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NorthBay Biz, November 2009

November 2009 NorthBaybiz 51

Passing the wine bottle might not always be easy but family succession planning sure isn't rocket science.

By Jane Hodges Young

T

he California wine industry has a 900-pound gorilla in the room, and it's all because of a lack of family planning.

Over the next decade, it's estimated more than half of the family-owned wineries in the Western United States, most of which are concentrated in California, will change hands—a trend that will send a seismic shift throughout the wine industry and impart a major blow to sons, daughters and grandchildren whose dreams of carrying on the family business could be lost in the cellar.

One can point to the economy or complicated regulatory issues, including tax consequences. But the truth is, the real robber baron is the lack of strategy and our society's general distaste for transition planning, according to Deborah Steinthal, founding partner of Scion Advisors, a leading wine business

advisory group headquartered in Napa. "Effective transition planning, whether it's to turn

over the business to heirs or sell to a third party, takes five to 10 years. But a mere fraction of the winery owners who plan to retire within the next 10 years have begun any kind of proper preparation at all," Steinthal says.

Two years ago, Scion Advisors and Silicon Valley Bank (SVB) conducted a comprehensive survey of family-owned wine businesses throughout California, Oregon and Washington. In the survey, a whopping 80 percent of significant stakeholders in these family businesses had no knowledge of the senior generation's share-transfer intentions, and more than 70 percent of those looking to transition ownership within the next decade reported having done no planning at all.

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How we got here In the grand scheme of things, the wine industry is still fairly young. According to the SVB and Scion survey, 88 percent of California wineries in business today were formed after 1975, and 75 percent are still controlled by their founders—a direct reflection of the age and maturity of the U.S. wine industry.

"Many are small, family-owned businesses where, in many cases, the founder got involved later in life," explains Dan Cohn, partner in Farella Braun + Martel, a San Francisco-based law firm with an office in St. Helena that specializes in wine industry legal issues. "They made their money elsewhere, retired and put their equity in the wine business. These people are getting to the point where the time for their second career is almost up, and they're confronted with the issue of transition."

When it comes time to decide whether to keep the business in the family or sell it outright, Steinthal notes that, "success isn't always intergenerational. Many times, a sale is the right solution for both the business and the family."

But if there's a burning desire to keep the "family jewels," so to say, both Cohn and Steinthal offer concrete and proven steps to help wineries move in that direction.

It's a process First and foremost, everyone must understand that transition is a process, "and

the earlier you start, the more flexibility you have," says Cohn. "If you wait, you encounter a number of problems that might

possibly have been avoided—tax issues, for example," Cohn explains. "When the older generation (called G1) holds the assets for too long and then dies, it may be too expensive from the tax point of view for the remaining family members to keep the assets, because they face a hefty federal estate tax (45 percent of any amount over $3 million). It would be better if, over a long period of time, the founders gave modest gifts or allowed for family purchases at advantageous prices, so when the parents get

older, some of the ownership has already been transferred."

Another key to a smooth transition is the professional development of the second generation, beginning with an honest assessment of what family members, if any, have an interest in the business and the talent and energy to make a contribution. And this is where communication is crucial, say Cohn and Steinthal.

"You have to build a robust dialog among the different generations. That's what gets you through the difficult times," says Steinthal. "Everyone needs to know what everyone else is thinking. Successful dynasties build stability through trust and dialog. They have a long-term approach and can afford to take their time as a family business to build a performance culture the right way."

52 NorthBaybiz November 2009

NorthBay Biz, November 2009

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"It works best if the issue is acknowledged and discussed, particularly in the case of multiple siblings," says Cohn. "How many, if any, are actually suited for the business and have a desire to be in it? How do you deal with those who don't want to be in it, yet want to be treated as equals economically? How does the son or daughter interact with non-family members in the business?"

Cohn believes it's actually a smart move to encourage the younger generations to work for other wineries or in other industries before moving them into the family business—a form of "street cred."

"Having credentials earns respect from non-family members and even among siblings," he says.

Both Cohn and Steinthal also champion the concept of independent outsiders as board members, because they can provide an objective, knowledgeable perspective. "They help provide structure, serve as a buffer between family members and really lessen the stress that comes with running a family business. They also are a bridge between the generations that can help with communication and succession in the event you have a sudden transition.

They can help the younger generation run the business," Cohn says.

Outsiders are also critical in keeping the business focus looking forward, not backward.

"Each generation brings more people to the table, so how you manage and change the structure as you move to the next generation can be a challenge," says Steinthal. "Outsiders who've been through this process with other companies can be a great help. The wine industry really doesn't have a lot of best practices because we're young. Outsiders help with the learning curve."

