Napa Valley is in the throes of a generational transition. Many of the region's signature Cabernet Sauvignon estates, wineries launched in the 1960s and 1970s in the wave of development that shaped the modern industry, are grappling with succession plans, either transferring ownership to the next generation or selling at elevated prices that seemed unthinkable 10 years ago.
There's no denying the trend. In 12 months, from summer 2007 to summer 2008, three major Napa producers sold—Stag's Leap Wine Cellars, in the Stags Leap District; St. Helena-based Duckhorn; and Chateau Montelena, in Calistoga. Prices for these transactions were $185 million, $270 million and an estimated $120 million to $150 million, respectively.
The sales struck a chord in Napa, and not only for the hefty valuations. Whether purely family-owned, as Montelena, or owned at least in part by investors, which was the case with Duckhorn and Stag's Leap, all three were part of Napa's old guard. They were founded by the mid-1970s and were high-profile brands with wide distribution. Moreover, Montelena and Stag's Leap, the winners of the 1976 Paris Tasting, both claim a prominent place in Napa history. So the rapid-fire time frame, especially following the 2004 sale of Robert Mondavi Winery, evoked falling dominoes in a region with a dwindling roster of longtime owners.
A number of factors were in play. At Stag's Leap, founder Warren Winiarski was 78 when he sold to Washington-based Ste. Michelle Estate and Tuscan vintner Piero Antinori. Winiarski, who has three children, refused to comment on his reasons for the sale. "We spent 10 years thinking about this and we spent the last four [trying to] determine [what our family] wanted," he said when the sale was first announced in July 2007.
Dan and Margaret Duckhorn had 80 investors, many of whom wanted to cash out of the business. The company, which also owns the Paraduxx and Goldeneye brands and more than 300 acres of vineyards in Napa and Anderson Valley, sold to GI Partners, a private equity firm based in London and Menlo Park, Calif.
Jim Barrett, of Chateau Montelena, sold his winery in July 2008 to Michel Reybier, owner of Bordeaux estate Château Cos-d'Estournel. "The place needed new management and new ownership to take it to the next level," he says.
About 78 acres of the 100-acre Calistoga estate need replanting or regrafting, or both, at an anticipated cost of at least $20,000 an acre. But Barrett's age and health were the primary factors. "[Thinking about selling] started some time ago, having to do with the fact that I've had some medical problems. I'm 81 and a half, and I got to thinking there's a possibility that I could pack it in, and I'm not talking about 15 years from now," he says. "My death would have been a financial disaster"; Barrett and his ex-wife Laura had equal shares of the business.
A different set of circumstances dictated the 2004 sale of Napa's most famous winery, Robert Mondavi, to Constellation Brands, the world's largest drinks company. Unlike Duckhorn, Montelena and Stag's Leap, which were privately held, Mondavi had gone public, in 1993. Still, until the tumultuous months preceding its sale, the business had remained visibly under Mondavi family control: Robert, who founded the estate in 1966, was chairman emeritus, Michael was chairman and Tim was chief winemaker.
"Our equity position with the company [became] reduced enough that it was difficult to be resilient to bumps of the road, and the board staged an internal takeover. Not that we wanted to sell, that's for damn sure," says Tim.
Generational change is front and center in Napa now. The Napa Valley Vintners (NVV), a trade organization of more than 300 area wineries, sponsored a seminar on succession planning in April, with representatives of 30 family estates in attendance. Scion Advisors, management consultants who help wineries build succession plans, has worked with 50 West Coast producers since the company started in 2004.
Despite the recent sales, there have never been a greater number of family wineries in Napa. Many brands are relatively new, begun with tech and dot-com money. According to the NVV, there are now about 400 Napa brands, of which 92 percent are family-owned.
These wineries will face their own challenges in the years ahead as the founder or founding generation passes from the scene. Under best of circumstances, it's difficult to maintain family ownership of a business beyond the first generation. The statistics certainly are telling: According to the Boston-based Family Firm Institute, only about one-third of U.S. family businesses are passed along to the children; that figure drops to 12 percent for the third generation, and 3 percent for the fourth.
