all the parties. So here we are. are either in foreclosure or bankruptcy. So everybody's preferences that an M&A process will be successful, and there will be some sort of negotiated solution, ideally, that the banks are made whole. Then it's up to the banks, or, and our other secured creditors, growers are also secured creditors, and typically have, if they follow the procedures correctly to fire all the grower lanes, they're going to be senior creditors in the situation. So growers typically have a preferred position in these situations. So I think it's everybody's preference and then everybody's best interest to forestall some sort of process that takes the decision out of their hands, like bankruptcy, assignment of benefit of creditors, foreclosure, and just shifts whose hands it's in. That's going to be everybody's preference of possible, but some of the transactions that are going to get done simply, that's not going to be possible. In those types of transactions, do you help people on the buy side? Is it like a good opportunity to pick up assets much cheaper? Sometimes, usually in a bankruptcy process, the assets are acquired much cheaper, but usually in worse condition. There may not be an incumbent business there. The assets may not have been well taken care of, so the price can be very attractive. It's also part of what has caused more difficulty between buyers and sellers about price expectations. Is there's been enough to stress sales and bankruptcy sales that it's educating buyers that this is the discount that they should get for being in the market? So the pricing is always attractive, but you might buy the wrong thing for the right price. For us, does it create buy side opportunities? Usually no, because we have worked on a couple of where we have had buyers retain us and be willing to pay us to help them evaluate and pursue those opportunities. But generally, there's not a fee available to us out of the process, unless we are working for the bank in a foreclosure or working for the trustee in a bankruptcy process. And that's generally work we have shied away from. I think that's work that we're going to have to do more of in the future. Yeah, because that's where many opportunities will lie. But that brings the point of the wineries that are selling and transacting. What are the key characteristics that make those deals transactable? That's a great question. I've been saying for a couple of years now that there were two things, the two types of transactions that get done in this market. And I've realized now that there are three types of transactions. And you know, at the risk of sounding cliche about it, they all start with the letter P, right? So there's puzzle pieces, right? There's, when you can make a really unique match that creates value for everybody involved and for which there's not a good substitute. That is the key. Then you have a puzzle piece. You have something that uniquely fits another thing. That's the majority of the work that we've accomplished over the last few years as the market has gotten more difficult, has been fitting puzzle pieces together. And those continue to have pretty strong valuations. The second thing that happens is price, like so opportunistic things. Things where the price just becomes so good, somebody will buy it despite all of the hair on it, despite all of the problems, because they just can't resist a good price. And then the third thing that we're now realizing almost kind of after the fact when we're looking back at some of the deals that we've done is people. Sometimes deals are getting done because people already know each other. They already have some sort of business relationship with each other. So maybe it's a vertical integration between a grower and a winery brand that already work together. Maybe it's an acquisition of a production facility by a brand that already had their wine being made there or an acquisition by a brand of a brand by a production facility. We did one last year where there was a building owner was involved in the investor group that was the landlord to the business. So people kind of creates a certain amount of kismet around deal opportunities because ultimately it's people doing business with people. And when they already know each other and already have a business relationship, there's usually some trust already there and already comfort in doing business together. And so sometimes the buyer is somebody that you already know which ironically in our business are the usually our clients last people that they want to talk to or people that they already know. But your most likely buyer might be somebody that's actually closest to the business. Nobody wants to expose the fact that they're selling to the people that they already do business with. But sometimes that's actually the smartest strategic buyer. Interesting. Do those factors differ if it's like a vineyard deal versus a winery or wine brand deal? No, I don't think so. I don't think so. I think that holds true regardless because a lot of the deals that are getting done are kind of across tiers of the industry. We're seeing growers buy brands, brands buy growers, production facilities, custom producers buy brands. So we're rather than just big companies, wine companies buying medium-sized brands which was the M&A market for a long time. Now it's a lot more focused on how do we fill out the parts of the business that we don't currently do? And that could go into any of the directions of that vertical integration. Right. Can you mention to your second P price what kind of valuations are you seeing in the market today and how has that changed over the last few years? Well, I think we hear a lot about the K-shaped economy and that metaphor