The Backstory Behind E&J Gallo’s Acquisition of Barefoot Cellars

Transcript

John Warrillow:             Next up you’re going to hear from Michael Houlihan and Bonnie Harvey, who are the founders of Barefoot Cellars. So you’ll know Barefoot if you’ve ever walked into a Trader Joe’s and seen that wine with the bare feet on the label. That’s their company. They built it up to six-hundred thousand cases a year and sold it to the largest winemaker in America. E & J Gallo. How did they do that? Well they’re going to tell you in this episode a couple things. One, that some of your best goals may not be ones you come up with yourself, may be ones that are set for you. And Michael will do a great job of describing that. Listen to the way they use distributors to get on the radar screen of their potential acquirers of choice. They’ll talk about the difference between vanity and strategic buyers, they’ll describe one thing every entrepreneur needs to do before they go to market. It’s not fun, but it’s important to create what Michael and Bonnie call a silent auction for your company. To describe this and the entire experience of building Barefoot, here are Michael Houlihan and Bonnie Harvey

John Warrillow:             Michael Houlihan, Bonnie Harvey welcome to Built to Sell Radio!

Bonnie Harvey:             Thank you! We’re delighted to be here.

John Warrillow:             I’m not only a fan, but a customer! I love your wine.

Bonnie Harvey:             Thanks! It was designed for people that love wine, but have been intimidated by it, so they haven’t really tried it.

John Warrillow:             Right, and so wine can be so snobby.

Michael Houlihan:         You think?

John Warrillow:             Everybody gets so uptight about wine it’s nice just to drink it.Yeah, so tell me abo ut how this thing started. Cause you guys didn’t start Barefoot, you kind of acquired it in a sort of funny way. Tell me the story.

Bonnie Harvey:             Well, yes we did come up with the label, but the name had been used. It was on a defunct wine that hadn’t been produced for twelve years. But the way we ended up in the wine industry is really quite a story. We were both living in Sonoma County and we were business consultants. I had a client. I was organizing his office and I saw that he hadn’t been paid for his grapes, he was a grape grower. He hadn’t been paid for three years, for three harvests. And he was owed $300,000. And I asked to see the contract and he said, “Well, I don’t have a contract. I’ve just got weight tags.” And I said, “Well, that makes it even more difficult.” I brought in my new boyfriend over here at the time, and I said, “Why don’t you just go out there and collect this $300,000?”

Michael Houlihan:         Yeah, I’m like I just met this gal and now she’s got me out looking for three hundred large. You know, what did I marry, the mob or what is this? So I go to this winery and when I get there the guard says, “I hope you’re not here to collect any money, because we declared bankruptcy this morning.”

Bonnie Harvey:             That very morning.

Michael Houlihan:         My heart sunk. And he says you can take your number and wait your turn with the rest of us. So I went through with the meeting anyway, and I sat with the board of directors, which were the secured debtors, and I looked out the window. I wanted to make small talk and I said, “What do you got in those tanks over there?” And they said, “Well we got cabernet sauvignon and sauvignon blanc wine in bulk.” And I said, “Really?” And I looked out this other window and I saw this thing that looked like a chrome locomotive in this handball court and I said, “What’s with the chrome locomotive in the handball court?” And they said, “Well that’s not a handball court, that’s a clean room, that’s a bottling room. And it’s not a chrome locomotive it’s a bottling line. That’s a very expensive German bottling line.” And I said, “Really?” And then it hit me like a chrome locomotive, and I said, “Listen guys, you obviously can’t pay us any money. But what if we clear the debt. What you do is you take some of that wine out of those tanks over there, you run it through the chrome locomotive down there, and you pay us in bottled wine. Without labels, just bottled wine instead of money.”

Michael Houlihan:         Okay? So then we had $300,000 worth of bottled wine, and I come skipping back to Bonnie with this contract in my hand, and I said, “Here you go. I think we got this solved.”

Bonnie Harvey:             Yeah I said, “Well that’s not going to pay any bills. That’s just the beginning of our problems here. We’ve got to get all the licenses, we’ve got to design a label, I’ve got to get credit with the suppliers for glass, corks, foils, labels. I said what is markup on them anyway? How are we going to sell this? We don’t have any plans for any of this.” We don’t have any knowledge of the industry. Neither of us were wine drinkers. I was intimidated by wine, I don’t speak French, I couldn’t pronounce any of the words on the label.

John Warrillow:             So where do you go from there? How did you guys get this business off the ground?

Michael Houlihan:         This is the funny part. So here we have all this wine and we don’t know what the heck we’re doing. So we do what outsiders do, and by the way the two things we thought we had going against us turned out to be our real strength. One was that we were outsiders we didn’t know the industry. That gave us an open mind and we really disrupted the industry with Barefoot Wine. And the second thing was we were broke. You know? We didn’t have any money. Yes we had this trade, but so what? We had no money for marketing or anything. Right? So Bonnie went out and negotiated a lot of supply contracts and whatnot and was able to talk them into giving us credit, and I went out

Bonnie Harvey:             I got the licenses.

Michael Houlihan:         Yes, she got all the licenses. This is a period of like six months, right? Meanwhile, this wine is sitting there, you know? And so finally, we say make friends in low places. People with dirt under their fingernails. So we don’t know any better so we don’t go to the gurus in the wine industry. We go to people like a guy that drives a forklift, a guy that runs a bottling line, a mechanic, a guy that drives a truck, a guy who is a clerk in a store, a guy who is a buyer for a supermarket. And we ask them all the same thing. We say, “What do you need?”

Michael Houlihan:         So this one buyer says, “You know, nobody’s ever asked me what I needed, they always come in here and they’ve got their programs, and they got their products, and they got their points they want to make. Yeah, you ask me what I want, I’ll tell you. I want a salt and pepper act, I want it better than Bob, and I want it cheaper than Bob, you got that?” And I’m writing this down salt, pepper, bob. I don’t know what the heck this is. I’m thinking this is some kind of industry jargon I’ve got to figure out.

