There is a widely held perception in the wine industry that merger and acquisitions (M&A) activity is currently quite robust, and that selling their wineries is how owners will exit the business.

In a report published by Silicon Valley Bank earlier this year (“Ownership Transitions in the Wine Industry”), more than 10% of the winery owners surveyed were “strongly considering” a sale in the next five years. Will 500 West Coast wineries actually be sold in the next five years? The short answer is no. For a variety of reasons, the 10% who are thinking about selling today will result in 2% who actually do.

It is true that there is currently a strong level of transaction activity in the wine industry. However, most sales have been of vineyards and the occasional winery facility. These are real estate sales transactions, which sometimes get erroneously conflated with M&A. The winery merger and acquisition market (meaning the sale of a wine company and/or associated brand[s] as going concerns) is quite different, with activity levels currently slow to normal.

It is difficult to see perfectly what happens in the wine industry M&A market, since there are so many small operations, and many transactions are not publicized. However, a review of the data about West Coast wineries collected by Wines Vines Analytics from 2005 through September 2014 provides a clear and remarkably consistent picture. (Included in the many interesting facts in this data, used for the Wines & Vines Directory/Buyer’s Guide and other services, is the ownership of the winery, for most entries.) On average, there are approximately 20 M&A transactions a year. There are some basic microeconomic principles that can explain why, although there are 500 winery owners who currently want to sell their wine company and/or brands, there are only 100 who will.

Fantasy Island
Some of these 500 “sellers” are sellers only if someone knocks on their door and offers them a ridiculous sum of money. The problem with this plan: It almost never happens. In the real world, the sale of a wine company occurs after the owner decides to pursue a sale, hires a professional advisor who establishes a realistic asking price and then conducts a complicated, lengthy and expensive preparation, marketing and negotiation process. Wineries owned by this kind of daydreamer will not, therefore, be sold in the next five years.

Human nature
A growing area of economics applies cognitive psychology to the study of human behavior in the marketplace. “Behavioral economics” is establishing that the theoretical economic agent maximizing his or her return does not exist, and that humans are more complicated and “buggy” and often make decisions that don’t pencil out. Empirical studies in this field have shown that people have a tendency to dramatically discount the value of gains in the future and overvalue immediate gains. People are more motivated by the fear of losing than by the hope of winning. People prefer the status quo over a better alternative. In sum, given the choice between a possible large future payday at the end of an expensive and difficult sale process that results in a winery owner having to change their whole life or continuing to run their business and live in their house on the vineyard, most winery owners will choose the latter.

So a large number of the folks who checked “yes” to a future sale in the Ownership Transition Survey will never begin the process. What will happen with those that do?

Two for the price of one
The winery merger and acquisitions market is in a state of permanent disequilibrium. That is to say, there are no simple mechanisms by which the large number of wineries for sale (the supply) will be cleared by price adjustments or adjustments in demand as there are in markets for less complicated items such as commodities or consumer goods. For example, there are many reasons why a winery owner will not accept a lower price in order to get a deal done. Some are similar to what we find in the residential real estate market, such as the amount of debt on the winery or the desire to preserve equity or obtain a reasonable return on an investment that has been held for many years (if not generations). In the absence of urgency created by outside forces (e.g. a bank or partners demanding repayment), many of the sellers who actually go to market will not obtain their price and therefore will not sell.

Buyer’s remorse
Even when buyers and sellers come to an initial agreement on price, a significant portion of deals will fail during subsequent contract negotiations and due diligence. This is because the stakes are high for individuals and companies acquiring an operating winery: Millions of dollars will be invested and borrowed; organizational reputation is at risk for the company and for the managers making the decision; and for most buyers, there are opportunity costs (meaning that the purchase of one wine company will preclude pursuing other future opportunities that might be a better fit). Having agreed to pay something near the seller’s price, even the most sophisticated buyer begins to worry that he has made a mistake. No matter how well prepared the seller’s offering, the typical due diligence and contract negotiation process leaves ample opportunity for the buyer to get spooked and walk away.

Econ 101
There are a number of structural issues in the wine industry that create further obstacles for owners wanting to sell their company. Among these are low barriers to entry, especially with the market acceptance of negociant and virtual brands. This creates competition, which drives profitability down and leads to many unsuccessful efforts. Furthermore, buyers can then ask: Why should I buy your failure when I can create my own? Another structural element: capital intensiveness. When added to low profitability in many instances, the investment required to acquire Chateau John Doe in relation to the returns is prohibitive for many potential buyers.

Finally, lifestyle buyers are a bigger part of the winery M&A market than they are in, for example, the technology industry. These buyers want to create Chateau Me, which limits the market for some types of brands irrespective of profitability.

S o what will happen to those sellers that will be unable to find a buyer in the next five years? The data from Wines & Vines tells the story. On average, almost 100 wineries shut their doors every year. In the end, we find that the U.S. wine industry reflects the vibrancy and risk-taking entrepreneurialism of the American culture. It’s creative destruction on steroids.

These, then, are the realities of the wine mergers and acquisitions market:

Because it is such a personally and organizationally complicated effort, for most owners, the sale of their winery will always be “two to five” years out. For others, the first (or even second) sale effort will not achieve a satisfactory result. For those owners, the solution will be the quiet liquidation of the brand and the separate sale of the real estate assets. Often, the owners will retain and continue to operate the business.

Nevertheless, a successful sale transaction is the single-largest contributor to a winery owner’s return on investment. For many, the effort required to find a buyer will be well worth it. Notwithstanding the old canard about large fortunes being turned to small ones in the wine business, the reverse has also been true. Fortunes have been made, and many more will be in the years to come.

Carol Collison is a partner in Global Wine Partners LLC, a leading winery mergers and acquisitions advisor based in St. Helena, Calif.