being used in a lot of different ways. That's true in the wine M&A world and there's kind of K-shaped transaction types. We're seeing, you know, we sold a couple of vineyards last year that both set record prices for their AVA, like in the worst great market of my career. Like we got lucky, we had the perfect puzzle piece fits, we had high demand because they were rare assets and in the worst great market of my career, we had some a couple of record setting valuations. So that's still possible for the right assets. And then the other thing that we're seeing is things that are going on the downside of the K, where it is just a distressed situation and price has to be very, very aggressive to move it. And so generally speaking, everybody acknowledges that the market is challenged. To sellers, they think, okay, fine, we want to sell in this market anyway. Maybe we'll have to discount 10, 15, 20%. And buyers are looking at like, no, I want 40, 50, 60% discount. And that's why we're seeing not seeing more transactions. There's a whole lot of people in the market wanting to sell and there's still lots of people wanting to buy. We're not getting a lot of overlap on where people are in valuation. The bid-ass spread is too big. The bid-ass spread. And I think both sides are being unrealistic. So we have to kind of find a spot in the middle. But I think psychologically the challenge is is that there are enough data points of extreme discounts and excess of 50% that buyers believe that that discount should be applied evenly across the market. And they're waiting for the plums to discount at 50, 60%. And that's not happening. And that's not going to happen. So the market's kind of stuck because the buyers are like, okay, I'm a buyer, 50, 60% discount. That's amazing. This is when I'm going to go buy that vineyard and oakville. This is when I'm going to go buy on Pritchard Hill. This is when I'm going to go buy in the Dundee Hills or Red Mountain. Those assets aren't discounting at the same rate that the distressed assets are. And so that discount isn't available on the plum assets. What is available is that those things that haven't historically been available can be bought now. But they're not discounting at the same rate. So the market is kind of frozen in terms of things being sold at kind of fair valuations. Because sellers are still too optimistic and buyers are still way too pessimistic for quality assets. Yeah. It reminds me of just even the wine market itself, right, like the burgundies that you were just unavailable before now. You can just buy them, right, it's still very expensive, but you can actually find them and buy them. Right, right, exactly. But, you know, in a rising interest rate environment that we have now that would normally impact valuations to the sellers appreciate that that's a big driver. I mean, you could easily see a couple multiples down, right, from interest rates rising from, you know, five to seven percent for long-term rates. I think sellers are realistic that valuations are weaker and people either just won't be sellers in this market or they will accept less. It's just how much less and can we get to a reasonable point? And is that discount 10 percent or is it 50 percent? And I can tell you for quality stuff, it's not 10 percent and it's not 50 percent. And that's why we're not seeing more transactions of quality stuff. Yeah. Like it probably is 20 to 30 percent and when buyers and sellers can get there, I think we'll see a lot more transactions. And so who are the main buyers in the market these days for wine assets? You know, it's all over the board. Part of our business strategy has always been to explore a diverse pool of buyers. I think historically, most of the highly publicized and high-profile transactions have been the large wine companies buying successful small to medium-sized brands. We all loved that business. That was a great business. Most of the large wine companies are either not in acquisition mode at all or if they are, they are far more cautious than I've ever seen them. And so the larger wine companies are going to be far more careful but most are still willing to look but the threshold to get to yes is much, much higher and much more difficult. And many of them have also become sellers. So we have quite a few transactions that we've done and others that we're working for for the large wine companies that have historically been our buyers that are now our clients. So when the most active buyers become the sellers, who are the buyers? So in that case, when we have large strategic selling assets, usually the buyer is other strategics where we can find a puzzle piece that says this no longer fits here but maybe if it's over there. there better. Then we have kind of the high net worth family office world. That's always been a significant part of the world. That has become more challenged because it used to be very fashionable for wealthy people to own wineries. Now they all have friends that own wineries who are like, whoa, man, this is a lot harder and I thought it was gonna be. And so the mystique of owning a winery is not quite the same as it was. And so it's not every wealthy person's dream anymore like it was. So that's still a big part of what we work in. But most of those folks are actually after a real business. We have a lot of clients come to us or like, well, just find me somebody rich and dumb. That doesn't care about making money. Like that's kind of a myth, right? So generally the wealthy buyers still care about having a business that is a real business that makes money. And so that's challenging. And then we're seeing financial buyers, whether they be institutional or financial entities or just kind of opportunistic investors. There