Bonnie Harvey:             Which it was.

Michael Houlihan:         And I’m on my way out the door and he says, “Oh and another thing.” He says, “Don’t make it a hill, don’t make it a leap. Don’t put the label in French. Make the name the sa.me as the logo, and make it clear and easy for her to see from four feet away. You got that?” And I’m writing that all down. Four feet away, I got salt, I got pepper, I got Bob. And so I go to my friend who’s been in the industry and I say, “Can you translate this for me?” I said, “What’s a salt and pepper act?” He says, “Oh, you know salt like sauvignon blanc wine, pepper like cabernet sauvignon wine. It’s a slang.” You know we use that.”

Bonnie Harvey:             It’s a red and a white.

Michael Houlihan:         Red and a white. And it’s an act because it’s under the same label. And I thought well that’s interesting. I said, “Who’s Bob?” And he said, “Oh Bob, that’s Robert Mondavi.” I said, “You’ve got to be kidding me. I’ve got to be better and cheaper than Bob?”

Bonnie Harvey:             Didn’t he also ask you to put in a pig.

Michael Houlihan:         Yeah, and I said, “Pray tell me what is a pig?” He says, “Oh a pig.” He says, “That’s the big fat bottle of wine. That’s the wine bottle that’s twice the size of the standard bottle, you know. It’s the 1.5 liters called the magnum.” So that’s when I realized that as snarky and as rude as this buyer was, in thirty-seven seconds, he had given me the keys to the kingdom. So we knew exactly what to bottle, right? So we go bottle it up and we do everything the way he says, we come up with this incredible label, that’s another story, and we go back to the guy and say, “There it is. Everything you wanted. It’s in a pig, it’s a salt and pepper act, its about the same price as Robert Mondavi, it’s about the same quality. How many truckloads do you want?

Michael Houlihan:         The guy looks at me like I’m crazy, he says, “Are you nuts?” He says, “We can’t buy this.” He says, “Nobody’s going to buy this, you got a foot on the label. What the heck?” He says, “Nobody’s ever heard of it are you going to pay a million dollars in advertising? If you do I’ll put it in.” This guy buys for two-hundred stores, it’s the big guy. This is our plan A, right? So here we are, I say, “Hey we bottled it up for you, what are we going to do?” And he says, “Well, I can’t take it, no box store is going to take it, no chain store’s going to take it, unless you put some advertising dollars behind it.” And I said, “Well you know, where do I go from here?” He says, “Well you got to sell every Mom and Pop and every independent, because we’re not going to take it.”

Michael Houlihan:         And I said, “Well that’s going to take years!” And he said, “That’s right, you better get started right now.”

John Warrillow:             When’s the best time to plant a tree? A hundred years ago. Second best time, right now.

Michael Houlihan:         So that’s how Barefoot gets started. On a traded debt and then we have to build it up.

John Warrillow:             Because this was the grape grower was a client of yours. Did you buy the receivable off of your client, or how did you come to, basically, own the receivable.

Bonnie Harvey:             It was two-fold. Michael and I had done the research for about six months. And then the client came to me and he said, “You know I’m the full time winemaker in addition to having the vineyards that I’m overseeing.” He said, “I can’t take on another project.” He said, “I guess I’ll just have to take the loss.” And we said, “No! You can’t do that. It’s too much money, number one, and number two Michael and I have been working for six months to make this happen. We’ve got all the contracts, the licenses, secured the product, we’ve got the label designed. You can’t just give up on that. And Michael said, “Well I’ve got an idea. Instead of us working for you, why don’t you work for us? We’ll take the debt, we’ll pay you a hundred cents on the dollar, and you’d be our wine making consultant, and you front us your grapes from the next harvest, and we’ll sell it all out at a chain store,” is what we thought at the time, Plan A remember? And we’ll pay you back and maybe put a couple bucks in our pocket and then figure out where we want to go from here.

John Warrillow:             Easy peasy!

Michael Houlihan:         Yeah easy peasy.

John Warrillow:             Yeah, little did you know.

Bonnie Harvey:             How hard could it be!

John Warrillow:             And to get folks up to speed on the time, this is 1986, right? So this is the early days of the winery. Give me a sense if there were one or two infleciont points between being told you had to go to all the independents and selling to E&J, is there one or two big strategic moves that you made along the way that you think defined your success? Are there one or two?

Michael Houlihan:         Oh yes, there were several. I think after two years of selling it in the mama papa independent market, it became a household name in California, and the chains had to take it. One of the chains that took it was a chain that was kind of crazy like we were, and they had nets on the wall and the guy who ran the store had a captain’s hat on and everybody else was a first mate, or you know, whatever.

Bonnie Harvey:             Hawaiian shirts.

Michael Houlihan:         And so they took Barefoot in and it became their staple. And then they expanded their stores across the United States, and they took Barefoot with them as an example of, “Hey, you guys in Iowa, you want to know what those wacky Californians are doing? Here it is. Barefoot wine.” Well the name of that store was Trader Joe’s.

John Warrillow:             And most people listening to this will know Trader Joe’s well.

Michael Houlihan:         That was an inflection point for sure.

Bonnie Harvey:             I think something that we learned early on, because we never owned vineyards, and we didn’t own a winery, or a bottling line, or a tank. But we used contracted services. And I think that that made a huge difference in our business, it allowed us to concentrate our energies on sales and marketing. And everyone that worked for us then was managing the contracted services.

John Warrillow:             Now, Trader Joe’s is famous for the pejorative “Two-buck chuck” or “Three-buck chuck” or whatever. Was that your wine that they were labeling Trader Joe’s or was that separate all together.

Bonnie Harvey:             Oh totally different, yes

Michael Houlihan:         Two-buck chuck comes along really about the early 2000s, and it doesn’t really hurt us because it’s a price point below us. But the thing about dealing with Trader Joe’s that was nice is that they kept asking us how they could get it cheaper. So we said, well you could buy more. And then we said well you can pay for it faster. And then finally we said you can buy more all of one varietal all in one truck load and in cash.

