Case Study #39: E&J Gallo Acquire Barefoot Cellars

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Case Study #39: E&J Gallo Acquire Barefoot CellarsMany years ago, Bonnie Harvey and Michael Houlihan were a couple working as business consultants in Sonoma County. One of Bonnie’s clients, a farmer, hadn’t been paid for his grapes for over three years. The total debt? $300,000. Michael went over to the vendor to see what could be done to satisfy the bill. The morning he arrived, the vendor had just declared bankruptcy. The debt was looking to be worth about 3.5 cents per dollar. As Michael looked around the property, and the work in progress at the vineyard, he negotiated to take $300,000 in bottled wine that hadn’t been labeled. Neither he nor Bonnie were wine drinkers, nor did they know anything about the industry. But they were about to start an adventure that would end prosperously.

The Power of What You Don’t Know

After doing research for six months about wine and the industry, Bonnie and Michael offered to buy the debt at 100 cents on the dollar but with no additional interest and good repayment terms.  The client agreed.

Precisely because they didn’t know anything about the industry, they asked friends who did and packaged the wine at the right price and in the right varietals. When they showed up to the big distributors, they were asked, “What are you going to spend for advertising?” Bonnie and Michael were broke and answered, “Nothing!” The response? “Then we won’t carry it, and neither will any other distributor until you do.”  This left them with Plan B and a much longer timeline: visiting individual mom and pop stores throughout California to build a following. That took years, but that’s precisely what they did.  

After two years, one particular small retailer took a shine to them and when they launched nationally outside of California, they took Barefoot Cellars, Bonnie and Michael’s brand, with them. The name of that retailer? Trader Joe’s.

Bootstrapping

As they sold through the initial $300,000 of inventory, Bonnie and Michael didn’t keep any of the earnings. They plowed it back into the company and a wine brand that had no vineyards, no bottling lines, and no facilities to maintain. They created departments for sales, accounting, and quality control. They did have a winemaker, but that winemaker would simply rent the facilities of other vineyards on days and weeks when Barefoot needed to do a production run.  

They also took advantage of lines of credit based on their accounts receivable, and they were able to do this because they developed a relationship with their banker (something we recommend often).  

They also made sure to spend time with the distributors and retailers in a customer-facing way. This allowed them to learn what people wanted and how to improve their product. By the time Barefoot got acquired, they were selling 600,000 cases of wine a year (for the wine novices, 12 bottles are in a case, so that equates to 7.2 million bottles a year). But growth alone wasn’t going to get them the sale they wanted.

Broker Education

Remember Bonnie and Michael had never owned a wine company, so they certainly hadn’t sold one before, either. They decided to take a broker out to lunch and ask questions about the metrics in such a sale so they could use those metrics to optimize their business (as an aside, you don’t have to take us to lunch to get some of these insider facts, but we aren’t likely to refuse if you offer!) They learned about valuation (anywhere between 2x and 10x gross sales, depending on both the wine market and the stock market in any given year), growth rate, and position in the market, key factors that the bigger players looked at when considering an acquisition of a smaller player.

Bonnie and Michael also wanted to target an acquirer and get in their sights. When doing their research, they found that E&J Gallo wines were the only ones selling faster than theirs, and this was due in part to a strong presence that their sales team had with distributors on the ground. Barefoot then focused their energies on the largest distributorships of Gallo, trying to get Gallo’s attention by performing well as a competitor.

They also found a broker who had not only done a lot of transactions in the wine space, but had recently completed an acquisition deal for Gallo. Another lunch later, Bonnie and Michael had the list of due diligence items that Gallo required from any acquisition target. They went about getting all of that lined up and Gallo was impressed to get such a fast reply to their due diligence requests (little did they know that the couple had been working on their homework proactively!)

The terms of the transaction were undisclosed, but it’s fair to say that Bonnie and Michael definitely turned that original speculative $300,000 bottles of unlabeled wine into a fortune.

What can we take away from this story?

  • Don’t be intimidated by your lack of knowledge in a business. Do your research, ask the experts, and then be willing to put in the elbow grease and financial sacrifice to make it happen.
  • Play the long game. Wine, like most businesses, is not a “get rich quick” scheme. When the big guys told them “no” early on, they didn’t give up, but started cold calling on each and every wine retailer in the Golden State.
  • Buy lunch for your broker. Okay, so this is a bit self-serving, but you probably get the point: we’ve done thousands of transactions and have knowledge we can share; all you have to do is ask.
  • Don’t be afraid to call your shot. Bonnie and Michael knew who they wanted to be acquired by and reverse-engineered it. That’s not always going to be possible. But the lesson of “have your due diligence ready before you’re asked” is something we all can accomplish. We have to be willing to set aside the time to prepare for the future.

Questions for Buyers to Ask, Part 3

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Apex Business Advisors: Questions for Buyers to AskThere’s almost an infinite number of questions you can ask sellers about the business you are considering buying from them. The response to previous articles we’ve done on these questions has been enough for us to add Part Three. While these are questions for buyers to ask sellers, they’re also good questions for future sellers to ask themselves so they can improve their businesses now.

