Transcript
Intro
Stephan Shipe: Welcome back to the Scholar Wealth Podcast. This week we begin with a listener considering selling his business who heard our earnout question a few weeks back and realized how much he didn’t know. We walk through the parts of the deal beyond the earnout that move beyond the number the seller is actually keeping. Next, parents who have the cash to help their son and daughter-in-law buy their first home with a family loan below market rate ask about what the IRS actually allows, and how to keep the arrangement from turning into a family problem. Finally, in our From the Field segment, we’re joined by Maureen Downey, founder of Chai Consulting and the foremost independent expert on counterfeit wine, to talk about how authentication works, why an estimated 20% of fine wine in the market is counterfeit, and what serious collectors should be doing before adding to their cellar. So let’s go ahead and start with question one, our business owner today.
Question 1 – What Else Should a Business Owner Learn About Deal Structure Before Selling?
Stephan Shipe: As a business owner: your answer a few weeks ago regarding an earnout structure gave me pause. It made me realize there’s a lot I should learn about structuring these deals before I’m in that situation. What other structures and potential pitfalls should I educate myself on?
So, great question, really good episode. I think we could talk multiple times about how many different idiosyncrasies there are when it comes to deal structure and cash flow and what the whole process looks like. So hopefully I can answer a few of your questions. I think process is the big one.
Before we get into what the pitfalls look like — before you even get to the pitfalls, the first pitfall I would go into would be this idea that you don’t know what the process looks like. You’re going to have one business that you’re going to sell. You’re likely dealing with, especially if you’re dealing with private equity or some of these other buyers who are buying businesses regularly — you already are at a disadvantage. You’re walking into a meeting and you’ve never done this before. And the other person negotiating against you on the other side of the table does this every single day. You stand no chance.
So the first thing you want to deal with is, before anything’s signed, or even before you’re even having conversations, I highly recommend having an attorney with you, or at least to start talking about this. Because what you don’t want to do is say the wrong things early. And all the conversations are always happy conversations, in the sense that, especially early on, everyone’s excited. They want to hear more about your business, and they’ll talk up your ego. So you’re just all excited about how great your business is. And the problem with that is it’s very common for you to give away too much information, and for them to play kind of the good cop, bad cop scenario on you, where now you’re talking about all the great things about your business, you’re talking about where some issues are, and they’re just taking notes for all of this. So now when they go back and they’re trying to structure their deal, they’re trying to reduce their risk.
That’s not to mean that all private equity, or all types of venture capital or any of this, is malicious. It’s their job, right? Their job is to reduce the risk for their investors. And if they are their own investor, then they’re reducing the risk for them. How do you reduce risk? Information. So the more information they can get from you up front, the more they’re able to reduce the risk in their favor. That doesn’t help you necessarily reduce your risk. And I’m not advocating for you to go out and lie, or hold back information. I’m just saying that there is a time and a place for certain information to be released to whoever you’re doing business with.
I see this a lot with somebody who comes in and says, I have someone who’s interested in buying my business. They took me out to lunch. We had a great lunch, these great conversations. And then they never went through with the deal. And now they’re competing against the same person who just opens up the business next door. So you have to be careful. This is where NDAs start to become important. You’re never talking about the specifics of your financials until there’s an NDA, until a lawyer’s involved. You’re not getting into the details of a lot of where your best clients are, who your best customers are, where you earn your most revenue, what are the biggest challenges. Those are all — you’re writing the business plan for them to compete against you. And that is not what you’re getting paid for. You’re not getting paid anything at that point.
So first thing is being aware of the situation you’re in, which is a precarious situation. You’re in a situation where you are immediately, as soon as you show up to lunch, for coffee, whatever it is, you are at a disadvantage, because you’re negotiating and talking to somebody who has a much better picture of what the whole playing field looks like than you do.
So once you’ve gone through that, the next part that throws people off, before we even get into structure, is how much time is going to be involved in this. And it’s not only smaller businesses, it’s large businesses. We even see this in publicly traded companies. You’ll see that one of the issues of raising capital is that time is being spent raising capital and not spent on the actual growing of the business. It’s a huge risk. So you’re going to spend time pulling together financial statements. What’ll happen is they’re going to provide you with a list of needs. It’ll be a long list of, I need this, I need five years of P&L, I need your balance sheet, I need a full cap table, I need to have an org chart set up, I need to have all this. And it’s going to be a long list of things. There’s no requirement that you have to fill out all of that.