Bonnie Harvey:             And pick up it yourself in your truck instead of us delivering.

Michael Houlihan:         This is the advantage of being broke is that you learn to sell things.

Bonnie Harvey:             You have to.

John Warrillow:             Love it! And in seriousness, did you finance those orders from Trader Joe’s by getting them to pay upfront? Is that how you were able to stay ahead of the cashflow?

Michael Houlihan:         Our financing came because as you remember we started with $300,000 worth of debt. Okay, so as we sold that inventory off, we held on to the proceeds, we did not pay the person we owed the money to with those proceeds. We used those proceeds for marketing dollars, we used those proceeds to expand. We then paid him off, but only after we got going.

Bonnie Harvey:             It’s about seven years by the way to get going.

Michael Houlihan:         The other thing we did was a big inflection point is that we developed a relationship with our commercial banker. And we got lines of credit based on accounts receivable. You know a lot of people start businesses today don’t realize that this is available to them. But we were getting seventy-five percent of the value of an account receivable paid to us by the bank in cash, with interest of course, and we had a zero balance sweep account. So we would write checks, if the check went over the amount of the account, then the bank would loan us money out of that line of credit, and put the interest on there until there was enough money back in the account to clear the debt.

John Warrillow:             Do you recall what kind of interest rate you were paying for that?

Michael Houlihan:         I think in those days it was cheap. I don’t know. Four to seven percent.

Bonnie Harvey:             I don’t remember.

John Warrillow:             Right, and did you give them a personal guarantee for that sweep account.

Michael Houlihan:         You know we didn’t.

Bonnie Harvey:             We didn’t own any real estate.

Michael Houlihan:         As a matter of fact, we applied and were rejected for about four years. And finally we went to this big bank, Wells Fargo, who had rejected us, and we said, “How come you’re giving home loans to our employees, and you won’t give us a home loan?” Because we lived in a rented place. We wanted to buy a house. They said, “They’re different! They have a good solid job.”

John Warrillow:             You guys are crack-pot wine makers from California.

Michael Houlihan:         Well, yeah. So there you go.

Bonnie Harvey:             But our employees, they were stable.

Michael Houlihan:         Yeah, very stable.

John Warrillow:             Right, so you’ve got Trader Joe’s as this account, the bank is financing, and you’re able to start paying off the individual who fronted you the grapes to begin with. Did they take a sort of interest rate on their $300,000, or did you just pay them over the seven years? You’re laughing.

Bonnie Harvey:             No, they were happy to get a hundred cents on the dollar instead of three and half cents before the attorneys took their cut that the bankrupt winery offered.

Michael Houlihan:         Which means they all got a penny and a half per dollar net.

John Warrillow:             And you kept that individual whole, it just took seven years to get there, but they got all $300,000 back.

Bonnie Harvey:             Exactly.

Michael Houlihan:         Yeah they got it all back.

Bonnie Harvey:             It’s a pretty good deal when you think about it.

John Warrillow:             Now, Barefoot is a unique name for a wine, where does the name come from?

Bonnie Harvey:             Well, grapes were originally crushed barefoot to make wine, so that’s how we related it to the product. And it was friendly, it was easy to pronounce, you remember that intimidating phase that wineries went through with being unable to satisfy a consumers needs of being able to pronounce the product without a degree in oenology viticulture. So we were able to satisfy that need, making it non-intimidating. And the name was the same as the logo. And that was something that one of the buyers said that that was what he wanted to see.

John Warrillow:             The salt and pepper guy said make sure the name and logo, yeah.

Michael Houlihan:         And also the barefoot is a symbol of recreation. When you are barefoot, it is hard to be uptight. You’re at the swimming pool, you’re at the beach, you’re in the hot tub, you’re in front of the fire. Being barefoot is a physical thing, but it is definitely recreational.

John Warrillow:             How did you build the brand other than getting it into these mom and pop shops and Trader Joe’s. What did you do, because the booze business is known for spending so much money on advertising and sponsorships, and the big guys just invest a ton. How did you guys compete? How did you build your brand in that context?

Bonnie Harvey:             Well, we didn’t have any money to throw at advertising. So we really had to figure out how to get those people’s attention so they’d come in and buy the product. So it was kind of a quirk that got us started in that directions. We got a phone call from a man in Chinatown who was head of this group that wanted to build an afterschool playground, park, for kids.

John Warrillow:             What does wine have to do with an afterschool playground? I’m not quite sure.

Bonnie Harvey:             He figured we had money, because we were in the wine industry. Everybody in the wine industry to get some money. Anybody that he thinks has got money for his program. He calls and he says, “I just need thirty-thousand dollars to put in some swings and everything.” We said, “Well, we don’t have any money to give you. However, we do have this wine. Why don’t we give you some wine, and you can either auction it off or serve it at a fundraising dinner. Maybe to loosen some people up, they’ll write a bigger check. And so he took some of our wines, and we notice, this was right in the beginning of our sales in San Francisco, this was in Chinatown in San Francisco, and we got the depletion reports from our distributor, and we saw that the sales had taken off around the area where this fundraiser had taken place.

Bonnie Harvey:             And we said, “Well isn’t that funny! I wonder if it’s got to do with the fundraiser?” So we tried it in a couple other areas, and supported community fundraisers for causes that this community was interested in that was around the market that carried our product. And what do you know, we sold there too. And it worked so well, that we took it across the nation, and Barefoot became one of the fastest growing wine labels in the nation without paid advertising.

John Warrillow:             What would your cost have been on a bottle.

Michael Houlihan:         Oh, our costs were if you didn’t put anything in the bottle, it was fourteen dollars FOB a case.

Bonnie Harvey:             Twelve bottles.

