ST. HELENA – There’s an ongoing joke in Jayson Pahlmeyer’s family in which the Napa Valley winery owner keeps saying he’s going to retire to Aruba. Although he made that proclamation years ago, it hasn’t happened. Yet, the family has been taking steps for the wine business to continue when he decides to trade barrels for beach.
A vast majority of Northern California wineries in business today were started after 1975, like Pahlmeyer Waters Ranch Vineyard, and about 75 percent are still controlled by their original founders. As they look towards retirement and passing the family business on to their heirs, the advice from business-succession experts is, if you haven’t started already, get planning now.
“Planning from generation to generation is extremely difficult,” said Joseph Kitts, partner in the tax practice of Burr Pilger Mayer.
Only a small percentage of businesses succeed in passing the torch, he told about 60 people gathered at Harvest Inn in St. Helena to listen to a wine business case study in succession planning and advice from an expert panel. The North Bay Business Journal hosted the May 21 event.
The panel of experts included Kitts, Richard Stone, co-founder and chairman of wealth-management firm Private Ocean; Nicholas Donovan, partner with law firm Gaw Van Male; and Tim Myers, executive vice-president and commercial banking manager for Bank of Marin.
The panel agreed the best advice on succession planning is twofold: First, start early, and know that it’s going to be an ongoing process. Second, talk to advisers. Bring financial-planning experts in to family meetings to establish goals, like how much you want the company to grow, whether to sell or hand the business down, and when to admit children into the ownership.
Kitts also suggested bringing in experts to teach the next generation philanthropy, financial literacy and establish core values and structure within the family business.
That’s just what Pahlmeyer is doing.
Sitting on another panel with his daughter, Cleo, Pahlmeyer Winery President Brian Hilliard and Gaw Van Male partner Jamie Watson, Pahlmeyer explained that years ago he was faced with a decision common to a growing number of winery owners: either sell the business, or pass it on to the next generation.
The best way to answer that question is to take a good, long look at yourself, Stone said.
“What is it you want to do? What does the rest of your life look like? Identify your own true passion,” he said.
Under the umbrella of Pahlmeyer, LLC, the vintner also owns a vineyard on Atlas Peak and another on the Sonoma Coast. He said his major concern for his business was to maintain the cash flow and retain family ownership. His daughter, Cleo, joined the family company in 2008, Her current position is as the company’s communications director. Pahlmeyer’s oldest son has his own business in New York, and his other son is 14.
In 2012, Pahlmeyer decided to hire an outside person to run the business. He wanted someone from a younger generation with an outside perspective who would upgrade the quality of the wine and ramp up operations. He also wanted someone who could serve as a mentor.
“At that point in time, I was coasting,” Pahlmeyer said. “And you know when you’re coasting, you’re going downhill. I wanted someone to ramp up the quality of the wine, ramp up the winery and make what I call ‘best in class.’”
Enter Hilliard. He came on board with a background from Constellation Brands and Jackson Family Wines before that.
“The first thing I asked him was, ‘Do you have plans in case you die?’” Hilliard said. “You need to develop a culture of planning. Know where the pitfalls are, and plan for the future.”
Working with Gaw Van Male, Pahlmeyer began setting up trusts in 2012. The firm suggested doing so in South Dakota.
While California law allows trusts to stand for 100 years before having to pay estate taxes, South Dakota allows families to set up trusts in perpetuity.
The federal estate tax rate is 40 percent on gifts in excess of $5.43 million. This rate makes it prohibitive to leave the property to heirs upon death as they would most likely have to sell the winery to pay the taxes.
“It’s an effective way to manage the business, and took the focus off of taxation,” said Gaw Van Male attorney Watson, who is married to Cleo Pahlmeyer. “It’s really the way to go.”
The succession plan called for Pahlmeyer to gift a portion of Pahlmeyer, LLC, to his wife, Paige, his daughter and two sons through four South Dakota intentionally defective grantor trusts, or IDGTs, and selling the remaining interest in exchange for a promissory note. That allows him to maintain the cashflow and proceeds of the business and retain control over assets, while the trustees are progressively buying him out.
With that arrangement in place, the Pahlmeyers still have more to plan. Now that they have a board of advisers, the next stage is to create a board of directors.
“Creating a board is a way to say a vote was taken and this is the decision,” Watson said.
And then, maybe Pahlmeyer can finally take that trip to Aruba.