So this is post-LOI — or not post-LOI, post-NDA. Now they’re starting to get some information so they can determine whether they’d like to make you an offer. And that would come as a letter of intent, or an LOI. When you get that list, be careful there too of how much you’re going to provide. You still may want to hold back customer lists. You still may want to hold back some information. You can be vague in certain areas, especially when it’s that first initial document request. Keep that document request vague. There’s not a need for you to give everything away right now. If they’re going to go through with the deal, then sure. But it’s common to misinterpret how serious somebody is about buying your business. And a lot of these deals are not going to go through. It’s hard to get a deal all the way across the finish line.
So you’re still early in the process. But what I typically see is somebody says, Stephan, they want all this data, they must be really serious. And my question always back is, how much time are they putting into this? Because while it seems like a lot, remember, they do this all the time. You’re just doing this today. So they’re just giving you a form sheet that says, here’s all the data we need. They have five minutes into this whole thing. And you’re about to spend weeks collecting data, talking to your CPA, pulling up books, getting everything ready, providing all of these notes to financial statements to present to them. Then they can look at it and determine whether or not they want to provide an offer. So they have nothing in there.
What they’re hoping is you’re getting tied up in this, and now you’re getting emotional about it. You’re talking about this to your family and friends. You’re excited about the opportunity to sell your business, for you to exit. It’s like a lottery ticket sitting out there that’s going on in the back of your head, saying this could happen. So we have to fight those emotions and realize, probably not going to happen. I don’t need to give all my business secrets away to this person. Give them enough to see if they’re even interested in talking further. And you know what? If they need more information later, happy to give them that information later. But for right now, this is all we need.
So now we get into the actual deal structure component of it. And the ones that I see commonly show up are issues related to the balance sheet and the structure of the deal. One of the greatest things about any type of private transaction is the structure can be very, very variable. It can be custom to what you’re looking for, and what the buyer is looking for as well. What you want to be careful of are little things that don’t seem like a big deal, but end up being a pretty big factor later on. One of them, as you’re talking about, is that earnout discussion that we had a few weeks ago, when we were talking about how little, or how few of the times that earnout is actually paid out, which is horrible. So it’s easy to say, well, you’re going to have this earnout, and this is — we plan to exit in seven years, and all of this. And they give all these promises, and then nothing ever materializes.
The part that’s missing from that is, not only may it not materialize, but you’re no longer steering the ship. So somebody else is running your business. And I’d argue, if you’re coming to sell it, probably there’s nobody better to run your business than you. So somebody coming in to run your business is likely going to make some mistakes. It’s going to take them a little while to get ramped up. It’s going to have all these issues. And they might be making decisions that are not conducive to you having that earnout. They may focus on overall growth. Your earnout may have been based on revenue. They may be focused on cost cutting and not growing the company. If that’s the case, then your growth projections for the earnout may not work out as well, if they’re out there cutting staff, cutting supplies, and trying to make the profitability higher.
And that’s a common issue, that dynamic, that tension between growth and profitability that happens with every business. But we see this here because the switch flips. And you say, well, I’ve been growing the business, everything’s been going great. And they say, that’s great. I love all the growth that you have. They take over the company, shut the switch off on the growth, and then just cut a bunch of the cost and pull the cash out of the business. That works great for them. It reduces their risk, because they’d much rather pull cash out early to pay themselves back and then say, you know what, we got all of our money back, we’ve already broke even, we’ve even pulled out a little bit of a profit. Now let’s see if you can grow the business. Well, that may not fit the timeline that your earnout was set up as. So we want to be careful about any of that. And that rollover equity falls into that category as well, of you still being tied to somebody else’s wagon and having no control over what’s actually going on.
The last one I would throw at you is more of the emotional side of this. A lot of people underestimate how hard it’s going to be for them to sit in the backseat while somebody else is driving the bus that they built. And it’s not necessarily the difficulty of someone else driving it. And some people look at that and say it’s a control issue, they want to be in control. It’s not the issue. A lot of times when I’m talking to business owners, their issue is the other people that are sitting on the bus. It’s the people they hired, it’s their team, it’s the families they know. And now they’re handing over the keys to the bus. And everybody that’s always relied on them is now relying on them to have made a decision to let somebody else drive. And if that person doesn’t have the best interest of the team in mind, or starts doing a lot of these cost cuttings or changing things around, then they feel like they let their team down. That is by far the one thing that never shows up in any Excel spreadsheet, that always shows up when I’m in meetings with business owners talking about these types of dynamics and shifts.