Michael Houlihan:         Now by the time, just so you understand, let’s say you put six dollars worth of wine in those bottles. So now you’re up to twenty dollars. If you take those twenty dollars and divide those twenty dollars by the bottles, you say, “Well, oh! That’s less than two dollars a bottle. Why is it six dollars on the shelf?” Well it’s because the distributor puts a big hit on it, and then the retailer puts a big hit on it. So in our industry, by the time it leaves our warehouse until it gets to the store shelf, its been hit twice. And the second time it’s hit, it’s hit on the hit. See, people are making money on making money.

John Warrillow:             Right, but importantly in these sponsorship negotiations, people had a perceived value of a case of wine being seven bucks times twelve dollars.

Michael Houlihan:         Full retail value, exactly.

John Warrillow:             Love it, love it. And that’s really how you were able to compete from a brand perspective with some of these

Michael Houlihan:         Well, again we were outsiders and because we were outsiders we looked at it and we said, “You know this isn’t really about sniff, swirl, and spit.”

Bonnie Harvey:             You have to sip, yeah.

Michael Houlihan:         It is a sip. It isn’t about notes or any of that, this is about distribution management. And so we started backwards, we said, “Let’s look at the store. Let’s start there.” Who comes through the door? And the answer is people in the neighborhood around the store. So we said, “What are they interested in besides a good bottle of wine or their groceries for the day.” And the answer is maybe it’s a kids after-school park, maybe its a library, maybe its cleaning up a creek. In the case of Southern California it was cleaning up the beaches and the ocean. And so we found groups that we could support in every state in the union that were doing something, whether it was cleaning up Delaware Bay or Lake Michigan or whatever. What they all had in common was most of them had to do with education or conservation. And of course that gave us kind of a halo too, because we would take their messages and put them on our bottles. And then we would solicit from the shelf. Image, instead of saying, “Buy our wine for six dollars and get two dollars of your sausages,” we said, “Buy our wine for six dollars and give ten dollars to the Surfrider foundation.”

Bonnie Harvey:             To help them clean up the beach.

Michael Houlihan:         And so now mom, who had two and half kids, is saying, “Well these guys care about my kids and their health and the beach.” So that’s my brand. So this is how we built the brand. We built the brand through associations.

John Warrillow:             And it worked because you got it up to 600,000, is it bottles a year?

Michael Houlihan:         No that was cases, multiply that number by twelve.

John Warrillow:             Six-hundred thousand cases a year.

Michael Houlihan:         And the publishers of Wine Spectator Magazine awarded us with the Hot Brand of the Year award two years in a row. And in order to do that you have to show ten to twenty percent growth over last year. That gets to be a lot.

John Warrillow:             On the back of six hundred cases it sure does. Give me a sense of the size of the company behind Barefoot Sellers at this point. How many employees do you have, what were you at that way?

Bonnie Harvey:             We had forty employees. We had twenty people who were out in the field taking care of the sales and marketing and all the non-profits we were supporting, and managing the distributors and the retailers and that was throughout the nation. And we had twenty people that were sales support. That was our office staff.

Michael Houlihan:         We only had two divisions: sales and sales support.

John Warrillow:             I’m starting to get a theme here. No sommeliers, no agriculture consultants.

Michael Houlihan:         We didn’t have time for anything other than sales and sales support.

Bonnie Harvey:             We had our own wine maker, and we had a production manager. We had people that knew the job but they were doing it in someone else’s facility. But we took control of every aspect of wine making and production, and responsibility as far as the law required.

Michael Houlihan:         So we outsourced everything except sales, accounting, and quality control. So when we outsourced, we sent our people into their production facilities, and that day they were the head sheriff. That day, see? So we could really get quality. And the beauty of that was if they didn’t deliver quality, we didn’t have to pay for it. If you buy all that huge bricks and mortar, you’re under a lot of financial pressure to put out something mediocre because it’s your stuff. Your grapes off your vineyard, and your winery time and your labor. We didn’t have that. So we actually turned things down.

John Warrillow:             I’ve always been curious about this, if you’re selling six-hundred thousand cases of wine, and wine by its very nature is not precise. It’s a grape, you grow it one place with some sun, how do you ensure a consistent product?

Bonnie Harvey:             Excellent question.

Michael Houlihan:         Excellent.

John Warrillow:             Yeah, how do you do that?

Michael Houlihan:         Well, Bonnie can address it, but I just like to give a little preamble here. I just want to say that most wines taste different every year, and they say, “Well, it’s a different vintage. The elephants got loose in the vintage this year and its a little chalky, right?” But I’m sorry, the people that were buying our wine wanted what you said. They wanted the consistent, predictable profile for every varietal. And so we had to have a wine library, we had to match it, and we had a very special person.

Bonnie Harvey:             Yes we did. So we took a taste profile and broke it down into how much sugar, how much acid it had, how much tannins it had, and looked at it chemically. And chemically, that formula can be reproduced. And we also bought on the bulk wine market in the state of California, the whole state was our appellation, our growing region, and we had no vintage on our label, so we could use grapes that were grown during any year. And we gave that to our winemaker, who had a chemist background. And she would analyze the different components and put them together in just the right way to have a consistent flavor that she would match with previous bottlings.

John Warrillow:             Got it, got it. Excellent. I’ve always wondered that, now you’ve solved something for me forever. So you’re forty employees, six-hundred thousand cases a year, what triggered you to want to sell Barefoot?

Bonnie Harvey:             We never wanted to own it in the first place John. We fell into the wine vat backwards.

Michael Houlihan:         To answer the question though, I would say we did something that we advise others to do now, and that is we took a broker to lunch, and we asked the broker, first of all it’s a broker who’s not only in our business, but has also sold a business that is like ours. And we said, “Okay, the business that was like ours, when did it sell? How much did it sell for? What were the number of units per year that it sold? What was its growths weight? What was its percentage of market share? What was its year on year.” And about fifteen or sixteen other questions that developed metrics for us. For the first five or ten years of our business, we had no idea what the acquisition metrics were for our price point and our category. And that was a mistake, because we were out there trying to sell our business when it was two-hundred, three-hundred thousand and we couldn’t get any takers. Well, we found out ten years into it that you have to be five-hundred thousand cases, half a million, at our particular price point, say at six dollars, in our particular category, which is popular wine.