The estate-tax bottom line requires planning. For an estate inherited in 2009, for example, U.S. federal law currently allows a $3.5 million exemption, with anything above that subject to a maximum 45 percent tax rate. In 2010, there will be no estate tax, while the following year, the exemption will stand at $1 million, with a maximum tax rate of 55 percent. (These fluctuating numbers, established by the 2001 federal tax law, resulted from the political negotiations and budgetary restrictions that shaped the legislation and are expected to be changed by the next administration.)
Tax law is very complicated. With savvy planning, owners can reduce inheritors' taxes through gifts and trusts. That's helpful at an established Napa winery because the above exemptions can constitute just a drop in the barrel. Quality Cabernet Sauvignon vineyards in the Napa AVA now sell for more than $200,000 an acre, and older wineries tend to have significant vineyard holdings; there's also substantial value associated with a successful brand, the winery and inventory. Inheritors face potentially large taxes, and despite Napa valuations, wineries tend to be cash poor.
"[Estate planning for Napa vintners] has gotten very different in the last 10 years, because of the enormous values. If you have an $8 million or $10 million winery and property, it's not that difficult to pass it down. But it's more complicated with the prices we are now seeing," says attorney Dave Gaw, cofounder of Gaw Van Male in Napa.
These preparations don't come cheap, and they take years. Depending on the sophistication of the plans, winery owners need to hire tax, estate and real estate attorneys, as well as an accountant. Gaw, who has practiced estate law for 38 years and worked with dozens of Napa vintners, says that attorney fees for a significant winery estate plan start at $25,000 and are more likely to approach $250,000. "It's a process. One of my clients and I have been meeting every six weeks for three years," he says.
Based on the demographics, it appears inevitable that corporations will be buying more Napa wineries. In February, Scion Advisors and Silicon Valley Bank published a report that nearly 1,000 West Coast wineries will undergo ownership changes (by sale or inheritance) within the next decade. Financial realities will be just one of the variables. "The goals a family winery has are very much about the lifestyle and family identity and culture. Family businesses outside wine tend to be more about business performance," says Deborah Steinthal, founding partner at Scion.
Coporate acquisitions of iconic brands create potential image problems, particularly for the premier U.S. viticultural region. Top-tier wines are the result of artisanal production techniques that demand rigorous attention to detail and, on occasion, financial sacrifice. Fair or not, the market assumption is that corporations are less likely to toe that line. "I think that one thing you lose (with corporate ownership) is a strong passion for the business, what it represented (to the family), how it became a part of you. I don't think corporations have that because they are essentially bottom line," says John Shafer, owner of Shafer Vineyards in the Stags Leap District.
A number of Napa's leading old-guard Cabernet producers remain under family ownership and want to stay that way, such as Cakebread, Caymus, Chappellet, Diamond Creek, Heitz, Joseph Phelps and Shafer.
Decades of experience in the business tend to foster a measured perspective about the recent sales, albeit sometimes with wistfulness at thinning of the herd. "First of all, I'm sad when I see my friends sell. But I think it's so personal," says Boots Brounstein, who co-founded Diamond Creek Vineyards on Diamond Mountain in 1968 with her late husband, Al. Brounstein hopes that the property remains with her family.
There's also the sense that the changes are part of an evolving market. "One of the things that's occurring is the maturation of the industry. I was in the textbook industry in the 1950s, and every single company was family-owned, and now they have all either gone public or been bought," says Shafer, 84, who bought his Stags Leap District property in 1972.
Longtime Napa vintners, much like long-term investors, tend to be unmoved by the inducements of the moment, such as high valuations in an otherwise challenging economy, or exchange rates allowing Europeans to be big spenders. "We've been here long enough to see these trends come and go. There were just 10 or 12 wineries in Napa when we started in 1961," says Kathleen Heitz, president and COO of Heitz Cellar, based in St. Helena. "We saw the French come in, like Domaine Chandon [in 1973]. We saw the Japanese [in the 1980s] and then the dot-commers. Some come, some go."