Question 2 – Family Loans for a First Home: How Low Can the Rate Go Before the IRS Calls It a Gift?
Stephan Shipe: My son and his wife are trying to buy their first home in an expensive market, and current mortgage rates are rough. My wife and I have enough cash to help, and we’re thinking about doing a family loan at a rate below what the bank would give them. How low can we go before the IRS starts counting it as a gift? Any other options we should consider for this?
So fortunately, the IRS is very aware that this could be an issue. And not necessarily an issue as in this is going to be a problem. It’s an issue as in, of course, somebody may want to give a loan to somebody and not charge them a high rate, and they want to charge them a lower rate. So fortunately, the IRS does post AFRs, or applicable federal rates, which is essentially the lowest rate you can have that the IRS would accept as not too low to deem it a gift. In other words, if I said, I’m going to loan you money and I want to help you out, and I’m going to loan you at — the AFR right now is somewhere around 4%, depending on the length of time. They break it down based on, if it’s under three years, it’d be a short-term loan, which may be around like four, four point one percent. And then a long-term loan, which would be over nine years, which is where you would be, probably closer to five percent.
So they say that’s the minimum that you can do. And I go out and say, you know, I really want to help you out. And instead of giving you a loan at five percent for your mortgage, I want to give you a loan at 2% for your mortgage. You say, that’s great, Stephan, you just made my day. The only problem is the IRS looks at that and says, that’s a little too low, that now you’re giving a gift. So let’s quantify how much of a gift I just gave you. So if it ends up being — and I’m going to simplify things more simple than they are — let’s say it’s a million dollar loan that I’ve just given you, and I gave you a three percent break every single year on that. Now that’s thirty thousand dollars that I’ve given you as a gift.
Now there’s a lot more complexity to that, in the forms that get filled out with the imputed interest and gifts and everything else. But that’s the idea. The IRS wants to set a standard that says, this is the number. And if you’re above that, fine. If you’re below that, at least we have a number to compare to, to say this is what’s fair, and you’re below it. So that gap between the two, that delta, is what we’ll treat as a gift.
So that is possible. So if you’re looking for different layers of this, I would say the first layer is, you could open the mortgage — or have the mortgage, and they could borrow that money from you, and you could take the AFR. You’re in the good graces of the IRS, everything’s fine. It’s still a lower rate than what a bank will charge in most cases. So everything’s good. They’re happy, you’re happy, IRS is happy. If you go below that and say, you know, it’d be really nice, we really want to kind of jumpstart their finances, so instead of giving them a loan at five, we’re going to give them a loan at like 2% — and if you do that, then you would just account for the gifting that you’re doing, and you’re essentially gifting them a lower interest rate every year. So that would be fine.
The other option is you could go and just gift them money every year to put down toward a loan, which would essentially be, if you think about it, a similar idea. If they have no problem going to get a loan, then it may make sense for them to go get the mortgage, and you to gift to them the gift limit, which this year is nineteen thousand dollars. So if you’re gifting to both of them, that’s thirty-eight thousand dollars. For both of you, if you’re a married couple, now you’re looking at $76,000 for this every single year. That’s a heck of a lot of interest that you’re paying right there in that gift, that is larger than you actually holding the mortgage. So that makes things real simple. Now you’re allowing them to go get a mortgage, you’re allowing them to build some credit, you’re allowing them to have that financial responsibility, but your gift is being used to make that a little easier, and takes a lot of the complexity out of you now having to have a mortgage with your kids, and having it be structured as a mortgage.