Michael Houlihan:         And whatever business you’re in you’re in a category and you’re in a price point. So the question is at what point do you achieve those metrics? Now a lot of businesses are out there trying to figure out what their goals are. Well, there already written on the wall the minute you start your business, you just don’t know it. So you have to discover you don’t choose your goals, you discover what they are. And we discovered finally, that it was five-hundred thousand. So we knew that was what we had to do.

John Warrillow:             So five-hundred thousand cases was the bogey that broker told you.

Michael Houlihan:         That was the bogey, and we were only at about two and a half, we were at a quarter million, we had to get to a half.

John Warrillow:             And what did they tell you a company with five-hundred thousand cases would be worth. What was the ballpark they were saying?

Michael Houlihan:         Well, you know they were saying it could be worth any times 2x to 10x depending on the stock market, and depending upon how many other wineries were for sale that year.

John Warrillow:             What’s ‘X’? Two to ten ‘X’, is that

Michael Houlihan:         Times the gross.

John Warrillow:             Times gross? Gross revenue?

Michael Houlihan:         Times gross. Yes

John Warrillow:             Wow, so they’re saying it could be anywhere from two to ten times gross annual revenue.

Michael Houlihan:         Depending on the market.

John Warrillow:             But you’ve got to eclipse that five-hundred thousand.

Michael Houlihan:         Oh yeah. So the market is really also interesting. This is why you want to get this number every year. The market changes. If the stock market is up, then the multiple of earnings is greater, if the stock market is down, the multiple of earnings is less. If there are a lot of businesses like yours out there for sale all at the same time, well then that depresses the multiple of earnings too. The other thing you have to remember is if you choose your buyer correctly, and I say choose, right? So Mr. Big doesn’t tap you on the shoulder, you get your peanut in front of that elephant. And that’s a whole other story. But, this is part of the strategy of acquisition, or how to get acquired. The point that I guess I’m trying to make is that it might be worth more to one buyer than to another. One buyer might say, “You know if I don’t buy it my competitor is going to buy it.” That’s strategic buyer. Now maybe you have a vanity buyer. I’ve always wanted to be in this business, right? And you know I just won the lotto, and I’ll pay anything to be in this business.

Michael Houlihan:         Most sales that we have discovered, especially in our industry, are strategic buys. So the big forces that are happening in our country today, well throughout the world, the big force is consolidation. And so you see consolidation of retail, you see consolidation of retail, consolidation of distribution, and you see consolidation of production.

John Warrillow:             And just before we go further, I just want to clarify one thing you said. Two to ten times, and then I wasn’t sure if you meant two to ten times gross revenue or two to ten times EBIDTA, or profit.

Michael Houlihan:         Well, it depends on how you look at it. I mean, yes it could be gross revenue, it could EBIDTA. But when you start dealing with numbers that big, you’re not really being very picky about whether it’s gross, if it’s net the ratio drops, or changes, right? So it depends. There’s a ratio for every way you present your picture.

John Warrillow:             Yeah, so you eclipse the five-hundred thousand milestone. You mention getting the peanut in front of the elephant, which is an analogy I’ve never heard but love. How did you go about identifying who would be the right buyers for Barefoot?

Bonnie Harvey:             We went out into the marketplace and we saw what wines were selling the fastest. And they were belonging to the Gallo Wine Company. And we also noticed that the Gallo reps were in the stores, they were merchandising the product, they were putting up their point of sale material, they were making sure the products were all on the shelf and that they weren’t running out, and they were very active at the retail level.

Michael Houlihan:         Hands-on merchandising.

Bonnie Harvey:             Exactly. And they had more products and people out there in the marketplace than any of the other brands. And after a few years of working in the industry ourselves, we realized that it really takes a lot of work at retail level in order to keep your product on the shelf. And I don’t have to tell anybody out there that if your product is not on the shelf and available, it’s simply not going to be sold, you’re not going to make any sales.

John Warrillow:             So Gallo had all these resources, but why did you then connect the dots that you should sell to them. It sounds like they didn’t need you as much because they already had their reps.

Bonnie Harvey:             They were also a family owned company. So they weren’t beholding to their stock holders.

Michael Houlihan:         So their five year plan could really be a five year plan, instead of a 90-day plan. Because they weren’t trying to please the stockholders. They other thing we liked about E&J was that we knew they were not going to destroy the brand. So many brands sell and that’s the last thing you hear about them, and the reason is because the companies that acquire those brands tend to simplify, standardize and de-neuter those brands to the point that they’re just labels for whatever raw materials they’re trying to sell through the brand. They lose their character. But what we saw with E&J was that they maintained, even built the character of the brands that they acquired. And we knew that we were going to go on and do other businesses, and that we didn’t want to have a black spot on our resume. Oh, you’re the guys who started Barefoot. Oh well that went bankrupt didn’t it? Or yeah, that failed didn’t it?

John Warrillow:             So it was important to you to see the business continue on after the sale.

Michael Houlihan:         For a lot of reasons.

John Warrillow:             Were there other companies that you considered as acquirers or did you laser in on E&J pretty quickly?

Bonnie Harvey:             There were other companies that were big and that were buying brands. And they did approach us, and we talked with them but there simply was not a match. There was nothing serious that ever took place. No, we never presented our product to other companies in that way.

Michael Houlihan:         We wanted to be acquired by this particular company for about four years before they acquired us.

John Warrillow:             And for all the reasons you just stated, the fact they were going to continue the brand and they were family owned and so forth. So you’d really identified them, how did you get up in their radar? What sort of ways did you go about getting their attention.