It's also important, says Steinthal, to listen to the ideas of each generation. "Don't assume you know the answers because you've been through it before. A business has different stages of growth, as do owners and family members. Some wineries are in formalization mode, others are mature. You have to know where you are and reconsider where you need to go. One of my favorite quotes is from Wayne Gretzky," Steinthal says: "Skate to where the hockey puck is going, not to where it is."

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...THAT'S WHO WE ARE.

"In this day and age, there's a danger in being too monolithic

of having a lot of heavy assets. I've learned you can't be too territorial... "

—Don Sebastiani, Don Sebastiani & Sons

Learning from the past When it comes to rocky transitions, the wine industry is chock-a-block with family soap operas that have played out on very public stages—Charles Krug, Mondavi and Sebastiani in particular.

One person who's more than learned his lesson about the need for a planned family succession is Don Sebastiani Sr., who, when tapped in 1985 by his mother to run the venerable Sebastiani Vineyards, earned a starring role in one of Sonoma County's longest-running wine dramas.

Until its sale to the Foley Wine Group late last year, Sebastiani Vineyards had been a family business for 104 years. At the time of the sale, Sebastiani told the Los Angeles Times that the decision to sell was not unanimous and was somewhat contentious, but "the family came together and decided in a collegial manner."

Sebastiani left the helm of the historic family winery in 2000 and started Don Sebastiani & Sons, International Wine Negotiant, in 2001, billing it as "The Next Generation in Wine." Over the course of the last nine years, with his own sons Donny and August—and now daughter, Mia—Don & Sons has grown to an annual case production of roughly 1.5 million. In July, the company announced it was spinning off its two divisions—Don & Sons and The Other Guys—into separate companies, in part because of generational change.

"I feel it's very important to promote the opportunity for family succession and set up a positive environment for it," Sebastiani says. "In this day and age, there's a danger in being too monolithic—of having a lot of heavy assets. I've learned you can't be too territorial, like an animal in a jungle staking out territory, then

54 NorthBaybiz November 2009

NorthBay Biz, November 2009

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passing it on by writ of force with all the equity placed in hard assets. Instead, we elected to take a different approach at every turn (when building the business)."

In January, when the spin-off is final, Don Jr. (32) will head up the more established Don & Sons. And Don Sr., son August (29) and daughter Mia (22) will let their creative juices flow at The Other Guys, which Sebastiani describes as "a petrie dish and playpen, where we can hone our skills, discover our interests and test new things while the bigger company is being run by a guy who looks like he belongs there."

Sebastiani is a fan of trial and error and prefers to also consider the Asian model of education "along with the Western, more Calvinistic, hyper-performance driven version, where you always have to beat your own best performance," he says.

"Instead of that, put the kids in a room with toys on a table and wait to see who goes to pick up the hammer, the coloring book or the pots and pans. Find out where their potential and drive is and go with that. It's really very simple—decide to fish where the fish are instead of picking where to fish all on your own."

Sebastiani cautions the elder generation, in any business, to not look at the landscape and command everything that's going on. "That's a corny old thing. You might have young people ready to go. There are young people who are starting businesses in their teens. At the same time, you have people who are 58 and 62 who are still waiting to grow up," he says.

If he offers one piece of advice, it's to "have faith in your children and give them the freedom to make mistakes. It's incredible to hear the words of my dad and grandfather's generations being repeated. It goes back to the stereotypical model—the older child will run this ranch and the other child will run that. Well, maybe the guy should work in an art gallery or be a good cook."

While Steinthal says one of the biggest obstacles to a successful generational transition is the fact that "dad or mom can't let go at the end," it's obvious Sebastiani doesn't suffer from such anxiety.

"My kids are now grown with families and obligations of their own. They're a little more tied down, while I have much more rope as a grandpa. My bungee cord is longer. I want to work on my next gig and let my kids handle the businesses. Sometimes it's the opposite with families; you have a dad who looks at his son or daughter and says, 'Well, you'll have your day, so just wait your turn.' I think that's bulls"t! It's much more fun to watch it now," Sebastiani says.

Giving in to generational change "lets me sit back and play Nonno'—and, quite frankly, it spurs me on. I have to find myself

a real job now that I'm turning the responsibility over to them. I have newfound freedom and a sense of serendipity. I can be out of the house more often. It's a condition that lays the groundwork for me to create a second adolescence. And if I fall, thank God I'll just stub a toe, not break a leg."

The way Sebastiani has structured this transition is obviously a source of personal pride, considering his own family history. Carefully planned and executed at each

juncture over nine years, with forethought of "the next generation in wine"—a perfect example of "family planning" and a case study for other wineries facing a similar path.

Please email comments to editor@northbaybiz.com

November 2009 NorthBaybiz 55

NorthBay Biz, November 2009