Because you’re going to want to structure it as a real loan. You’re going to need amortization tables. You’re going to make sure everything’s there. Maybe that’s your thing, and you want to have an awesome Excel spreadsheet that tracks principal and interest, and it wouldn’t be too difficult to set up. And every month they send you a check, and you put all that in there, and then you have to have some escrow concerns for taxes and insurance. So you are adding a lot of complexity. And if really all you’re saving them is a percent or two in interest — which is not to say that’s small, but that’s probably going to be under the gift limit anyways. And it’s probably going to be easier to say, you know what, you go get yourself a mortgage, and we’ll just gift you an amount every year that we find is the same as a reduction in interest rate from a mortgage, to help you out. That makes things a lot easier.
And you can even kind of throw some gasoline on that fire a little bit, if you wanted to gift them earlier to help them with the down payment. So that may put you over the gift limit for the year. That’s not to say — and I know we’ve covered this in past episodes before, be very careful — when I’m talking about this gift limit of being $19,000 a year per person per donor, that is assuming that you are going to go over the estate limit of, right now, $30 million for a married couple. If that’s not the case — you say, well, that’s not going to be the case, our estate’s probably going to be 10 to 15 million or something like that — then in that world, you could gift higher than the gift limit. All that’ll happen is that $30 million limit that you have gets reduced by $200 or $300,000, whatever the down payment is.
So I think you have a lot of options there. I would just take a step back before you go and add a bunch of complexity, not only to your finances, but to the family dynamic of having a mortgage, and say, do I really need to hold the mortgage for them? Or could they go out and get their own mortgage, and then we could gift to them to help supplement that and make it a little easier? And I’ll leave you at this one. If for some reason you say, they can’t go get a mortgage because they don’t have the finances to be able to go get a mortgage — then I would seriously consider whether or not you, if a bank said no, there’s no way we’d give those people a mortgage — why in the world would you say, you know what’s a great idea, I want to be the one to give that person a mortgage, regardless of if they’re family or not. So keep that in mind as you’re making that decision.
From the Field – Counterfeit Wine, Authentication, and What Collectors Should Do Before They Buy
In our From the Field segment, we’re joined by Maureen Downey, founder of Chai Consulting and the foremost independent expert on counterfeit wine. With over 20 years of experience, Maureen has compiled the largest database of counterfeit wine in the world, has advised the FBI and U.S. Department of Justice on high-profile cases, and developed the Chai Method, a proprietary authentication process. Maureen manages some of the world’s largest private wine collections and offers services spanning collection management, appraisals, and expert witness work.
Stephan Shipe: Maureen, welcome to the Scholar Wealth Podcast. To start, can you share with us a little bit about your background, and what got you into this world of wine authentication?
Maureen Downey: Sure. Thanks for having me. It’s — I did not come about this the regular way. It’s really interesting, because most people in the wine industry basically fell into the wine industry because they either failed out of other industries, or they chose to follow their passion. I actually started studying wine as a freshman in college. So by the time I was out of college, I already knew that this was something that I wanted to do. But in 2000, I got out of — I was in New York City. The Court of Master Sommeliers had moved me to New York after taking the advanced master sommelier exam at the age of twenty-three. And I was there for a few years, and I managed some of the best restaurants in the world. I’m really proud of that. But that’s not what I really went there to do.
So I started working in wine auctions, and it was a really nascent industry. And the fun thing about that is you get these boxes of wine, and you put all this wine up on tables. So it’s kind of going back to the old Sesame Street thing of, one of these kids is doing their own thing — where you start noticing patterns of, well, wait a minute, those three all look alike, that one looks a little different. And I just kind of started finding these wines that didn’t fit. So I asked my boss, and he was like, yeah, there’s counterfeit wine. And my mind was totally blown. I was like, no way, come on, that’s crazy. But I didn’t really have anybody to teach me about it. So I had to go about finding experts in other fields that I could apply, like experts in paper and experts in glass, and really learning a lot about the history of production and of different producers. But again, working in wine auctions, I was seeing so many bottles all the time that it just kind of became a thing. And I guess I like puzzles. I got a little bit of OCD and a little bit of a photographic memory. So those things kind of came together as the perfect storm for me to do this.
How Wine Authentication Actually Works
Stephan Shipe: What does that entail, when you authenticate a bottle of wine or a case of wine? Because you’ve advised for the FBI, right, and federal cases on this. What does that process look like? And why is the FBI bringing you in? Give us some examples of why that’s the case.