are a lot of investors that are kind of red ocean investors that actually follow troubled markets. And like wherever the ocean is the most red is where they go because that's where they see opportunity. So we're seeing a lot of new buyers kind of hovering around the wine industry, trying to figure out like, okay, I can buy assets at a really strong discount right now. So let me look at investing in wine. And then they look and then they realize, okay, it's a great discount because this business is broken and it's losing money, how am I going to fix it? So we're seeing a lot of those people circling, but not a lot of them ending up yet acquiring because they have to have a solution for it. You can buy an asset cheaply, but if you can't figure out how to make it make money, then you've just bought a liability. - And are those types of buyers looking at certain price range like your high net wealth people or normally looking at the smaller luxury type brands, and your old strategics were looking at things they could blow up to be bigger. It's sort of like at the medium to low end of the space. What are these people sharks or whatever you wanna call them who are circling around what kind of price range are they looking at? - Generally, the more the better for them. For folks that where the access to capital is not the issue, there's a certain amount of just kind of brain damage and transaction costs that goes through a transaction and that's not proportional to size. It's usually actually inverse to size. The smaller, the more brain damage. And so for them, it's gotta kind of be worth the effort. So generally, medium to larger is better, but it also depends on who the person is, right? So what does that mean? Is that a kind of a 10 to 50 million transaction is probably where a lot of that is, where a lot of that shopping is, but like I said, we haven't seen a lot of that activity actually land. We've seen a few deals like that, but not a lot of that actually finish. - And even in a good wine market, the bigger you get the fewer players there are to be able to take you down, to acquire. And I always wondered like, even for like when Duck Horn was going public, right? Like who do they sell to? Like who's next? And then they ended up having to go public and I was a public wine companies are always challenging because of the large working capital on cyclical nature of the business. - Right, yeah. - Yeah, the short-term decision making you're forced into. - Are there any of the big strategics or big rich families, you know, like the Artemis of states or whatever, like actually looking still in acquisition mode? - I don't know if I would say there are very many of them that are in quote acquisition mode. I mean, we have multiple engagements that we're live with right now, marketing, and we're getting a lot of the, we're getting, yeah, I'll take a look at that. Let me sign the NDA, send over the materials from the large strategics for things that are special. So we have, you know, we have our first engagement in Europe right now that we're working on. You know, it's a 100.1, it's an iconic producer, it makes money, like people are signing that NDA and getting that book, right? We have a NAPA Valley project that we just launched this week that's very profitable, it's 100% DTC, people are signing that NDA and getting that book, right? But when we're like, we took a vineyard to market recently and it's a really special vineyard, uncontracted, no home for the grapes, people like, no thanks, don't need to sign an NDA, don't need to learn more. So for the right things, the large strategics are still looking at for the special things. But they're more cautious, more reluctant to act. I had somebody who runs, you know, one of the large wine family businesses who I sent the NAPA Valley project to and the response I got was like, oh, yeah, we'll take a look because it was like, it was like so tempting, it was like, I don't wanna look at something else, but God, I gotta look at this. - Yeah. - So it's almost a reluctance to look, but if it's special and it fixes problems, it'll still transact. - One, historically you've done most of your work in the Pacific Northwest, right? But it sounds like you got clients in NAPA and in Europe. How do those markets differ? Like in terms of buyers and sellers of, you know, wine assets in the different areas? - That's a great question. And that's something that we're learning, right? So when we started our practice, we were a validly Pacific Northwest only. That was our niche. We did wine, we did Pacific Northwest, and we've done the lion's share of the deals in Oregon and Washington over the last 10 years. Our plan was to go to California in 2027. And when my third oldest kid goes off to college, my biggest competitor-- - Third oldest kid. How many kids you have? - Well, I have four, but I can't wait 'til the fourth one got out of me. I'm gonna be an old man by then. So the plan was to go in 2027. My biggest competitor, who we love and we're great friends with, they sold their company to a large bank, and we're like, oh, shoot, we gotta go to California now, because it created open space in the marketplace there, and the phone just started ringing off the hook from people that were looking for another option, thinking that they're gonna kind of vacate the middle part of the market where the medium and smaller wineries are. So we expanded to California, similarly to Europe, like we weren't planning on expanding to Europe, but when we got a referral sent to us from some iconic producer, and we tried to refer 'em off to somebody that does that work in Europe, they're like, no, no, no, my friend who's winery, you sold said we have to work with you. Would you do