As if there aren’t enough things to worry about when purchasing a winery - due diligence, seller demands, financing hassles - there’s the confusing matter of federal Alcohol and Tobacco Tax and Trade Bureau ("TTB") and California Alcoholic Beverage Control ("ABC") winery licensing compliance to grapple with. Buyers want to get down to business as soon as possible, but regulatory compliance dictates otherwise. Those of us tasked with assisting a smooth transition for the winery buyer have the job of explaining the uncomfortable fact that TTB and ABC regulations do not mesh well under these circumstances. The issues stem from conflicting federal and state rules and timelines for issuing new winery permits.
Taking a step back to the basics, a California Type 02 winery permit allows a winery to produce, bottle and sell its wine. The federal equivalent is a federal basic wine producer’s permit and bonded winery registration. Both federal and state licenses must be in place for you to operate your winery.
When a winery changes hands, typically the transfer is achieved via an asset sale. The rationale for this structure is to avoid the buyer unintentionally assuming liabilities that might have been incurred by the old business. Important as this is, it does present difficulties from a licensing standpoint.
Compliance on the state side is somewhat straightforward. The California ABC will issue a temporary permit to the new owner while the person-to-person transfer application for the Type 02 winegrower’s license is being processed. On the other hand, TTB does not issue a temporary permit to a new owner while a new winery permit application is being processed. Instead, the new winery owner has to submit a change of proprietorship application to TTB, which is in essence an application for a new winery permit and registration. It takes about 90 days from the time the application is submitted to obtain a new permit from the TTB, but most winery purchasers want to close much faster than that. Therefore, despite the existence of a temporary permit on the state side, without having the federal basic permit, winery registration and wine bond in place, the purchaser still can’t conduct regular winery business.
The best solution to this tough situation is for the buyer and seller to enter into a transitional services agreement (TSA). Under the TSA, the buyer leases the winery back to the seller after closing and the seller continues to conduct winery operations under its existing permits and bond until all of the buyer’s permits have issued. This involves some cooperation between the parties after closing but is, in the view of the agencies, the best way to proceed in light of the regulations regarding changes in control of winery premises.
No one wants to start their newly purchased winery business by running afoul of federal and state regulations, so make sure to plan ahead and consider these licensing issues as part of the overall sales transaction.
Please contact Caroline Boller at cboller@dpf-law for more information or assistance with these issues.