Maureen Downey: Well, so I started training and then working with the FBI in 2008. So that’s been quite a long run. When you authenticate a bottle of wine, it’s not totally dissimilar to authenticating, say, a piece of art, or a piece of anything physical. The difference with wine is, and what should scare people, is that it’s a consumable product. So there should be inherently more risk involved with buying a counterfeit bottle of wine, because you don’t know what the hell’s in it. But we can’t open the wine. You can’t taste the wine. People cannot taste for authenticity. If people could taste for authenticity, this wouldn’t be a multi-billion dollar a year industry.
So you have to look at it really with all the different parts, and really just kind of forensically go through it. And you look at the glass and the paper and the glue, and how the ink was applied to the paper. Is the ink the correct type and color, and is the application the correct method? Was it plate-pressed or digitally printed, or printed on a home inkjet or laserjet? And then you have to make sure the glass is appropriate for age and appropriate for the producer. But then there’s also some forensic stuff that we look at. I mean, we use a lot of magnification, we use a lot of special lighting. There have been changes to the composition of, say, paper or glue throughout the ages — or not just the ages, but even the use of glue. In olden times, they used milk to affix labels to bottles.
But one example that I like to give is that in the 50s, there was a chemical compound called optical brightener that was patented. And optical brightener is now used in almost everything. That optical brightener is why, when you go to the club and you’re under the UV lights, you shine. And it’s now used in all sorts of textiles. It’s used in clothing and paper and glue and all sorts of things, and it does react to a UV light. So if you’ve got a bottle that’s supposed to be from the 20s and the paper reacts to the UV light, you know you got a problem, because that paper is definitely not age-appropriate. So it’s a process. A lot of times it’s really weird, where you just kind of look at the bottle for a little while and let it talk to you, like you would a fine piece of art. But it does take skill and time and a lot of education in the background.
Stephan Shipe: So how much of that is seeing a bottle that is real and comparing that? Or is it more of what you’re talking about, of just the historical evidence around the bottle itself, right? If I have a bottle — how are you able to go in on a 1920s bottle of wine? Do you have to have one that has been authenticated and then compare it? Or is it a matter of, no, I can look at the glue, the type of paper that’s being used, the bottle, and be able to pull conclusions from that?
Maureen Downey: Fortunately, I’ve been doing this long enough that I have a massive database. It’s actually many terabytes. And so for most known fine and rare wines, I do have exemplars. Either they are other counterfeits, or — you know, I’ve seen a lot of bottles, basically. And we photograph all of them. And I’ve come up with certain protocols for how everything myself or anybody on my team sees, so that we have the same exact standard to look at every time. But using those standards, we can then take a bottle that we’ve never seen and apply the same knowledge, history, and logic to it.
So a lot of it is logic. Does it make sense? You know, here’s one — if you see a 25-year-old face on a 60-year-old body, does that make sense, or do you think some work’s been done? Guess a little work’s been done, right? So the same thing can happen with a bottle of wine, where you’ve got this really tattered and old-looking label, but a pristine capsule and a high fill. And at that point you go, okay, well, that’s a 65-year-old body with a 25-year-old face. Something might not be copacetic there, because the whole thing should have aged together. So that might be a refill, or it could just be a bad counterfeiter who didn’t — usually they age the parts separately and then put them together. But that’s kind of the old way of making counterfeits. We’ve moved into a new era.
But it is a combination of both things. It’s having seen things before, recognizing what doesn’t make sense, and applying a lot of logic. If you’ve got a pristine label and a low fill in a bottle, and a capsule that looks like hell, but there’s no seepage on the labels — does that really make sense? The condition — if that bottle had been laying in one place where the condition would have allowed seepage and for the capsule to get corroded, why is the label pristine? So it’s a combo of all those things.
Stephan Shipe: You mentioned it could be a refill, but then you’re saying that it’s impossible to taste authenticity. How do you judge authenticity then of the actual wine, or liquid, inside?
Maureen Downey: There are very expensive ways to do that. But if you have a bottle of wine, even if it’s some super expensive ten thousand dollar bottle of wine, are you going to spend twenty thousand dollars or more to fly it back to France to go to the University of Bordeaux to have it — and buy another bottle to test against it? That just doesn’t make sense, right? So there’s really no way. And trust me, I get contacted about five times a year with somebody who has the new solution of some radioisotope ability to authenticate the bottle. Unless you have an exemplar — and even at that, take like 1945 Mouton, for example. There were several bottlings of that wine. So if you test it chemically perfectly against another one, maybe you’ve got a different bottling. That doesn’t necessarily mean it’s counterfeit.
