How Market Structure and Competitive Analysis Affect Valuation

By Paul B. Finch, MBA & Susan Winters Finch, MS, MBA | 10/1/2025

The value of a winery is not predicated on a simple, static formula or method as many inexperienced or unqualified valuation analysts would have you believe. On the contrary, the valuation of a winery requires a solid understanding of how it has created value historically, and how it plans to create value in the future, as well as an understanding of the essential conditions of the industry in which the winery competes. The value of a winery also requires the inclusion of an appraisal of any vineyard land owned by a winery, separate and distinct from the value of the winery business, in order to arrive at a consolidated valuation for a winery.

As a foundational concept, Business Valuation in general is rooted in the understanding of how a business achieves a Competitive Advantage through its selection of a Competitive Strategy and thereby tactically deploys its invested capital to generate returns in excess of its cost of capital. To that end, a comprehensive understanding of the Market Structure in which a winery competes, as well as an understanding of the Competitive Strategy a winery utilizes to compete within its industry, provides the theoretical basis for how a winery is best analyzed and its equity interest should be valued.

This article is targeted for the following audiences:

· Winery Owners and Investors;

· Commercial Real Estate Brokers and Agents; and

· Bankers to the Wine Industry.

The Purpose of this article is to:

· Introduce Winery Owners and Investors, Commercial Real Estate Brokers/Agents, as well as Bankers, to creditable and defensible financial approaches and methods to analyze and value the equity interests of wineries; and

· To assist these Winery Owners and Investors, Commercial Real Estate Brokers/Agents and Bankers, in the proper use of these financial approaches and methods in order to optimize the value of wineries for the benefit of equity holders.

The “Wine Industry” is Not the “Wine Industry”

The words we use are important as words can influence the way we think and act and, in this case, how we approach the valuation of wineries. In this case, the term “Wine Industry” is a misnomer. In reality, all industries are defined by the collection of firms that offer similar products [or services] that are perceived by consumers as substitutes for one another. Accordingly, as craft beer and spirits are substitutes for wine in many price categories, wine producers compete in the larger Beverage Alcohol Industry with wine producers being constituents within the Wine Segment of the overall Beverage Alcohol Industry.

So why is this distinction important? It is important because we need to understand the Market Structure in which wineries compete in order to develop appropriate approaches and methods for valuing a winery’s equity interest.

Market Structure

The Beverage Alcohol Industry competes in a Market Structure best defined in economics as Monopolistic Competition. For wineries, a Monopolistically Competitive Market Structure for Beverage Alcohol is an industry composed of many firms, which if successful, are selling differentiated products (wine, beer or spirits) and are capable of setting their own wholesale and consumer prices within the parameters of their products’ positive consumer attributes. The monopolistic part pertains to individual firms being able to set prices whereas the competition part pertains to the presence of many firms.

In other words, prices can be set based on the unique determinate attributes of a firm’s products, as expressed through its Competitive Strategy, and profits earned through the firm’s ability to compete with substitute products. When successfully executed, this is referred to as a firm’s Competitive Advantage.

Competitive Strategies

Monopolistically Competitive Market Structures require strategies focused on product differentiation. Such Competitive Strategies emphasize the following attributes:

· Development of a distinguishable/well recognized brand;

· Strong Market Positioning for the Brand; and

· A strong financial position, that being a well-balanced and funded Capital Structure, as a means to appropriately execute the strategy.

For a winery, the tactical execution of its Competitive Strategy directly affects the equity value of a winery.

Valuations Approaches and Methods

Because wineries compete in an industry composed of many firms selling differentiated products, all of which can be considered substitute products, in order to successfully value a winery’s equity interest, it is necessary to utilize approaches and methods that specifically isolate the free cash flow of a target winery because:

· To some degree, every winery is different; and

· A winery’s free cash flow is the best metric for measuring the success of a winery’s Competitive Strategy.