Kathleen and her brother, David, inherited the business from their parents, Joe and Alice. The transition was relatively seamless, says Heitz, because she and her brother already owned much of the estate before the death of their parents. Also, the division of responsibilities and authority—a major hurdle at many family businesses—occurred fairly organically. "David is quieter and was always more attracted to the viticulture and enology, whereas I was more outgoing. We were both cross-trained, with science degrees, but we found our niche," she says.
Some older Napa wineries have rebuffed so many potential buyers over the years that they're approached rarely, if ever. Others continue to receive inquiries. "They've been after me for years. They come in registered mail; they come in all the time. We're just not interested," says Jack Cakebread, who started his eponymous Rutherford winery in 1973.
From the outside it can seem like keeping a Napa winery in a family is simply about not needing to sell, and not choosing to. But the biggest hurdles are not financial so much as familial. Chuck Wagner, owner of Caymus Vineyards, based in Rutherford, inherited the winery from his father, Charlie. "We had some differences at the start. Father-son relationships are difficult, so the challenge wasn't so much the business as the family relationship. But over time we became very strong partners, and worked together," he says.
Effective succession planning forces families to address topics they'd rather avoid. "It's not easy to talk to your parents and say, 'What's going to happen when you die?' And that's where consultant facilitators are very helpful, because they are matter-of-fact, asking the necessary questions," says Carissa Chappellet, one of the nine principal co-owners of Chappellet Vineyard, the winery started in 1967 on Pritchard Hill by her parents, Donn and Molly.
There are indeed many uncomfortable, but essential questions, such as what happens in the event of a divorce, and which child will be in charge. "We have the great pleasure [while facilitating succession plans] of putting the pink elephant on the middle of the table," says Steinthal.
Carissa Chappellet also notes that it's important to keep it professional. "At the start of meetings we remind people how we conduct ourselves, that it's a business meeting, and that I'll be speaking as the corporate secretary, not as the sister. You don't want to be reactivated by childhood issues," she says.
Despite the misgivings sometimes associated with the sale of a family winery, it's often the best option. "I know quite a few of the people who've sold, and in some cases they're sad and at other times they're frankly relieved," says Bill Phelps, chairman of the board at Joseph Phelps Vineyards, founded in 1973 by Bill's father, Joe. "They go on, sometimes start something new. They've achieved liquidity."
That liquidity worked out well for the family owners of Louis M. Martini Winery, sold to Gallo in 2002. Some of the family had wanted to cash out of the business, begun in St. Helena in 1933. Acquisition by Gallo also gave the Martini brand access to a powerful distribution network, a huge advantage in a competitive market.
With such staggering potential profits on the table, the surprise isn't that some families sell, but that so many families don't. And for those that choose to retain ownership, the decision goes beyond money. "Owning a winery is a wonderful experience for a family," says Shafer.
For all the drama associated with the sale of Robert Mondavi Winery, the family walked away with tens of millions, money that has allowed them to pursue new ventures. Michael Mondavi and his family import, distribute and produce wines at their Napa company, Folio Fine Wine Partners.
In 2005, Tim Mondavi, his sister Marcia, Robert and Margrit Biever Mondavi started a new brand, Continuum. This summer they purchased an 85-acre property on Pritchard Hill, in the eastern mountains of Napa. The site, which already contains 26 acres of Bordeaux red varieties, has room for additional plantings as well as a production facility.
Tim's two elder children, Carissa and Dante, work full-time at the winery, and his youngest, Chiara, did the graphic design of the label; the children are part of the reason behind the name Continuum. "The odds are against legacies in America. [But] my father was pretty amazing in understanding that if you can inspire and capture people's interest and passion, the likelihood of success is great," he says.