Editor's note: The first article in this series appeared in the April 2009 issue of Wine Business Monthly.

In our quest to make the world's finest wine produced by a law firm on Main Street in Napa, we recognized the threshold question: where are we going to do this? As with all new businesses, start-up expenses and logistics can be devastating. These details cause many entrepreneurial concepts to vanish into thin air.

Fortunately, in the wine industry, current law permits an entity to get involved in the winemaking process without the expense of purchasing a bricks-and-mortar facility with all of the requisite equipment and supplies.

Aside from the obvious expense of the land, building and equipment of such a stand-alone facility, legalities of regulation must be addressed--at the county level for permits, the state level for licensing and the federal level for bonding and regulatory provisions.

Today's modern regulatory scheme provides a viable and much less costly alternative.

Custom Crush vs. Alternative Proprietorship
The most obvious alternative is an arrangement known as a "custom crush" operation. An entity can simply contract with an existing licensed facility to produce a wine from the customer's grapes. That facility already must possess the necessary county permit, state licensure and federal bond in order to operate. Many, if not most, wineries, utilize this option to supplement cash flow by using their excess capacity to make wine for others.

Custom crush contracts have varying terms and prices, depending upon the facility and the customer's requirements. Essentially, however, these arrangements call for the facility or the "custom crusher" to take responsibility for the grapes and use their own judgment to produce a wine that will be delivered at a designated time. The custom crusher takes on the responsibility for the winemaking, traditionally from crushing to bottling. While there may be some consultation with the customer, the facility usually produces the wine using its own staff and its own judgment. This is the simplest alternative but is fairly expensive and leaves little room for the customer to be involved in the winemaking process. However, many custom crush facilities do permit their customers to use a "consulting winemaker" to have a more direct input into the process.

The other option is a regulatory scheme called an "alternating proprietorship." These arrangements permit various individuals and entities to, in effect, share the licensed, bonded facilities owned by the producer or "host" for a period of time. The same work areas are "rented" to different "tenant" winemaking entities to complete their portion of the process for their wine. In this way, it is the client, rather than the owner of the facility, who is responsible for the winemaking process; the client merely uses the facility for a designated time. While the facility must have all the appropriate licenses and approvals, the customer must also hold a license from the state to operate a winery.

When one client is finished, the facility is then used by another alternating client. Most of the facilities so licensed will agree to perform certain winemaking functions on the clients' wines, but do so at the direction, control and risk of the client, not the facility. This allows the client to have full control over the product but also allows the client access to the machinery and equipment necessary to produce the wine. Since there is much less risk and burden on the owner, these contracts are typically less expensive for the customer. However, the separate licensing of the customer as a producer is a lengthy and expensive process.

As our merry little band includes some grape growers and individuals who have some experience in winemaking, we decided to see if we could find a facility that would be a good match for us.

Legal Contract and Documents
Glenn and Gayle Cook own and operate Cook Family Winery out of their Stoney Springs facility northeast of St. Helena. Their own G. Cook wines have enjoyed excellent reviews, and they have a very functional home-built facility that seems perfect for our project.

Glenn is a wonderfully affable, charismatic retired dentist who loves to make wine. His equipment is well maintained and complete, and his facility is spotless. When we described our project, he was enthused about working with us and proposed a contract for the production of our wine that seemed fair and exactly what we were looking for. The contract specified the expected price to be paid and terms but also was clear about who was responsible for the wine at each stage of the process. It set forth the expectations for sharing space, the anticipated needs, as well as the owners' rules of conduct and expectations as to our behavior at the facility. Clearly setting forth the expectations of the parties as to these elements allows the best chance for a successful relationship.

We will bring the grapes we acquire into the facility. Glenn will crush them and go through the entire vinification process. We will act as our own consulting winemaker, which will allow us to select and supply the yeast and any and all supplies, and actually be involved in the process. After fermentation is complete, we will assist with pressing the wine and putting it into our barrels, which will be stored at the facility.

As a custom crush customer, we will need to obtain both a federal wholesaler's Basic Permit from the Alcohol and Tobacco Tax and Trade Bureau (TTB) and, as we expect to sell the product, a Special Occupational Tax Registration as a wholesaler. On the local level, we will need to have a business license and file a Fictitious Business Name Statement (designed to let the public know who the real owners of our brand are).

We may utilize the services of a further consulting winemaker--an expert who will work with us to help us select the style of wine and to help us produce a product in the chosen style. That consultant will be subject to yet another contract, clearly defining the expectations of each party to the arrangement.

Thus, our group has chosen the appropriate legal entity for our venture and is in the process of forming that with the state. We have selected a custom crush arrangement with a facility that we look forward to working with. In our next installment, scheduled for October, we will describe the process for the selection of a name and the legal protection of the intellectual property and trade and style that we will be using. Stay tuned as we venture through the process. wbm