Less Creditable and Defensible Valuation Approaches

Market Approaches - Market Based Approaches utilizing either single Guideline Companies or multiple Comparable Transactions are generally not considered creditable and, thereby, are less defensible approaches, because there are no true comparables as expressed by the Market Structure in which wineries compete. At best, the use of Market Based Approaches to value wineries provides a prospective range of value, however, as economic conditions change over time, so does the validity of the so-called comparables as the comparability of transactions diminishes over time making the Market Approach less desirable for valuing the equity of a winery.

Asset Approaches - Likewise, Asset Based Approaches are not considered appropriate for valuing wineries that have achieved persistent earnings because such approaches do not directly address the issue of valuing Goodwill in a transaction (Goodwill being measured as earnings in excess of the underlying value of Net Tangible Assets). As such, Asset Based Approaches are best reserved for the valuation of holding or investment companies where the underlying holdings/investments possess the intrinsic value of a company or companies lacking earnings persistence.

Most Creditable and Defensible Valuation Approaches and Methods

Income Approaches – Because Income Based Approaches provide a direct link between a winery’s earnings capacity and its equity value, Income Approaches represent the preferred approach for valuing a winery’s equity interest because Income Approaches capture the unique aspects of a winery’s Competitive Strategy through the measurement of a winery’s current and future free cash flow. As such, the following are generally recognized Income Methods for valuing wineries:

· Capitalization of Earnings Methodology - The Capitalization of Earnings Methodology is a financial valuation methodology that estimates a company's value based on its current normalized sustainable earnings (“Normalized Earnings”). This method involves capitalizing Normalized Earnings to find the present value of future earnings into theoretical perpetuity by dividing Normalized Earnings by the capitalization rate minus a factor for long-term sustainable growth. The Capitalization of Earnings formula is expressed as follows:

Value = Normalized Earnings / Capitalization Rate – Expected Long-Term Sustainable Growth Rate

where,

Normalized Earnings = A Business’ Free Cash Flow to Equity, Adjusted for Ongoing Profitability where current or recent years free cash flow to equity is typically adjusted for ongoing profitability by removing any income or expense generated from (i) non-operational assets and liabilities; (ii) adjusting out one-time, nonrecurring expenses; (iii) as well as adjusting any transactions payable to related parties to fair market rates.

where,

Capitalization Rate = The Risk and Required Rate of Return on the Equity Investment which is typically derived utilizing a build-up model such as the Capital Asset Pricing Model (or “CAPM”) Modified for Company Specific Risk Factors.

and where,

Expected Long-Term Sustainable Growth Rate = A Factor for the Annual Growth of Normalized Earnings into Perpetuity which is typically derived utilizing a one, two or three phase growth model.

The Capitalization of Earnings Methodology assumes all assets, both tangible and intangible, are indistinguishable parts of the business and does not attempt to separate their values. In other words, the critical component to the value of the business is its ability to generate future earnings (or free cash flow in this instance) resulting from its Competitive Strategy. As such, the Capitalization of Earnings Methodology is more theoretically appropriate for valuing businesses that are in a mature phase of growth where future growth is expected to be reasonably linear, which is to say more constant and stable over time.

· Discounted Cash Flow Methodology – The Discounted Cash Flow Methodology (“DCF”) is a financial valuation methodology that estimates a company’s value based on projecting future normalized earnings (“Normalized Earnings”). This method involves calculating the present value of its expected future earnings by discounting Normalized Earnings to the present, as well as a terminal value, using a discount rate that reflects the risks and required rate of return on the equity investment, which also incorporates the time value of money when discounted. The DCF formula is expressed as follows:

Value = Normalized Earnings / (1+Discount Rate) ^ Number of Years Estimated

where,

Normalized Earnings = A Business’ Free Cash Flow to Equity, Adjusted for Ongoing Profitability where Free Cash Flow to Equity is typically adjusted for ongoing profitability by excluding any consideration for income or expense generated from (i) non-operational assets and liabilities; (ii) excluding one-time, nonrecurring expenses; (iii) as well as adjusting any transactions payable to related parties to fair market rates.

where,

Discount Rate = The Risk and Required Rate of Return on the Equity Investment is typically derived utilizing a build-up model such as the Capital Asset Pricing Model (or “CAPM”) Modified for Company Specific Risk Factors.

and where,

Number of Years Estimated = Number of Years in which Free Cash Flow to Equity is Estimated into the Future plus a Terminal Value which is typically derived utilizing a minimum of five years and a maximum of ten years with the addition of a Terminal Value used to calculate the present value of future earnings into theoretical perpetuity by dividing Normalized Earnings by a capitalization rate minus a factor for long-term sustainable growth.