Michael Houlihan:         How did we get our peanut in front of the elephant? Okay yeah, so that’s a good one. First of all, you can’t do it yourself. A third party has to do it, and it has to be a third party that they respect. So what we did is we took a look at their distribution and we saw that there was three distribution houses in three different states that were selling predominately Gallo products. And we deliberately put our product in those distribution houses, and then we put energy into selling those products in those houses, specifically because we wanted Gallo to notice what we were doing in the field at the street level. And so sure enough, the word got back to them. Distributors would say to them, “Hey this Barefoot thing, you better take a look at it, someone’s going to buy it. They’re doing a half a million cases right now and they continue to grow. And just look at these sales or look at what’s going on over here.”

Michael Houlihan:         Well if we had done that, we would have driven our price down to nothing. They would have said, “Oh these guys here.”

John Warrillow:             Do you remember back in grade nine, Bonnie this must have happened to you a thousand times. You’re a little bit nervous to ask the guy out, so you sort of ask your best friend to ask if he would go out with you. Did that ever happen to you? And I’m looking at you Bonnie because I know that never happened to Michael.

Michael Houlihan:         Oh no, it happened all the time.

John Warrillow:             Just teasing.

Bonnie Harvey:             So in the same respect, yes.

John Warrillow:             Is that the same thing you’re talking about?

Bonnie Harvey:             We found a business broker that had successfully sold other brands to E&J Gallo, and we began working with him.

John Warrillow:             Okay, I want to get into this, but I find that the strategy of targeting those three distribution hubs, distributors, I find that fascinating. Did you sort of, I guess my tongue in check question was a bit more serious, did you specifically let the distributors know that you might be interested in an acquisition?

Michael Houlihan:         No.

John Warrillow:             Okay, you did not.

Michael Houlihan:         No, you don’t have to. Sales is the biggest club there is. If you can demonstrate sales, believe me, they are talking about it. And so this is why we had a special guy in each one of those distributorships on our payroll, and their job was to move product like nobody’s business, and they were doing it in spite of the distributors. So even if the distributors were putting their emphasis on other products, ours were still selling like hotcakes because our guys were making the sales and turning them in at the distributor level.

John Warrillow:             Excellent. Okay, so now to your point Bonnie. You hired an expert who sold wineries before, wine labels, wine brands before. Is that right?

Bonnie Harvey:             Correct! And he had known us since we started. So we had a long history. He’d seen us grow, he understood our style, he understood our staff, and we got along very well, we know his position, and when the time came, he was the only one we considered to take our ideas to, and ask that he take them to Gallo.

John Warrillow:             What was Gallo’s reaction?

Michael Houlihan:         The key, I don’t know if you mentioned this or not, but he had just completed a major sale to them. So he was like their fair-haired boy already. So he’s already on their radar. And so here you are, you’re engaging a broker who’s already had a recent successful sale with your potential acquirer. That makes a huge difference. I mean that just cuts all the time in half.

John Warrillow:             How did you ensure that broker was still working for you. Because as you say, he gained a lot of political capital with Gallo by bringing this great acquisition to them, if he keeps doing that eventually, you might argue that your broker is kind of working for the other guy.

Bonnie Harvey:             Could be!

Michael Houlihan:         Well first of all the broker is always working for both parties because the broker doesn’t get paid if he can’t put the deal together. Ask any realtor. They’ll tell you to lower the price on your house because if you lower your price ten percent, ten percent of their six percent isn’t very much. But, what we did was we negotiated with our broker and we said, “Look, you normally work for six percent, if you make this number, you’ll get six percent, if you make this number, you’re going to get five percent, if you make this number, you’re going to make seven percent.” So we put him on a sliding scale to make sure that, as you say, he was working for us.

John Warrillow:             Got it, and so what was Gallo’s reaction?

Michael Houlihan:         To what, to him?

John Warrillow:             No, to the idea of acquiring Barefoot cellars. When he brought you guys as a potential candidate what was their reaction?

Bonnie Harvey:             W`ell, when we were talking with the broker, he said “These are the things that the buyer is going to want to see. This is the due diligence process that you’re going to be going through. And if you have all of these prepared ahead of time and are ready, that’s going to give them a much better sense that you’re really organized and that you’re ready to sell and ready now.” So we prepared all the documents and we had everything ready to go, so once we got the word that they were interested we could give them that data immediately, and that impressed them a lot. They had never seen so much information available so quickly. So they could see that we were very organized right from the beginning.

John Warrillow:             What was the quirkiest thing you prepared in advance? Everybody knows you got to have your sales numbers, you got to have your profit numbers. But help our audience know what kind of quirky things a buyer might ask for.

Michael Houlihan:         Okay how about this. You know Mary, who did your logo that you got on your wall? And she charged you twenty-five dollars an hour, right? Did you get a legal sign-off from her?

John Warrillow:             Saying you were the owner of her work.

Michael Houlihan:         Because if you wait until you’re being acquired and then go back, she’s going to want $100,000 for the legal sign off. So it’s much better to say Mary, I know you charged twenty-five dollars an hour to do a logo, but I am not going to even give you the twenty-five dollars an hour, unless you sign this legal quit-claim right here that says you have no claim on this artwork and that you have been paid in full. That’s pretty quirky. Most businesses don’t even think about that, but it’s one of the twenty things we were asked for that we were really shocked by.

John Warrillow:             What were the other nineteen?

Michael Houlihan:         Well that’s why you got to talk to us on another day.

John Warrillow:             Well what’s a good example.

Michael Houlihan:         How much time do we have?

John Warrillow:             Not enough, Okay. So again, I am curious to know. So you do the pre-diligence you do all the getting the stuff together, you go to Gallo, they’re interested. Did they then provide an offer? How did they sort of express their interest?

Michael Houlihan:         Okay, first of all, part of the strategy was, you know you’ll have brokers who say, “Oh, you should just put it out for auction, just tell everybody it’s for sale and the highest bidder.” Now that might be true maybe with a house or something, but with a business you have got to be really careful because your staff is going to have a stampede to the door the minute you say it’s for sale. Your vendors are going to ask for cash and your buyers are going to say I’m going to wait to see what the new owner is going to offer in terms of quality, in terms of customer service, in terms of terms. You’re basically going to lose the very value that your selling.