So you really can’t test. Now, like, here’s a counterfeit bottle from a counterfeiter named Aleksandr Lugov. And The Economist is going to come out with a big story about him soon. This bottle looks great to the eye, but it was not produced to the same specifications as the real thing, and it tasted like absolute crap. So he wasn’t trying to make his counterfeits taste good. He didn’t care.
The Easy Tells — and the Hardest Fakes to Spot
Stephan Shipe: What’s one of the first tells? If you think of bad counterfeiting to good counterfeiting from a quality perspective — if I’m out and buying a bottle of wine at auction or somewhere along those lines, what are easy ones where you could look at, spotted a mile away, and say that’s a problem?
Maureen Downey: The inconsistencies. If you’ve got a really bad label and a brand new pristine capsule, or if the capsule is too new for the age. There was — it was funny — there was an auction house called Baghera. The very first lot of their very first auction, the very first photograph of that very first lot had a bottle in it that was supposed to be a 1978 Romanée-Conti, but the glass is glass that they only made in a different year, and they made it one year. And I could just look at that and be like, no way. So there are some things like that that jump out at you, if the glass is the wrong color. But it really is just consistency. Do the pieces fit together? Is it logical? Does it fit the story? Those are the ones that are, to me, the most obvious.
Stephan Shipe: And what’s the hardest to spot? What’s the best counterfeit you’ve seen, and what was it that gave it away, that one?
Maureen Downey: This guy. Not this particular bottle. So in the wake — Rudy Kurniawan and Hardy Rodenstock were really famous counterfeiters. And they made old and rare wine. And that’s difficult, because you have to get period-correct glass, because the production of glass has changed over time. And they had to age their labels, and they had to age the capsules, and they had to get corks and make them look older. That’s a lot harder than what they’re doing today. Because in the wake of those counterfeits, a lot of the producers switched away from classic methods of production like plate press printing, which is very difficult and expensive, and they adopted cosmetic solutions, which include invisible ink and holograms and things like that, that are produced on these professional digital printers.
Well, this guy was able to go out twice, because he got arrested. He’s been arrested twice now. So in the first round, they got a digital printer. They spent about half a million dollars to get a great digital printer. And they go to a glass producer and they get the glass made, and it’s got all the right markings, and it’s got all the right embossment, and it looks just like the same thing that a producer would have. And so they get all the pieces made professionally, and they can digitally recreate all of that anti-fraud right on the label, or the capsule.
The problem is that these cosmetic solutions are very easily replicable. Expensive, but easy. Because when you’re talking about $20,000 bottles, a $500,000 investment is not big. So organized crime has gotten into this, because they can sell twenty thousand dollar bottles. If they get caught, nobody really cares. And even if they do get caught, maybe one guy goes to jail for a year. Maybe. Lugov got a €120,000 fine for making $20,000 bottles. That’s a day’s work, right? So the issue that we have now is that the counterfeits — because the producers have adopted these cosmetic solutions, all the counterfeiters have to do is spend more money up front, and/or get funded. And they can create counterfeits to almost the same level. So now we have to be very careful. And then the other thing that I was going to say — producers are so secretive about the anti-fraud measures that they do put on the labels, that most even reputable vendors don’t know what to look for. They just see there’s invisible ink, it must be right. So it’s not making the fine and rare wine market safer.
Stephan Shipe: Yeah. And so, going back to that story and this example that you have with you, how was it determined that it was counterfeit? What was the final determination?
Maureen Downey: Just a little bit different. The paper was just a little bit different quality. The print is just a little bit different. The anti-fraud is just a little bit different. Now, on these ones, we happen to know, because my real job is that I manage private wine collections. And I do happen to manage some of the largest wine collections in the world. So we have a plethora of producer-direct examples that we get to photograph and observe and take all our notes on. But it really does take a trained eye to know the difference between these new counterfeits and the real thing.
How Widespread the Problem Actually Is
Stephan Shipe: And how prominent is this issue? Like, should I be worried if I go out today and try to go add to my wine collection and go buy a five thousand dollar bottle of wine?
