Allan London, a CPA out of San Francisco and a board member of Goosecross Cellars in Napa, sent me a fantastic financial spreadsheet last week and asked me to share it with everyone. If you’ve ever dreamed about starting up your own winery, you owe it to yourself to play around with this spreadsheet. It will sober you up but good.
Below I’ll walk quickly through the scenario he’s presented, and give you some tips on setting it up for your own analysis. It’s a tremendously useful calculator that takes your back of the envelope assumptions and uses them to spell out in gory detail just how long you’ll need for your startup winery to actually generate a positive cash flow. It also highlights the importance of product mix in determining the amount of up-front investment required (i.e. making a Cab = more investment up-front).
Allan has also developed a full-fledged accounting system for established wineries called Virtual Winery. You can download the free demo (Excel based) at his website and get a feel for just how sophisticated good winery accounting can be. Highly reccommened.
A Quick Tour
Download the spreadsheet: StartUpWinery.xls. Then fire it up in Excel or Open Office.
Ater opening the file, the first column is the typical back of the envelope data that you’ll need to collect to have even a vague idea of what your financial situation will be. Most of it is pretty straightforward but will depend largely upon what varieties you’ll be producing, and at what price point you think you’ll be able to sell your wine.
To figure out your per case price, take a good look around at what other folks are selling their wines for (your competitive set) and, if you think you can match or exceed them in quality, price your wine accordingly. You’ll also want to consider what percentage of your wine you’ll sell direct and what percentage you’ll dump straight down the drain sell to a distributor. A good rule of thumb is to take your direct price and halve it to find your Free on Board (FOB) price to a distributor. You could also just set fire to stacks of $20s in your office. Either way.
The next column is where you determine your product mix. It’s also where the pills start to wear off and Allan’s spreadsheet really starts to harsh your mellow. Based on what varieties you decide to produce, the spreadsheet will calculate the amount of investment that will be necessary and then gives you an operating cash flow estimate going out 5 years (it assumes you move your entire inventory 12 months after release).
Bottom line: It’s not pretty.
Sadly, while year five looks like the promised land, the cumulative cash deficit created by the huge early investment tells a diferent, much more depressing story.
According to Allan, the red line doesn’t cross the X axis on the graph above until year 8. Year 8. That’s enough to make you want to take your toaster in the bath.
Still, there are a couple things you can do to try and tame the red line.
- One is to begin building your brand, and thus your revenue, in advance of actually building a winery. In other words, start virtual. Oh, and sell direct.
- Another is to produce wines that don’t need to age for 36 months so that your cash isn’t locked up for large periods of time. Obviously most whiltes will fit the bill, but personally I like the balance pinot strikes between time in barrel and the price it commands. That’s why they call me the pinotblogger.
- You can also play with the barrel mix to cut costs. If your style is one that is more reserved in terms of oak usage, or if you decide to tea bag your wine with staves or what have you, you can certainly save some cash on the front end.
Hope you find this useful. If you do, or if you have any questions or corrections, please do leave a comment. And another big thanks to Allan for providing this unique, depressingly helpful tool.
A stellar post, Josh! A great sanity check for would-be vintners.
“What’s the best way to make a small fortune as a winery owner? Start with a large fortune.”
I’d be interested in hearing about what your Capozzi spreadsheet looks like, if you’re willing to share.
[...] a look at Josh’s latest feature over at Pinotblogger. He has some of the gory financial details that come with winery [...]
Great info Josh, I think it would be great to put one together for the future vineyard developers. May be I’ll do that.
Great post Josh!
By the way, when you’re looking at a business as an going concern you can’t look at he debt created by the initial outflow beyond the interest paid for debt financing. Simple analogy - my house. I haven’t “broken even” on it (yet - GO CA REAL ESTATE!!!), but I’m not worried about that because when I sell it I’ll get that initial equity back. So, yes, that read line is WAY down there but let me ask you this - Do you think Amazon.com has broken even from the $500M it took to start? (Actually I think it has only recently - 2001 - started to really make money).
Anyway, winery owners should be getting into it for the LONG haul (generations) in my mind. So that initial outlay won’t seem like more than mortgage payment to a home owner.
Alan,
Do it! I know a guy who could probably help.
Joel,
While I agree with you, and that’s how I’d prefer to look at profit, if you’re going to look at a winery from a purely financial standpoint, this spreadsheet is the proper way according to Allan.
I guess the point of the exercise is to fight the very impulse you cite. It’s also why our houses aren’t realy the great investment that we think they are when you factor in upkeep, taxes, etc (http://www.smartmoney.com/mag/index.cfm?story=feb02-investment).
But like you say, we’re in it for the long haul, and we’re also irrational, so the costs somehow seems to make sense to us.
Interesting model - keep in mind that your bottle yields from a ton of fruit is more like 120 gallons finished (2 bbl) or 2×25cs/bbl or 600 bottles of wine. Also - your fruit yields can also vary from 3.5 to 5 for quality varietals (I know that’s a debate…)
Having done this recently with our first vintage in 2002, the winery is in the black. And that’s at price point of $18-$30 / bottle. OK - I’m not bringing in a salary yet - I’m not considering the total debt on the property against the winerie’s earnings (but I also live on the property and can take this on my fed income tax), my entire inventory is paid for - and my annual case production is only around 800 cases annually. Here are my tips - and what I learned:
Just do it - if you are passionate about wine.
Write yourself a good business plan - this spreadsheet is a good start.
Don’t assume all direct sales ($300/cs) - consider that when starting out, you will need other channels to move your product and develop the brand and reputation. This will decrease your revenue potential during the first couple of years.
Keep it small at first - unless you have a rich uncle and swelling bank account. There is nothing wrong in starting out small, keeping debt low and developing the brand.
Expect a lot of hard work - unless you have a fat wallet and want to pay someone else to do it all for you. I’m holding down a fulltime professional career, while establishing the winery.
Last but not least - 2000 case annual production magic number - that can easily be achieved over a 5 year period.
I agree with Josh - plan on doing this for the long haul. I intend on doing so - and I’m only 45.
How are you figuring SG & A?
Great post! I am starting my own negociant business. Anyone have any suggestions on how to adapt this spread sheet for purchased wine and no land ownership?
cheers.