Michael Houlihan:         So basically, the longer that it takes you to sell your business, the less you’re going to make as a rule. So you don’t want it to become public. So this requires all kind of things like a stay bonus for your key staff, and you have to think about how you’re going to present it to your acquirer. Like the way that we presented it because we were advised by a seventy-five year old broker who had done a lot of these things. And he said, “Listen this is what you got to do. You have to do your acquirer’s due-diligence for your acquirer as Bonnie said, you have to have a package for legal, you have to have a package for HR, you have to have a package for production, a package for marketing, a package for sale, and so forth and so on. And these packages are going to be laid out on the table in front of them, and they’re going to be given a period of time to review those packages, to send them out to their various different departments for review and get back to you with an answer within a very specified period of time. Like twenty days of something,

Michael Houlihan:         Now, when they see that you’re prepared like that, and they also know that they have the right of first refusal, you’ve created a silent auction, because now, if they don’t take it, they know you’re dressed for success. They know you can take it to their biggest competitor and you are ready to go. That will give your audience some insight into what we learned about acquisition.

John Warrillow:             Yeah because at that point it’s very clear that you’ve done all of the homework necessary, and you don’t even have to say that there is a buyer waiting in the wing.

Michael Houlihan:         No you don’t say that at all.

Bonnie Harvey:             It’s better if you don’t.

Michael Houlihan:         It’s better if you don’t.

John Warrillow:             But they can read the writing on the wall.

Bonnie Harvey:             And the broker does all the talking, you don’t need to talk at all

Michael Houlihan:         You don’t talk at all.

John Warrillow:             And so what was your reaction, did Gallo say, “Okay guys, what do you want for the company?” Did they ask you to throw out a number? Did they give a number to you?

Michael Houlihan:         Well, we can’t get into that. We signed an agreement with them that says we can’t disclose the details of the acquisition. So out of respect for them, I’ve got to–

John Warrillow:             Take the fifth on that one? What was it that they saw in you, because you saw lots in them, but what do you think they saw in you?

Bonnie Harvey:             They saw that we had a large percentage, well actually a smaller percentage of the market, but every place we were in, we were selling a lot. So there was a lot of opportunity for growth. We were a fast turn. We sold a lot of bottles in every market we were in, and if they could expand the number of markets, they knew they could make a lot of sales, and they’re already in a position to do that.

John Warrillow:             They were stores that they were in that you were not.

Michael Houlihan:         Oh yeah, we were probably in twenty percent of [crosstalk 00:50:34]

Bonnie Harvey:             I think it was seventeen

Michael Houlihan:         Seventeen percent of all of the places where you could possibly sell wine in America.

John Warrillow:             Got it, and they’ve got all these great merchandising sales people.

Michael Houlihan:         And so here they have this army that they can put behind this brand. So I think what they found attractive was the marketing was done, the pull was done, the sales process was done, and that all they had to do was step on it. The car was built, they just had to fuel it and step on it. And that’s what they did, pretty much. They hired us back as consultants to help them with some of the branding and to keep what they called the Barefoot spirit alive.

Bonnie Harvey:             To help them understand why it was that that brand was so popular throughout the nation. And why it was it was such a fast grower, increased sales year after year.

Michael Houlihan:         And loyal. They wanted to know why our buyers were so loyal.

John Warrillow:             So your deal was sort of cash and then you did a separate agreement, like a consulting agreement. Okay, that’s helpful. Admittedly, you guys started this business, in your own words, with nothing, or you didn’t have a lot of money at least, I am sure you had a little bit. I mean, you sell this company, how does that change your life.

Bonnie Harvey:             Well I guess I don’t have to tell you we had a little more free time.

Michael Houlihan:         There’s good news and there’s bad news.

Bonnie Harvey:             But we didn’t have any medical insurance coverage, we didn’t have any sick leave, we didn’t have any services, any overhead, professional services to do anything. We lost a lot of things that business owners will take for granted. Like their automobile expenses, their travel, their meals. So that took a little getting used to, you know?

Michael Houlihan:         And also things like a staff, like you can ask your legal guy, “Hey is this legal?” You can ask somebody to do a clerical job for you, or you can have somebody research something, or you can have your social media person, we don’t have those people anymore. So they’re all gone. Plus, now you’re not on salary, so you’re not as bankable. Even thought you have a lot of cash, the bank wants to see income. And so you lose some of your credit, as a matter of fact. So I mean these are the kinds of things we hadn’t considered, and I would say the biggest thing that we see that many businesses, they think they’re going to be serial entrepreneurs. They sell a business, they’re going to start another one, right? With what? You don’t have that staff behind you anymore. And we run into hundreds of people who are fed up with their corporate job and quit and they got a great idea for a business and, “Oh I’ll just ask legal about this, I’ll just have social do this.” They don’t have those guys anymore. They have to pay for all that

John Warrillow:             In your own case it sounds like it was all downside. There must have been a positive outcome of selling. I mean, did you buy yourself a trophy. Any sort of way to commemorate.

Michael Houlihan:         We started getting a good night’s sleep.

Bonnie Harvey:             Very restful. And, we went to Chile for a whole month!

Michael Houlihan:         Yeah, so we had never had a vacation.

Bonnie Harvey:             We took a long vacation.

Michael Houlihan:         We took a long vacation, and visited friends in Chile.

Bonnie Harvey:             No emails.

Michael Houlihan:         We also did some other cool stuff like we paid off our house, so that we didn’t have to pay interest rate to the bank, paid off our cars. There’s things the if you get a chunk of cash, you look at it and you go do I really want to rent this money now that I have it? You don’t want to rent it. So you stop renting money altogether.

John Warrillow:             What do you mean by renting money? I don’t know what you mean by that?