it? We're like, well, for you, sure. Here are the reasons why we're not the right fit for you. We don't live in Europe. We don't work that market usually, but I mean, we work it for buyers, but we've never worked a sell site engagement in Europe, but here we are going into the market. So what we're finding is that, I think California is maybe more, is processing the challenges of the wine industry more fully, more realistically and more proactively than really anywhere else in the world. So I think California has a little bit more eyes wide open approach to how big the challenges are and what we need to do to address them, but it also means that California is more pessimistic. And so there's a little bit more nihilism in the California market about what's happening in the wine industry. So I think the market is more challenged, but I think operators are making harder decisions earlier there. And so I think California is going to kind of lead us out of this. California and Washington are both being very aggressive about adjusting grape supply and doing vineyard removal to the point where like we might actually have already removed enough vineyards. I mean, I mean, I don't think we're going to be short on Napa Valley Cabernet any time soon. We're not going to be short on Washington Cabernet any time soon, but there's been enough vineyard removal in California and Washington to right size the supply. Now, we need to work through the assistant training markets and we need to stabilize wine consumption. If wine consumption keeps declining, we're going to have to keep taking out more vineyards. But if we can stabilize wine consumption, we probably have about the right amount of grapes. Oregon, on the other hand, is not meaningfully removing vineyards. And so Oregon was kind of last to kind of come into feeling the decline and they're feeling it everybody's much as everybody else right now. But Oregon, there aren't very many large vineyards. It's the average size vineyard in Oregon is 20 acres, right? It's a lot of small vineyards stitched together. It's much more burgundy-like, not just on the varietals, but in terms of how it's done. And so Oregon also tends to have significant weather events every few years and that hasn't happened since 2020. So generally, Oregon's supply resets every three years with a frost, with a freeze, with something. Since the fires of 2020, Oregon's had an average or above average crops every year. And so it's kind of compounding. So we're kind of waiting for, you know, wind it bloom to, give us a small crop set, which normally happens in Oregon every three or four years to kind of reset supply. So Oregon's not really addressing the supply issue. Europe is in a real world of hurt, right? The strong producers with strong brands are doing better, but Europe is totally focused on export and that's becoming more and more challenging, particularly with the US and tariff situations and it's not helping. - China consumption dropping a lot and everything else, yeah. - I saw charted from the American Association of Wine Economists about a year ago about China consumption over the last 30 years. We're at like 1990 consumption levels in China. The whole boom, we lost all of it. We are back to like pre-wine sales boom in China levels. It's gone. - The value might be better, like better wines being consumed, but in terms of volume, yeah, for sure. The disappearance of the gifting market and also the other things are crazy there. And you're up at least, you don't get government support for pulling out vines or distillation of oversupply and things like that. In America, we're just too small of an industry for the governments to really care much. So we have to do it all ourselves, which is challenging and painful. In your type of business, what is the sort of standard pricing and business model for a firm like yours? That's a good question. So how we get paid is we get a certain percentage of the ultimate transaction value that we're able to create for the client. And we get paid retainers during the process that are then credited against that success fee is what we call it. And so the client pre-pays a portion of their success fee in retainers. The way we do our retainers, some people charge fixed monthly retainers, we charge an engagement fee up front, and then we don't charge any retainers until somebody accepts an offer. Then once they accept an offer, there's retainers through the due diligence process from accepted offer to closing, everything that they've paid prior to closing is then subtracted from the success fee at closing. And the way that success fee is calculated is a certain percentage of the value of the transaction on increments of value. So as the value goes up, the percentage goes down. Got it. Is the retainer model is that fairly new because in a lot of, well, at least in like a major investment bank, they're often, it's only the success fee in a lot of cases, but maybe for the small SMB market, it's different. I think in the middle market where we are, I think it's standard. And so yeah, it's standard. I know our competitors charge that. There are different ways to do it. Like when I first started doing this, the firm that I started at Vision app, we just charge fixed monthly retainers and then we got paid them whether or not we made any progress that month. So we have now that it's my firm, we've tried to create more alignment with our clients and say it's going to cost you a certain amount of something to get started. If we never produce an offer for you that is acceptable to you, that's all it's cost you. For us, having a retainer is critical for the client to demonstrate their commitment to the process. If it doesn't cost them anything to explore the