ARTICLE

Published in Vineyard & Winery Management - Jan/Feb, 1999

A VWM reader—an amateur winemaker with dreams of "making wine for real some day"—recently contacted the editors with a request for information on how to get started, legally. This issue's column is dedicated to answering that excellent question.

There are two separate but related ways I often help people who are planning to enter the wine industry. The first is to explain their licensing options—some of which require much less investment and far fewer regulatory responsibilities than others. The second is to assist them in contacting the many interested agencies and taking the steps required to begin operations.

Licensing options

There are four main approaches people take to entering the wine business:

An aspiring winery owner may consider these four approaches not only as mutually exclusive alternatives, but also as a series of steps by which to work into a full scale commitment gradually.

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The Piggyback way

Many clients who come to me have already embarked on the Piggyback way. Piggybackers are usually grapegrowers who have had grapes custom crushed by a local winery and have made arrangements for the winery to market the wine for them. Piggybacking is not an approach I would recommend, especially not for the long term, because it can create an illegal "hidden ownership" situation if not handled correctly. That is a serious legal problem from an alcohol regulator's perspective! Also, it gives the Piggybacker no legal control over his own wine—and that is a bummer from the Piggybacker's point of view.

Generally, my advice to Piggybackers comes in two parts: My first advice is to carefully structure the relationship to the winery so that the Piggybacker receives his money from the winery for grapes, not wine, as the wine sells. In California, this arrangement must be put in writing, because California law requires payment for grapes thirty days after delivery in the absence of a written agreement providing otherwise. No matter where you are located, I would recommend putting this agreement in writing just to make sure it is clearly understood, strictly followed—and able to be documented if questioned by a state ABC official. My second advice is to take steps to get the Piggybacker his own license for making wine sales directly.

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The Negociant way

The second licensing approach is the one most favored by converted Piggybackers, and also by many others upon first entering the industry—to become a Negociant. "Negociant" is not a specific type of license; it is a French term referring to a brand owner who depends on others to produce the wine he sells. In France, most Negociants deal in the bulk market; in America, some are grapegrowers and others are bulk wine artisans.

In this country Negociants are invariably licensed by BATF and their state ABC as wholesalers. This form of licensing allows them to hold title to wine and to sell it directly to other licensees (depending on the state you're in and the privileges of the license you get, a Negociant's legal customers can include producers, other wholesalers, and retailers). In California, but in very few other places if any, Negociants can also hold off-sale retail licenses, allowing sales of bottled wine to consumers.

A Negociant's life is pretty simple. Production responsibilities—both practical and legal—are delegated to a bonded winery. As a result, the investment required is quite low, and recordkeeping and reporting requirements are also minimal. The biggest disadvantages to this approach are (1) wholesalers don't have all the promotional privileges that wineries have and (2) wholesalers can direct but not completely control the winemaking process.

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The Alternating Proprietor way

The third and fourth options both involve becoming a bona fide winery, conferring all the privileges and control, and requiring all the recordkeeping and reporting, that goes along with winery licenses.

Alternating Proprietors get to have their own bonded winery and their own wine-stained feet at bargain basement prices. The way they get around the usual million dollar price tag for these privileges is by sharing space and equipment with an established winery. The challenges of this way of operating are (1) the licensing paperwork is more complicated and (2) operating this way can be confusing to everyone involved. Often the "host" winery provides cellar personnel and recordkeeping services, which makes it easy to confuse the arrangement with a normal custom crush relationship. Also, it can be hard to remember that a wine movement from one tank to another is actually a bond to bond transfer! But since 1991 when wineries first started operating as Alternating Proprietors, this way has become well established and has been proven to work smoothly.

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The Bricks'n'Mortar Way

The Bricks'n'Mortar way is the time honored method of starting a winery. Those who take this option build, buy, or lease a premise and set up an independent winery operation of their own. When buying an existing winery, alcoholic beverage licensing and local permits are already in place and can readily be transferred to the new owner. But when starting from scratch, all of these approvals must be taken care of by the aspiring winery owner. This brings us to the second area of help I often give to folks entering the business.

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Agency overview

Below is a list of names and functions of agencies that a follower of the Bricks'n'Mortar way will most likely deal with. This list is general and not necessarily exhaustive. Specific agency names and functions vary from place to place so you must adapt the list for use in your locality.

Bear in mind that many requirements are case specific. You may not need to contact counterparts of all agencies on this list, and you may need to contact one or more which is not on this list.

Remember, you are the coordinating agent between agencies. Don't assume the agencies will coordinate your project for you. Hand deliver everything, make follow up calls. Sometimes you don't find out about a problem until you call them.

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Helpful hints

No matter where you are, the following hints can save you time, trouble, and money when getting started in the wine business:

  1. No regulatory process is purely technical. All agencies are run by people. Diplomacy is a big part of the process. Unless your situation is perfectly black and white, interpretation of laws and ordinances are needed—and you want the most sympathetic interpretations. If you treat public officials with respect and do what you can to make their job easier, they will work hard to help your project fit the requirements.
  2. Unhappy neighbors can delay you, cost you, even stop you. Neighbors can prevent you from getting a use permit or zoning change. Even after you have county approval, neighbors can protest your alcoholic beverage license. An ounce of prevention is worth a ton of cure. Communicate with neighbors personally, early on in the process. You may not feel like doing this if you don't know them or don't get along with them, but it's even more important in those cases.
  3. Hire professionals (i.e., engineers, architects, etc.) who are experienced with winery development. They can help you foresee potential problems and adjust plans to maximize chances of success. Equally important: hire people who have good relationships with the regulators. Not all professionals are equally good at diplomacy.
  4. Start your process early—contact all agencies to learn their requirements. Don't be afraid to ask questions and always provide complete information so that you can get the right answers. A small change in the facts may greatly change the answer.
  5. Ascertain suitability of your site before proceeding. Do your perc test before applying for a use permit. Plan ahead—some sites require wet weather testing; you may have only a small window of opportunity.
  6. Submit complete applications to avoid delays.
  7. Keep track of timelines: for example, use permits will expire if not implemented or extended within a specified period.
  8. Decide on business structure before applying for licenses, to avoid having to reapply from scratch later.
  9. As I said earlier, the process of getting started in the wine business can be much shorter and simpler if
  10. you start out custom crushing instead of beginning with your own winery
  11. you purchase an existing business or property currently used for a winery
  12. you take advantage of the alternating proprietors regulation

Hopefully this information has been helpful—even encouraging—to the reader who inspired this article, and to many others as well. Every year my company assists more and more people to enter the wine business. With good information, proper planning, and a little help here and there as needed, your turn could come sooner than you think!