Michael Houlihan:         Okay, you buy a car, your payments are this, you’re renting money, you’re paying interest. You get a house, your mortgage is this, you’re renting the money. You’re paying interest.

Bonnie Harvey:             One of the great experiences that I had, it was in Chile, I went into the shop, and I found this really cute leather jacket. And I said, “I really want this leather jacket, and I know I can have it now because I have plenty of money.” And I said, “Michael, I want to get this leather jacket.” And he looks in his wallet, and he didn’t have enough cash, and some problem, they weren’t taking credit cards. And I turned to the sales lady and I said, “This is something I’ve wanted to say all my life.” And then I turned to Michael and said, “Michael, you go to the bank and get more money. I’m going to stay here and continue shopping.”

Michael Houlihan:         Yes hunny. Well the other thing is it enabled us to do something that we’ve been told to do for a long, long time by our employees, by our vendors, by our buyers, and that is to write a book on our philosophy of doing business.

John Warrillow:             Yeah, tell me about the book, I want to get into it. What’s the book about, what’s it called, first of all?

Michael Houlihan:         Okay, it’s called “Barefoot Spirit.” That’s like the entrepreneurial spirit, or in our case it’s the spirit behind the brand of Barefoot.

Bonnie Harvey:             The full title is “The Barefoot Spirit: How Hardship, Hustle and Heart build America’s Number One Wine Brand.”

John Warrillow:             Nice. Okay, and available bookstores, Amazon.

Michael Houlihan:         Yeah it’s available all over the place. We wrote the book and then we looked at it and it looked like so many business books that were prescriptive, here are the three things you have got to do, the five things to never do, the twenty-eight things the customer wants from you. And we said, “No, no this is no fun.”

Bonnie Harvey:             So we through it right in the garbage.

Michael Houlihan:         Took a whole book and through it right in the garbage, right?

Bonnie Harvey:             Never published that one. And then we got Rick Kushman, who was a wine writer for The Sacramento Bee, and I read one of the books he had written, he had a wonderful sense of humor, I grabbed his articles before, he was talking to the everyday person on the street, he didn’t try to complicate wine, he made it easy to understand. And I said, “Well that’s the way we presented our brand!” And that’s how we wanted to present our story. And he used a lot of humor. So the book has stories that we experienced, that we’ve given to Rick over a period of a year, he would come from Sacramento to visit us and he’d spend a couple days with us and we’d tell him the stories for the book during the day and he’d take notes and write on his computer and carry on and then at night we’d have dinner and a bottle or two of wine, and we’d tell him the stories that don’t go in the book. So he got the full picture of our experience in building the brand, and he created a wonderful, wonderful story, very entertaining, and it became a New York Times Bestseller.

John Warrillow:             And I understand there is kind of a new audio version, talk a little bit about that if you would.

Michael Houlihan:         So you write a book like that, then you go on a book tour, and then you start speaking, we’re speaking all of the world, we speak at sixty scholars that teach entrepreneurship about a lot of the same things that you’re into. Like, why are you in business, where are you going, what are your plans, that thing. And we started to notice just like you right now that the audience was coming in wearing earbuds, right? This was about three, four years ago. And so we started asking, “Well what are you listening to? Is it Hip-Hop, is it rap?” And they said, “No, I’m listening to War and Peace,” and another guy says, “No, I’m listening to a podcast.” And we said, “Well that’s interesting.”

Michael Houlihan:         So we started to look at it and we saw that the podcast thing had really blown up, that people were really downloading these podcasts and they were just growing like crazy. And as a result, so were audiobooks. And it was because a podcast and an audiobook doesn’t immobilize your mobile device. So you can be jogging or driving or doing something else multitasking, and you can be being educated at the same time.

Bonnie Harvey:             We wanted to get our message out to the greatest number of people. Because we learned so much the hard way, it is very painful emotionally, financially, time consuming, and in order to do that, we wanted to open it up to another audience. So that’s why we took “The Barefoot Spirit” and created the audio book.

Michael Houlihan:         Then we bought a bunch of audio books and we listened to them. And what they all had in common was they were all being read to us by a narrator. So if you didn’t like the narrator, you were stuck with them for seven hours.

Bonnie Harvey:             Or not.

Michael Houlihan:         Or not. So what we did was say, “Okay, what’s the next step in audio?” And we decided it was business audio theater. So we created a whole new idea of using actors and music and sound effects to actually perform the book for you instead of read it to you. And then as a result of listening to the performance, you can pick up on these elements, some of which we’ve touched on today by seeing real life scenes and you’re right there. It’s happening inside your head in the theater of your mind, right? So we’re really excited about that.

John Warrillow:             And that’s live now, right? You can go to Audible.com.

Michael Houlihan:         It’s live now, you can get it on Amazon, you can get it anywhere.

Bonnie Harvey:             Audible.

Michael Houlihan:         Yeah, Audible, iTunes, Google, it’s all over the place.

Bonnie Harvey:             You can also get it on our site. Which is www.barefootaudiobook.com.

Michael Houlihan:         And there’s free samples there you can listen to. As a matter of fact you can listen to an entire free chapter.

John Warrillow:             Fantastic. Well, I’m going to have to do that. Michael and Bonnie, where’s the best place, the website is helpful, people will go there, grab the audio book or the book itself, “The Barefoot Spirit”, bookstores, Amazon. If people want to reach out to you personally, do you guys do LinkedIn.

Michael Houlihan:         Oh yeah, we’re all over the place.

John Warrillow:             What’s the best way for people to reach out?

Michael Houlihan:         They should just go to our website that has all the social on it. And the website is The Barefoot Spirit, just like the name of the book. Thebarefootspirit.com.

John Warrillow:             Michael, Bonnie, it was a tremendous pleasure to hear the story. I got to go listen to the audio book now because you guys are a real joy to be with, and I’m sure the book is just as good. So, thank you for doing this!

Michael Houlihan:         Thank you!

Bonnie Harvey:             Thank you! This has been fun John.