Part 1 of this article discussed the issues to consider when deciding whether to structure the purchase of a vineyard or winery as an asset purchase or a stock purchase. Once the parties have agreed as to how the transaction is to be structured, a purchase agreement will need to be negotiated. A carefully crafted asset or stock purchase agreement should allow a prospective buyer a reasonable period of time to perform its due diligence and determine the suitability of the property for the buyer’s intended purposes. This part of the article will discuss the following investigations and reviews that the buyer should undertake during its due diligence period:

• Investigating the Permitted Use of the Property – In the case of an existing operation, does the vineyard/winery possess all necessary local, state and federal regulatory permits and approvals? If the current use is nonconforming, can it be “grandfathered” and continued? In the case of a new operation, is a vineyard/winery an outright permitted use on the property or will a variance be required? What is the likelihood of successfully obtaining a variance? Are special events and associated parking permitted?
• Reviewing Seller-Provided Due Diligence Items – All available information regarding the vineyard/winery should be provided by the seller to the buyer and carefully reviewed by the buyer and its professional advisors, including any books and records, financial information, surveys, soils analyses, well driller’s reports, water analyses, asset lists, appraisals, intellectual property information, permit, license and regulatory approval information, environmental information, customer and supplier information, and third-party contract information. In addition, depending on the structure of the transaction, it may also be necessary to obtain and review entity documentation, information regarding credit arrangements, tax information, employee information, and information regarding claims and litigation.

If possible, the buyer should also obtain from the owner a vineyard layout or plot plan showing the varietals of grapes by block, the age of the vines, the wood stock that each variety is planted on, the number of vines in each varietal, and the production per acre for each varietal, as well as information regarding the historical farming cost per acre.

Is there a current survey of the property? If not, one should be obtained and carefully reviewed. Does the survey legal description match the legal description in the preliminary title report provided by the seller? Is adequate access provided by dedicated public streets? Are there any encroachments onto adjacent properties or from adjacent properties onto the property? Is the size of the property appropriate? How much of the property is actually usable as a vineyard/winery? The advertised size may be misleading since it often contains acreage that is not suitable for growing grapes.

• Reviewing Title to and Encumbrances Affecting the Property – The seller should be obligated to provide to the buyer within a short time after the purchase agreement is executed a preliminary title commitment from a reputable title company, together with copies of all encumbrances affecting the property. Are there any local improvement or utility district assessments or other items that could impose a monetary obligation on buyer following closing? Are there any agreements giving third parties access or other rights over the property? In addition, the seller should provide for review Uniform Commercial Code searches for state and county financing statements. If those searches reveal any existing financing statements, they should be terminated by the seller prior to or at closing.
• Performing any Desired Property Inspections – The buyer should have the property thoroughly inspected to address the following issues:
  • Water/Utility Issues – Even if the ultimate goal is a dry-farmed vineyard, water must still be available for the first few years during which the vineyard is established. What is the availability of water/irrigation? Is there a water storage possibility on the property? Does the property have a history of flooding? What is the water-holding capacity of the soil? Are there any applicable regulations regarding the use of ground or surface water for non-residential purposes? Have any necessary water discharge permits been obtained? How are electricity and other necessary utilities supplied to the property?
  • Topography and Climate Issues – Are there contours in the topography that might create micro-climates that will affect grape production and quality? Is there frost control? What type is it? Are the vineyard rows laid out to maximize the utilization of sunlight? Are the planted varietals properly matched to the vineyard?
  • Access and Pest Issues – Is the property accessible by usable roads? Are those roads wide enough to accommodate the equipment needed to support vineyard/winery production? Are the access ways located on the property being purchased or is access dependent on being able to go over adjacent properties? In the latter case, are there enforceable, recorded easements allowing use of the adjacent properties? Are there any disease or pest problems, noxious weeds, noxious animal activity, or insect activity on the property?
  • Environmental Issues – Do local regulations allow grape pomace to be used as vineyard compost or must it be disposed of offsite? Is there a current “Phase I” environmental report? If not, one should be obtained and carefully reviewed. Does the property contain any actual or suspected contamination? If so, is a Phase II inspection necessary to determine the extent of the problem and how to remediate it? Does the property contain any above or below-ground storage tanks? If so, are those tanks and their use in compliance with applicable laws, rules and regulations?

These are only a sampling of the many issues that need to be considered when purchasing a vineyard or winery. As can be seen, such a purchase is not an easy task. It involves a myriad of complicated legal, tax and other issues that must be carefully evaluated before a decision is made from which there is no turning back. Otherwise, what starts out as a dream can quickly turn into a nightmare. Therefore, anyone who plans to acquire a wine business, in addition to needing deep pockets, long-range vision, thick skin, and an unwavering belief in the end result, should seek out competent professional input to protect their interests.