The Discounted Cash Flow Methodology, as with the Capitalization of Earnings Methodology, assumes all assets, both tangible and intangible, are indistinguishable parts of the business and does not attempt to separate their values. In other words, the critical component to the value of the business is its ability to generate future earnings (or free cash flow in this instance) resultant from its competitive strategy. However, the Discounted Cash Flow Methodology is more theoretically appropriate for valuing businesses that are in early phase of growth or businesses adopting new competitive strategies where future growth is expected to be reasonably non-linear, which is to say where growth is expected to be more variable going forward.

Final Thoughts – Winery Valuation v. Vineyard Appraisal

When valuing a winery, a distinction needs to be made between the value of the business, specifically the winery, and the value of the land, specifically the vineyard.

This article has examined approaches and methods for the valuation of wineries. To arrive at a consolidated valuation for a winery that includes the sale of vineyard property owned by a winery, an appraisal of the vineyard property must be assessed separately and added to the value of the winery.

The separate appraisal of vineyard property is necessary because the land is a long-term, relatively stable asset that is distinguishable from the winery, which is to say that vineyard property has its own separate intrinsic value distinct from that of the winery. It can be, and often is, sold as a separate asset from the winery itself.

Failing to account for the value of vineyard property, when consolidating the sale of a winery, with vineyards included, can seriously undervalue the overall consolidated transaction.

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Benchmark Solutions, Inc. is an industry leader in Financial Valuation for business owners, investors, commercial real estate agents/brokers, and bankers. Our services are used to analyze and determine the economic value of businesses, business assets, and capital investments as well as the viability of commercial real estate investments.

Since 1996, Benchmark Solutions, Inc. has been advising clients, both domestically and internationally, as it pertains to buying and selling business interests, raising capital, analyzing commercial real estate investments, as well as developing new and existing businesses. Our Strategic Financial Advisors individually possess over twenty-five (25) years of experience as financial executives in industry. Our breadth of experience and depth of knowledge enables us to give our clients exceptional advisory services and work product that will provide them with the competitive advantage needed to achieve their financial goals and objectives.

If you would like to learn more about Benchmark Solutions, you can locate us online at www.benchmarksolutions.us.com or visit us on LinkedIn at Benchmark Solutions, Inc.: Overview | LinkedIn

About the Authors:

Paul B. Finch, MBA, is a founding Executive Director of Benchmark Solutions, Inc. and a Sr. Strategic Financial Advisor at the firm. Professionally, Paul has focused his career on the various facets of corporate finance that revolve around the creation and measurement of equity value for his clients. His work includes both domestic and international merger and acquisition engagements as well as projects specifically designed for the purpose of increasing profitability, earnings quality, and growth prospects, while limiting risks and exposures, for his clients. Paul is a recognized subject matter expert in Financial Valuation, Strategic Financial Planning, Capital Acquisition, and Merger & Acquisition Transactions and has published many articles pertaining to these topics, some of which can be found on LinkedIn. You can contact Paul at paul.finch@benchmarksolutions.us.com or on LinkedIn at Paul Finch, MBA | LinkedIn

Susan Winters Finch, MS, MBA, is co-founder and Executive Director for Benchmark Solutions, Inc. and is an Economist. Susan specializes in areas of Managerial Economics such as Supply and Demand Analysis, Market Structure and Competitive Analysis as well as assessments of current and forecasted macroeconomic activity. You can contact Susan at susan.finch@benchmarksolutions.us.com or on LinkedIn at Susan Winters Finch, MBA | LinkedIn