Wine InStyle case - what to do?

With Wine InStyle, Robert Eberhart made use of a regulation change in Japan to build a promising wine business. His outsider status posed challenges (such as the near-impossibility of obtaining a wholesale license as a foreigner), but starting his business in Japan also offered considerable advantages (such a favorable tax environment and discounted space for his new venture). Leveraging those - and a partnership with Dick Maher to break into the California Wine Industry - brought Wine InStyle impressive sales growth (from $0.1M USD in 1999 to $4.1M USD in 2007), which still continues strong.

Now, Eberhart is at a decision point. He wants to spend more time in Palo Alto and give up day-to-day financial oversight of a Japan-based company. Wine InStyle is also facing a major cash crunch as it tries to support rapid growth. A potential solution to both of these problems has appeared in the form of a Japanese investor group offering a cash infusion in exchange for controlling interest in the company. Should Eberhart take the deal?

Points in favor:

• It offers a quick solution to cash issues
• It offers a liquidity event for Eberhart and other early investors
• It (likely) will make Eberhart free to spend more time in Palo Alto
• It could look like a vote of confidence in the new Japanese CEO (Khoo)

Points against:

• It may be possible to resolve cash issues without giving up control, by cutting costs
• It's unclear whether proper financial oversight will be exercised if Eberhart leaves
• It's possible the bidding group is a disguised rival or ill-wisher, bent on destroying Wine InStyle (and/or lacking the promised cash)

The last point against could be mitigated by notarized investor certification, and Eberhart absolutely should not agree to the deal without certification. Beyond that, the right decision depends on Eberhart's personal priorities. If family is his current priority, he should sell controlling interest as long as the investors reveal their identities and have the promised cash. If he's still deeply emotionally attached to his company and its future, he should sell only if meeting the investor group convinces him that they will exert their control responsibly. If he's not convinced, he should retain the company and look at alternatives to reduce his involvement (e.g., hiring a financial manager) and alleviate cash flow problems (e.g., aggressive cost-cutting or selling a non-controlling stake).

WineInStyle - Case Discussion

When faced with the mystery buyers as laid out in the end of the case, Eberhart has a tough decision to make. I think that the whole decision really boils down to the results of the investor certification. If it is that the buyers are legitimate and have the time and resources to give the company the attention that it needs - continuing its pursuit of efficient operations and overcoming recent struggles to handle larger account - than yes indeed he should sell. He has already transitioned away from being CEO in order to spend more time with his family in California, and this decision would strengthen that initiative. Also, as mentioned in the case, this would be a strong sign of support for the new CEO and his vision to continue the companies growth. The potential downside is if the buyers turn out to be a bad fit - which given the specificity of the business, is a real possibility. Given the shady business practices laid out in the case about threats and pranks in Japanese business, there is a chance that this offer is a fake and could somehow lead to the downfall of the company. Either by a competitor posing as a buyer in order to tank the business or by learning important details in diligence and using them to their advantage. Additionally on the side of not selling is the recent growth shown by the company and what it signals for the future. Khoo has only been CEO for about 2 years, which is not a long amount of time to give him to demonstrate his ability to overcome hurdles and grow the business under current board leadership. A change in majority stake might also come with a change of CEO or direction for the company. I would say overall that they should sell, pending the results of the investor certification come up without any major red flags.