Money on the Vine

By Chip Knighton

Take a drive around the Charlottesville area or the western reaches of Northern Virginia and you can’t help but notice the signs, bearing names like Barboursville, Jefferson and Catoctin Creek. Over the past decade, Virginia wineries have sprouted up seemingly as quickly as the vines that blanket their fields, with nearly 300 now calling the Commonwealth home.

If you’re not distracted by a watering mouth and a desire for an outdoor table with a view, you probably thought, “Those wineries must be dealing with a lot of money.” And you’d be right — Virginia wineries and vineyards, along with related jobs and taxes, constitute a $750 million industry, according to a 2013 New York Times article.

And as always, anyone who is sitting on that big of a business is best served hiring a CPA to help manage it. We spoke with two VSCPA members working in the industry to get insight on the quirks that make Virginia wine — whether represented by liquid in a glass or numbers on a balance sheet — such a hot topic.

The insider

Lynn Carden, CPA, doesn’t drink. But her days are consumed by wine. The VSCPA member is the controller at Chateau Morrisette in Floyd County, a stone’s throw from the Blue Ridge Parkway an hour south of Roanoke.

Carden, a Floyd native, has been a CPA for almost 20 years, starting out in public accounting and before moving into the corporate world, where she specialized in technology, development and transportation. She made the switch to the wine industry two years ago when the job at Chateau Morrisette came open, offering her an opportunity to jump into a growth industry in her small hometown.

As with any move into a new industry, the change presented a learning curve for Carden. Accounting for wineries was more complex than her work at previous jobs.

“Every component has to be accounted for,” she said. “There are certain additives that go into the wine, so the winemaker has to enter that into our system. Then you have to add sugar and other additives that you have to account for, as well as labor. You have to allocate the cost of the bottle, the label, the cap, the cork. All of those are up-front costs. 

“When you bottle the wine, you bottle it today and you expend a substantial amount of money on it. Then it might sit for two months or 18 months before you see any cash on it.”

And the particulars of the wine itself are only the beginning. Chateau Morrisette, coming up on 40 years in business, is one of Virginia’s oldest wineries, and company leadership has expanded the winery’s offerings, adding a restaurant and tasting room and offering a facility for weddings and other celebrations.

“We are a seasonal business as far as the other aspects,” Carden said. “We’re very closely tied to the traffic on the Blue Ridge Parkway. I work with our marketing director to try to promote this as a destination. It’s not just coming to a winery — we also have a fabulous restaurant and a gift shop and music concerts.”

The consultant

Tony Hudimac, CPA, is out of the wine business, but the grapes got their hooks in him just the same. He maintains an extensive wine cellar in his Loudoun County home, although he takes pains to make clear that he’s no expert on the vintages he enjoys.
He's also an expert on a different aspect of the wine industry. Hudimac was working at Yount, Hyde & Barbour, when the firm began attracting clients from the burgeoning Northern Virginia wine industry.

“The clients were referred to the firm, not necessarily to me,” he said. “I was one of the ones who gathered the skill set in order to deal with the unique characteristics of vineyards and wineries.”
Hudimac quickly became a go-to resource for new and expanding wineries in Northern Virginia and worked extensively in the industry from 1999 through 2010, when he started his own firm. During that time, he saw the industry expand like a vine taking over a hillside.

“Back when we first started working with wineries, there were not nearly as many of them as there are now,” he said. “Within probably a five-mile drive of my office in Purcellville, there are at least 25 vineyards and wineries, and most of those are less than five years old.”

Like Lynn Carden, Hudimac dove right into the complexities of bottling and selling wine. 

“You can treat it all as one complete activity,” he said. “In that case, you’re doing accrual basis for pretty much the whole thing — the growing of the grapes and the making of the wine. If you elect to bifurcate the two activities — one agricultural, one for the manufacturing process — you can treat the growing of the grapes as cash basis and the making of the wine as accrual basis.

“It’s mainly from a tax standpoint and cash flow basis that you would choose to bifurcate, to have cash basis and accrual basis. Then you can deduct the expenses currently for the growing of the grapes and capitalize the expenses into the cost of making the wine. If you treat it all as accrual basis, you’ve got to track and capitalize all the costs of growing the grapes into the barrel cost of the wine. It’s more advantageous to bifurcate for the smaller wineries and vineyards than it is for very large wineries and vineyards.”