Maureen Downey: Yeah, unfortunately. About twenty percent of all wine is counterfeit. And it’s not all on the very high end. I mean, think about somebody who counterfeits currency. You can either make a lot of ones, or a couple of hundreds, right? There’s been counterfeit Yellow Tail in the UK for a long time. And I contend that somebody that goes to a pub and drinks a glass of Yellow Tail every day is in a better position to be able to taste for authenticity. Because if you drink Coca-Cola every day and somebody gives you a Pepsi, you’re going to know the difference, right? Whereas how often are you really drinking a five, $10,000, $15,000 bottle of wine? And there is bottle variation, and that’s what a lot of the counterfeiters rely on. They rely on a collector tasting a bottle and being like, this must be an off bottle.
So it is cause for concern. And I don’t know why it’s not a bigger story, especially because wine is a consumable product. But I think that the producers don’t want to — even when we do get guys like Aleksandr Lugov, who, again, he was arrested, he was tried, he was found guilty, he was sentenced to time served, he was given a fine, and then he went directly back in and started round two and made better wine. And then he and six other guys were arrested two and a half years ago now, for the second time. And he’s out again. He’s just hanging out in Paris. So it’s unfortunately a crime that’s been around forever. Pliny the Elder wrote about it in 70 AD. And as long as these bottles are expensive, people are going to figure out how to either counterfeit them or refill them.
Refilling is also a really big thing. There was a big crime ring that was broken up in Europe where they were paying busmen and servers and stuff at hotels, casinos, fine dining restaurants, to keep the expensive bottles of wine, and they were all collected and refilled, and they were sold in online auctions in the US and Europe. So it happens.
Stephan Shipe: And are there certain bottles that are counterfeit more often?
Maureen Downey: The answer to that is yes. I mean, some bottles are going to be worth twenty to thirty thousand dollars immediately on release. So those are kind of the low-hanging fruit, unfortunately, for somebody who’s got a lot of money to invest in creating the counterfeits. But that said, because a lot of attention has been paid to those bottles, I think the scope is widening. That’s what we’ve noticed. And when I say we, I’ve trained a lot of people in authentication, and we have an international network of these people that are certified in my method. And we have noticed that it’s not just the highest end of Burgundy now. We’re seeing more Italians in the $40 range that are counterfeited.
But there’s also supermarket wine, especially in Europe, that is just massively counterfeited. And that doesn’t mean it’s not drinkable. It just means you’re getting — if you buy a Châteauneuf-du-Pape, you’re not really getting a Châteauneuf-du-Pape, you’re getting a Côtes du Rhône. Or you’re not really getting a Pomerol, you’re getting a Bordeaux AOC. But they change the label and make it a better wine for more.
What Collectors Should Actually Do
Stephan Shipe: So what would be the advice then to me, if I was asking you — I said, Maureen, I’m going to start building a wine collection. I’ve listened to this episode, and now I don’t want to add anything to my wine collection, because I think that every five bottles, I’m getting one that’s going to be counterfeit. Do I just need to accept the fact that one of these is going to be counterfeit, and the wine collection I’m building is twenty percent counterfeit? Or what’s the solution then? What do I need to do?
Maureen Downey: So if you’re buying five thousand dollar bottles of wine and one out of every five is going to be counterfeit, doesn’t it make a lot more sense to hire an expert who’s going to be able to help you vet that, for a lot less? Yeah.
Stephan Shipe: That’s exactly what I’m wondering. What is that breakeven that you find that says, at above this level, the odds of being counterfeit is higher and you need to bring somebody in?
Maureen Downey: Well, so — yeah, that’s the problem. It’s not always a monetary number. And everybody wants the — everybody’s like, how much wine out there is counterfeit, what’s the number? If we knew that, we would have solved the issue, right? It does make sense to hire somebody who knows what they’re doing. Again, at Chai Consulting — which is C-H-A-I, chai is French for cellar — at ChaiConsulting.com, we’ve got a team. We are all over the globe, and we are there to help.