If I had to start all over again, what 1-3 things would I do differently?

Most business owners don’t necessarily take the time to write down their mistakes or share them with the public. But in a certain sense, they have a lot to gain from telling you. Those mistakes are resolved and in the past. They can be a way to talk about opportunities that can re-emerge with a new owner. Perhaps there was an employee or a vendor that had a personal disagreement with the current owner, but would be open to working with a new owner. This particular question, if asked in a friendly and non-confrontational way, has a chance to build a lot of personal rapport. The seller has to be a bit vulnerable and admit where he/she could have done better. As a buyer, you’re also able to brainstorm with them as to possible solutions.

What do your customers say you do best? Why do they choose you instead of the competition?

Here it’s important to have customer data. Yes, the business owner knows this information, but we want that cross-correlated with what the customers have to say. Many times a business owner who feels he/she knows the answer by instinct has been surprised by the results of a customer survey. The competitive spirit in any business owner can make it hard to admit things that a rival does better. If the business owner doesn’t really have a good answer, find a discreet way to find out for yourself (which can include calling the competitor). 

What percentage of business comes from referrals and/or repeat clients?

We know that referral business is the best business. When referrals happen, you don’t have to spend advertising and marketing dollars. But most businesses are not 100% referral based. Find out what percentage is referral based and why it’s at that level and not higher. Is the business set up for repeat business? Are there extensions or products and services that could turn a one-off client into a repeat client?

What are the licenses and permits you need to operate, and what are the technical qualifications that the staff need?

Whether we like it or not, there’s a fair amount of regulation in certain industries. You need to make sure all of that is documented and, as part of diligence, that you can obtain the licenses and permits yourself in the transition. Does the industry require any type of certification for your staff? How long does it take to acquire and how much does it cost?

What’s the status of your website and back office technology?

This is an important question, and one that business owners forget about because it’s not in their faces every day. Is the website equipped to deal with current web trends and basic SEO demands? Are the back end systems that connect to the website backed up to the cloud? If not, why not? Do the employees understand how to use this technology to the fullest extent? Are there software upgrades or purchases that the current owner has been considering? What are they and how can they help?

You can find Part One of this series here, and Part Two here. If you have some to add to this series, give us a call and let us know!

Entrepreneurial Tips from Sara Blakely

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Sara Blakely

Photo Attribution: Gillian Zoe Segal / CC BY-SA (https://creativecommons.org/licenses/by-sa/4.0)

A couple of decades ago, Sara Blakely was selling fax machines door-to-door. Today, she’s the billionaire founder of Spanx, with the occasional appearance on Shark Tank as a guest Shark, as well as most recently, a release of a Masterclass about her journey and her mindset and tactics to build a company in any field. We can’t cover everything she talked about in the 3.5 hours of classes, so we decided to pick three of our favorite ideas to share with you.

Build a Support System

Very early on in her entrepreneurial journey, Sara joined a small mastermind of business owners so that she would have people she could trust to bounce ideas off of. Many years later, she is still part of this group with the same members. Entrepreneurs need to have people they trust who can give them impartial, unemotional advice about their business as well as the way they are conducting their personal lives in relation to that business.

While this can be helpful in one-on-one situations, like a good relationship with a business coach, a banker (something we harp on all the time), or with an accountant or attorney, it might also be worthwhile to build up a small advisory board that can meet quarterly or biannually. You might look at financial statements, ask about marketing strategies or sales ideas, or simply pour out any challenges you have that you can’t share with your employees. You’ll be surprised at how many people in your network would jump at an opportunity to help you in this way.

Let Your “Why?” Define Everything

Sara heard “No” a lot early on. When she went to manufacturers she was dismissed as a nobody with no financial backing (she started Spanx with $5,000 and has managed to retain full control until the present day) but she persisted because she noticed that everyone in the supply and manufacturing chain were men. These men would never, ever wear undergarments for females. She firmly believed that her company would make products for women that considered the wants and needs of women, so she pushed through the Nos because she had a powerful Why.

This is a bridge many entrepreneurs have to cross not just early on but even late in the journey. We can be made to feel like we are crazy or delusional and if we have a powerful why that animates what we are doing we will work through those voices telling us to stop. If we don’t have a why, we can get stopped in our tracks.

Redefine Failure

When she was young, Sara’s dad would ask her and her brother at the end of each week, “What did you fail at this week?” If Sara had nothing to say, her father would be disappointed. When she did have a failure (or two) to share, he would give her a high-five and told her, “Congratulations!” By reframing what failure looked and felt like, Sara’s dad was removing the fear of failure. By recognizing what she wasn’t good at, owning that, and even admitting it to her dad, Sara was inoculated against some of the hardest trials of entrepreneurship: self-doubt and fear of failure.

This didn’t mean she avoided difficult things. It meant that she understood from a very early age that failure was a natural part of any successful journey. It is not to be feared but to be embraced, learned from, and when appropriate, celebrated.

We’ve got a few of our own entrepreneurial tips we’ve picked up along the way, not just from our buyers and sellers, but as brokers building our practices. We’ll be happy to share some with you anytime. Just give us a call!