Navigating the business

The accounting itself isn’t the only tricky part of running the business side of a winery. Virginia strictly regulates wineries with regard to who they can and can’t sell to.

“In the state of Virginia, a winery cannot sell their product directly to a local restaurant. They can’t sell 10 cases directly to a local restaurant,” Hudimac said. “They can’t sell 15 cases of wine to a local vintner or wine store. The state requires that they sell through a distributorship. 

“The margins for small vineyards and wineries are fairly tight, and if you have to go through a distributorship, that takes another hit on your profit margins. A lot of wineries don’t sell through distributorships, so their revenue comes through their tasting rooms and VIP clubs.”

That’s been a major revenue stream for Chateau Morrisette as well, with management capitalizing on its picturesque Blue Ridge Mountains location in an effort to promote the winery — and Floyd itself — as a tourist destination.

“We have a restaurant and a tasting room,” Carden said. “We do festivals throughout the year, we do weddings, we do website orders. We’re a very complex business — I think the most complex business I’ve ever been involved in. We have so many aspects under the same roof.”

Those alternate revenue streams are necessary for wineries to boost their bottom line in an increasingly competitive market. Virginia vineyards do not produce enough grapes to fully supply all the state's wineries, so producers must import grapes to satisfy production demands.

Virginia law strictly regulates the way wines are labeled. Any wine labeled as a Virginia wine must consist of at least 75 percent Virginia grapes.

“We love Virginia wines and we like to make as much 100 percent Virginia wine as we can,” Carden said, “but it’s not a reality. Virginia can’t support the volume of grapes needed. Both our general manager and our owner have talked with the Governor’s office and the Secretary of Agriculture about trying to promote that type of business in the state of Virginia — not just wineries, but vineyards.”

She added: “The federal and state mandates for what has to be legally put on a label are very complex. We’ve really been working on increasing our new products just as a strategic development and growth plan.”

As with any small business, such a plan is essential for long-term success — and it's especially important for wineries, where an owner won't see any return on his own grapes for years.

“From the time you plant roots to graft vines onto, it’s going to take three to five years to have your first full commercial crop and be able to make your wine with that grape and what those fields are going to produce on an ongoing basis,” Hudimac said. “Year two or three, you’re going to get some grapes off it, you’re going to be able to make some wine, but you’re not going to reach your full potential for about seven years.”

Even established wineries have to account for a wine's maturing process.

“The wine can be bottled today, but because of the different varieties of wine, it may be ready to go to retail or wholesale in two months or 18 months,” Carden said. “In order for my cash planning and cash forecasting to know when I’m going to get the revenue for that, I have to understand the life process of that bottle of wine as well.”

Her company is expanding into new markets in an effort to maintain and grow its customer base. Chateau Morrisette recently signed an exclusive five-year agreement with China and is the first Virginia winery to export there.

And like many wineries — which tend to be located in attractive, pastoral locations — taking advantage of the surroundings is a big part of staying in the black. Carden, who sits on the board of the Jacksonville Center, a local artist collective, is working hard to promote her hometown as a tourist destination. Long known as an attractive mountain getaway and a home for the counterculture in Southwest Virginia, the county is embracing that reputation, notably with the Floydfest music festival each summer.

“We work closely with the tourism board in Floyd to help promote events that happen in the area and bring tourism in,” she said. In the winter, it’s a slow time for the winery as well as Floyd. It’s become more of a summer destination. The country store has been in Smithsonian and The New York Times. “I just find it very exciting. It’s interesting that I can find more things to do here than I would have ever expected. Floyd has changed, and a lot of the people who have moved into the area have really promoted that.”

The secret of their success

Winemaking requires a large plot of land, expensive machinery, specialized expertise and the liquidity to survive without seeing a profit for several years. So what makes a successful winery? 

“The people who are doing it generally love wine,” Hudimac said. “It becomes a passion for them, and it’s something that they enjoy doing. They figure that if they have a passion for it, if they enjoy doing it, they want to try to make their living doing it.

“They’ve got to have good business acumen, a good business skill set, to understand how to run the business. They pay attention to the details of your business. And you’ve got to make a good product.”