One of the things that I really, really like to tell people is that before you buy, let us inspect. Because a pre-purchase inspection is really not that expensive. And it’s better to avoid a problem. Because once you’ve bought it, you’ve got a problem, now you’ve got to deal with it. Now you’ve got to get a lawyer, and a lot of times we can usually go back to a lot of vendors and say, hey, this is an issue. But the vendors don’t want to admit that it’s a problem. Most vendors don’t do the due diligence, because for them it’s easier to ask for forgiveness than permission. So they just don’t do it, they go, oops, sorry, we didn’t know. And even though — when you’re buying at retail, the vendor is, in the United States, responsible to give you what you purchased. At auction, you have a buyer-beware situation.
But in either event, only buy from trusted sources that don’t have a history of selling counterfeits. If a deal is too good to be true, it is. If somebody is selling you a Ferrari for $10,000, are you going to look under the hood first? Because you should. Is there an engine? If there’s an engine, is it a Honda engine? Like, what are you getting? For some reason, people have just not been willing to ask these questions about wine. And that’s why my clients hire me. All of their wine offers come in to me first. And I push back, and I ask the questions. And I go, that’s a really rare bottle, where did the guy get it? And you’d be amazed how many of these offers fall apart after like two smart questions. Okay, great, where did he get it? Can I see a receipt? Can I see a credit card statement that he purchased it? That’s enough. We’ve decided not to represent that bottle anymore. Really? Okay. So you wanted my client to buy a $90,000 large format bottle, but I’ve asked you two questions and now you’re not going to represent the bottle anymore? I just think that people need to be aware, they need to be diligent, and they need to not be afraid to ask questions.
Stephan Shipe: And what does that normally cost, or a rough range for somebody listening, if they’re looking at — and I know you have, there’s obviously a network of people doing this, and different specialties and everything. But just some ballpark estimates of that. Does it vary based on the value of the wine, or specialty? Okay. All right. So there’s not a —
Maureen Downey: No, no, no. So that’s one thing that’s very — that’s something that’s very strange about my — I got into this business, and I left auctions in 2005 to go to work on behalf of the collector. I was frustrated working for auction houses. I recognized that a lot of these people, they’re captains of their own industries, and they just needed a little bit of qualified advice. I mean, I don’t do my own taxes, right? So I got somebody who’s an expert in that to do that for me. And these guys should have an expert in the field that I’m an expert in to do this for them, so that they don’t get defrauded.
So one of the things that makes us different — when we do pre-purchase vetting, we don’t get in the middle of that sale. So if you have an offer for a thousand dollar bottle and I take that to the client, the client’s going to buy it directly from the vendor. So they know for sure that I’m not getting in the middle of that and making a commission on that. If I’m hired to help somebody build a collection, that’s my job. And my job is to get them the best product at the best price. We do charge by the hour or by the day for authenticity. So no, it’s not about the value of the bottle, because I think that’s crap. I just think — this is all about being ethical. And I don’t think it’s ethical to charge somebody more because their bottle is worth more. It’s going to take me the same amount of time.
So it’s a couple hundred bucks an hour for pre-purchase authentication, which is what I always advise. Like, let us go look at the auction lots beforehand. Let us go look at secondary market wines beforehand. It’s a less invasive inspection, because we don’t have to prepare a report that you might have to use in a lawsuit. But it’s better. And what we end up coming back with is like, look, I would buy this one, or I would not buy that one. I don’t necessarily tell you why. I don’t give you all the reasons, because I haven’t done a report such that I would get myself on a stand and testify in court. But it’s enough for me to say, no, I’m not comfortable with that, let me look someplace else for those wines. But it’s a couple hundred bucks to a couple thousand.
Stephan Shipe: Yeah, it seems like a worthwhile investment before spending thousands of dollars on a bottle of wine. Makes perfect sense.
Maureen Downey: Yeah.
Stephan Shipe: Well, Maureen, thank you so much for hopping on here today with us and walking through this. Very interesting conversation, very interesting world that you’re in, and we appreciate it.
Maureen Downey: Thank you so much.
Outro
Stephan Shipe: That’s our show. Thanks for listening, and we’ll see you next week.
Disclaimer: The information provided in this podcast is for general informational and educational purposes only, and is not intended to constitute financial, investment, or other professional advice. The opinions expressed are those of the hosts and guests and do not necessarily reflect the views of any affiliated organizations. Investing in financial markets involves risk, including the potential loss of principal. Past performance is not indicative of future results. Before making any investment decisions, you should consult with a qualified financial advisor who can assess your individual financial situation, objectives, and risk tolerance.