market, everybody would be a seller all the time. So for us, it's less about making money, like if all we get are retainers, we lose money. It's more about a skin in the game for the client and then demonstrating their commitment to a process. If they won't pay something to explore the process, that tells us they just want to go phishing in the market that they're not serious about it. So for us, it's really a gating item, qualifying item. And what do your clients get for those fees? Oh my gosh. So on a macro level, what they get is a confidential marketing process to qualified buyers. So we know who the buyers are in the market. Both the strategics as well as private offices, high net worth individuals, financial investors, and we run a confidential process. It's not out there on any deal boards. There's no real estate listings. There's no publicity around it for being for sale. It's literally point-to-point marketing where every client gets a bespoke list of what we call a buyer target list. And we say, for you, here are the universe of buyers out here, there. We start with a list that we've qualified over 1,000 prospective investors in the wine industry. And then we will create a subset of that for each individual client. We say, of those 1,000 plus prospective investors, these are the 60 that make sense to talk to for you. And depending on how unique the engagement might be, it might be 30, it might be 5, it might be 150, but generally we'll say maybe a 60 or 80 prospective buyers. And then we do point-to-point marketing to them. We create a full marketing package on the engagement as well as an executive summary of that at teaser that's anonymized so they couldn't guess what it is. And we do private direct outreach to each one of those buyers. And we say, "Okay, I've got something that looks about like this. This is why I think it makes sense to you. I can't tell you what it is until you sign in on disclosure agreement. If it's not a fit for you, tell me now, don't sign the non-disclosure agreement. We'll move on. If it is a fit for you, strategically based upon what you know and you're in the acquisition mode at this time, then sign the NDA and then we'll give you the full book. So it's a very cautious process that is intended to put it in front of only qualified people that have specific qualified interests in that type of opportunity and get it in front of them in a way that is protected under non-disclosure agreement and controls how many people know about it. We also do pretty extensive business modeling and performance on all of our engagements. So we study the business itself, then we figure out how would we optimize that business? How can we tune up the car for the next owner of it to make it run better? And then we show them, "Here's the historical performance. Here are the things that we would recommend changing. And here's what the performance is going to be if you change those things." So we do a lot of financial modeling. I've got this amazing director of marketing, Mattel and Pennington. She makes the most beautiful and compelling books for, we call them Sims or Confidential Information Memorandums for the clients. So all of that, and then we manage the due diligence process. We get the buyers, we negotiate the deals, we get them on board, we manage the due diligence process, and then we do a lot of tax and legal work. We're not the clients' accountants, we're not their lawyers, but we do an awful lot of work that looks and feels like tax and legal work to optimize the transaction for that, minimize what their third party expenses are for accounting and for legal counsel and smooth the path towards closing. And one of the most important things is we're kind of their friend and therapist through the process. It's a really lonely process. People don't talk to their friends about it, they basically get to talk to their spouse and us and their lawyer. Maybe they're priest. It's a really small circle and it's lonely and it's hard. And having been through it, I know how hard it is. So we become, often becomes very close friends with our clients and help them through the therapy side of it too, which is, it sounds like a joke, but it's a big part of the job. Wow. That's an interesting, important part that is probably underappreciated. So Eric, what's your view on why an M&A over the next year or two? Hmm. Well, I've been thinking that kind of stabilization and it's going to happen and we're going to turn the corner next quarter for, I don't know, about six quarters now. So I hope it's a stop clock thing and I get right here eventually. I'm not more optimistic about the wine industry than I have been over the last few months. I hear a lot of people saying, oh, we're turning the corner. We're turning the corner. I am seeing some green shoots. I mean, I'm seeing a few signs of stabilization, but nothing definitive yet. So I'm not sure what it's going to take for us to get there. I think we're close. I think that what it's going to take is it's going to take a stabilization of consumption. And I think we're close to that. So if we get to a stabilization of consumption, then the next thing is we need to work through some of the inventory. And then once we get inventory back in equilibrium, then the wine industry is going to be rebalanced. And I think when that happens, and I don't know if that's 12 months or 36 months away, I hope to got it somewhere in between there. But when that happens, I think the M&A market is going to be a flurry. I think there's what we saw happen in 2021 and 2022. I think all of us in the M&A market had our best years ever in 2021 and '22. A lot of that was delayed and deferred activity that would have naturally happened in 2020. In 2020, everything