Tuesday, March 15, 2016

The Whiskey Appraisal Racket

Photo courtesy of Luther / whiskeyid.com
I am asked all the time what this or that bottle of whiskey is worth. My answer is always the same; it is impossible to say. I will even go so far as to advise that anyone willing to appraise a bottle of whiskey for you is not to be trusted.

This is why.

In the USA, valuations of whiskey are problematic because the secondary market is illegal except for the rare licensed auction. You can't sell alcohol legally without a license. There are no exceptions. And just to be extra clear, trading is the same as buying/selling for legal purposes.

This is primarily a state law matter, although it offends Federal law as well. Primary enforcement, such as it is, comes via each state's alcoholic beverage control authority. Enforcement is lax but that doesn't change the facts. The entire secondary market for beverage alcohol is illegal.

Sales take place all the time, of course, but because they are illegal they aren't publicly reported. When they are reported it is informal, without documentation. Without a reliable record of recent sales to reference, accurate valuations are impossible. Anyone who tells you otherwise is either uninformed or dishonest.

People will hazard guesses based on what information there is and from their own experience but even when it is done honestly and with the best of intentions, it is not like appraisals in other fields. Without a reliable record of past sales it is impossible to estimate value accurately.

That said, and understanding that you have to view skeptically any attempts at valuation, some people do take an honest stab at it. I usually advise folks to start with Bottle Blue Book. They have their limitations, as I've already explained, but they are honest about them. Check out the site.

One criticism: They need to do a much better job of explaining their methodology and making that information easy to find. The best thing they have on the subject is here.

Most people who have something they might like to sell have no idea how much it could be worth, whether $50 or $50,000. A resource like Bottle Blue Book can give you a rough idea, which is all most people want anyway.

This is all presented here for the purpose of providing accurate information about the situation as it now stands. I support the legalization of secondary sales but it is unlikely to happen. Alcohol regulation hasn't changed much in 80 years. Prohibition sentiment is still with us, so constructive dialogue is difficult. State legislatures have been persuaded to modernize laws regarding alcohol production and primary sales on economic development grounds but no one has effectively made a similar argument for normalization of the secondary market.


Kurt said...

I agree that the valuation of alcohol can be problematic, however the sentiment that anyone willing to provide a value is “not to be trusted” is a misplaced slur on appraisers which may be based on experience with irreputable dealers or speculators. We aren’t lawyers or marketing reps after all ; ) Certainly no-one should trust a value provided by someone who has an interest in the item. Anyone making an offer to buy something, or who has an interest in its value remaining high or low is conflicted. A professional appraiser, trained by of any of the major professional organizations to comply with USPAP (https://en.wikipedia.org/wiki/Uniform_Standards_of_Professional_Appraisal_Practice) will maintain an “arms-length” impartiality. Moreover an “appraisal” should be a well documented report with clear definitions, methodologies, and evidence. Anything else is an "opinion of value”.

As far as the valuation is concerned, there are multiple issues at play. There are a range of different types of appraisal. If you had a large collection of Whiskey you wanted to acquire insurance, an appraiser would be looking to the retail market for a replacement value and including things like tax and shipping if applicable. All fully legal and clearly accessible information. Your hiring the appraiser to catalog and document the collection as much as to do the value research necessary.

In matters of a "division of assets” such as divorce, or dividing an estate among heirs, an impartial appraiser will use a number of methods to arrive at an appropriate “market value”. Depending on the specific circumstances an appraiser may have local or state laws to comply with in terms of defining “Market value” they should include the definition they are using in the written appraisal report so the users understand it. Beyond that they should include the methodology for determining value. If they are an experienced retailer they may use their personal experience as a guide but as is the case with any asset the higher the value the higher the burden of proof necessary. To substantiate a valuation of $200 for an item can be a matter of opinion, however a $5,000 item should be supported by evidence.

Trained appraisers can base their valuation on gray markets as allowed by the IRS in it’s definition of “fair market value” as a “theoretical” situation. https://www.irs.gov/publications/p561/ar02.html Or they can attribute restrictions on an item as having an affect on its value such as “30% discount from retail” or “Extreme rarity leads us to conclude a 20% premium over the last auction record shown”. Good research, logic, and the law all inform the final appraisal.

Further the value of an item who’s sale is restricted is not automatically zero. The sale of migratory birds and their components is unlawful, however the Federal Government in the IRS argues that it still has a value. http://www.artnews.com/2012/05/01/rauschenberg-eagle-ruffles-feathers/.

It all distills down to the simple fact that you should deal with reputable people. If your looking to sell your collection of $10,000 bottles of wine you don’t need an appraisal, contact a reputable auction house or dealer who will sell on commission. Don’t immediately trust someone who offers to buy your whisky because they’re only offering what its worth to them, find another offer, or a completely disassociated party to verify the value.

And Thank you for the Bottle Blue Book tip.

Kurt Soucek, ISA
Chicago, Il.
Member, International Society of Appraisers
Whiskey lover

Crown Point Marc said...

Happy St. Pat's Chuck.

Chuck Cowdery said...

I thank Kurt for his long and authoritative explanation of appraising, but he really never addresses how you appraise the value of something when the market for it is almost completely hidden from you. Retail values are irrelevant, auction results are extremely limited, and virtually no one active in the whiskey secondary market has ever consulted a legitimate professional appraiser such as yourself.

I never intended to caution anyone against consulting a legitimate appraiser who will, presumably, explain his or her limitations regarding a black (not grey) market.