shut down, it was super weird. And then '21, it was like, oh, my God. We did four deals in 2020, and we were lucky to do that. We did 13 deals in 2021. And when it really should have been, we probably should have done about eight and eight. So I think there's a lot of deferred and delayed activity that will come back once the industry regains its confidence. M&A is a confidence game. People buy businesses, they make multi-million dollar investments when they have some level of confidence that the future is going to be better, that they're going to do better than the previous owner has, that they have to believe in the future, they have to have confidence. Right now, the confidence in our industry has kind of been rocked. And until we have confidence return, we are going to continue to see tap-ed activity. We'll see deals get done here and there, where they can fit one of those three P's that I talked about. But it's going to be tap-ed activity until confidence returns. And once we get consumption stabilizing, inventory, that equilibrium, then I think we'll have confidence that people will be like, oh, my God, this is the bottom. We've got to get it now. And we're going to see a bunch. Interesting. So it's going to be this year, clearly it's not this year. Hopefully next year, it's your point between 12 and 36 months. Well, what's encouraging is that the vineyard removals are real and substantial. The other thing that's different is that people aren't making as much bulk wine for spec. Right. And so, inventories are going to reach balance here faster than I think people expect. Because right now, if you want to go out and buy bulk inventory, there's not very much 2024 available or 2025 available, but there's lots of 24 and 23. That's not normal, right? So what happened is in 23 and 24 when people couldn't sell their grapes, they made bulk wine. In 25, people are like, huh, I'm not doing that again. I'm still sitting on my 23s and 24s. So people didn't make bulk wine in spec in 25. People didn't make much bulk wine in spec in 26. So the bulk wine market is actually going to get thin and then those 23s and 24s are going to look old and people are going to have to dump them down the drain and people are going to realize, oh crap, we got to go make more wine again. And so the fact that people are willing to drop fruit on the ground and pull out vineyards making those hard decisions right now is actually what's going to help us get caught up. And it's probably going to sneak up on us. probably gonna realize we're short on inventory and then we're gonna be scrambling to contract more fruit and get more wine made and backup vintages. - That's always a pendulum swing, right? - Yeah, and it always goes too far. - Exactly, that's the nature of the pendulum, right? Well, Eric, we always like to wrap each episode on a personal note and we're curious as to what has been your most memorable winery visit and why? - Oh, this is such a sweet question. You know, lay people from outside the industry are always like, oh, what's your favorite wine? Like, and that's every wine person's least favorite question. But that's such a clever way to ask something similar but more personal, more meaningful. So a few years ago, I went and did a tour in Bordeaux, had some lovely visits throughout Bordeaux, went over to Sotterne, had a great visit at Chateau de Cam and Chateau-Gurot, and that was all great. And then I went to Chateau-Clemens and I had a whole day with Bernice Lertong when her family still owned Chateau-Clemens and maybe it was just the magic of her and that day, but hearing her talk about the wines and they're all biodynamic and they do all their own biodynamic preparations and she took me into kind of like the drying house where they dry all their biodepe preparations. And then we were talking and my wife wasn't with me on the trip and she asked a question about my wife, like, was I married, do I, you know, I'm like, oh yeah, my wife, what do you, was your wife do? I said, well, my wife's a certified classical homeopath and she just lit up and she's like homeopathy. That is the same as biodynamics. It is biodynamics for the body and you know, biodynamics is homeopathy for the vineyard and then we ended up spending the entire rest of the day together, went out to lunch together and I got to hear her talk about her philosophy of farming and I know a lot of biodynamic farmers. We've sold a lot of biodynamic properties but I've never seen somebody who really captured the spirit in a way where they just, they just lived it in all aspects of her life and I love the wines from Clemens and they were already my favorite chateau from Sotern and even more so now, I think the wines have just that perfect balance of sweet savory and acidity and just a depth to them that's beautiful and we should all drink more Sotern. It's the, it's one of the greatest wines in the world that people don't drink enough of but that would be my, I think my most memorable visit. It sounds special and very connecting with the person and someone who's very passionate about their life and connecting with that I think is really special. Well Eric, thanks so much for sharing your knowledge and getting us up to speed on the white market today. - It's my pleasure, thank you for the time and thank you for the excellent questions. - Hey listeners, if you love the show, support it by buying a show notes book. They not only compile two years of episodes but also organizes them into themes for better learning. They can be an inspiration to listen to or relist into an episode or provide a quick reference of the key learnings from a show. Go to xchatto.com and click on the store page for easy links to buy. Thanks for listening. [BLANK_AUDIO]