Before you decide to pass your restaurant on to your children, make sure you have taken all the steps necessary to make the transfer to the next generation a smooth one. Andrew Spikes, CPA, shares his insight on the transfer family business in this edition of Mize Minutes.
If you prefer to read this content, the video transcript is below.
I got into the restaurant business shortly after college. I lived in Denver and there was a small franchise popup called the Spicy Pickle. And I ended up buying three franchises of the Spicy Pickle and ran those for five years and then ultimately ended up selling out of the business and came back to Kansas here and ended up finding a firm here, Mize Houser, that had a large restaurant group doing accounting work for McDonald’s restaurant owner/operators. It was a perfect fit.
What are three things to consider before selling a restaurant to the next generation?
One, what are the implications to selling a restaurant to a family member, and that’s best understood by engaging with your CPA or a consultant that is familiar with passing businesses on to family members. The second one, I think, is to really have a good understanding of the capabilities of the person that you want or people that you want to pass this business on to. And then the third one is really understanding what the financial situation looks like.
What mistakes have you seen owners make during a transition?
It’s usually surrounding a lack of communication and a lack of a plan. Those two things generally, if they’re not there, we’ll see failure in the process. If communication isn’t had with the next generation about what the plan is, then generally there’ll be issues that come up. There’s not an understanding of truly what this looks like. Expectations aren’t maybe met either for the parents or for the children they’re trying to pass the business on to.
What goes into a good plan?
A plan usually starts with sitting down with your CPA or your consultant and learning what it’s going to take to get there. And some of that has to do with entity structure. How is the business owned? Also wanting to understand maybe how the business is valued. What is the ultimate price it’s going to be? And then also inclusion in that is putting a financial plan together, a retirement plan for the parents that are trying to sell this business. Plans can also be even more important if you’re looking at multiple family members, bringing multiple family members into the business. Certainly can be a huge challenge, especially if mom and dad are still going to be in the business and we have multiple kids coming in now. Now we’re really trying to support a lot of family members out of just the same business. So many times we’ve gotta look at plans that are growing the business along the way to support all the family that they wanna bring into the business.
What skills should children learn to prepare for owning the business?
They do need to have an understanding of all the aspects of a business. It’s not just the operational side of things. It’s not just the people, but it is the marketing side, it’s the financial side, and potentially if you’re dealing with a franchise, understanding the whole franchise concept and the company and the politics that come into that as well. It’s important to give them an opportunity to step in the role that you’re looking for them, which is truly an owner that can evaluate all aspects of the business. And as they’re doing that, it’s important to watch them and see how successful they really are.
Is it difficult for parents to let go of running the business?
If you’re gonna sell your restaurant just on the market in a normal business transaction, you don’t get to qualify everything that that next owner is going to do and that still needs to somewhat hold true with a transaction among family members. Realize that if your ultimate goal is to sell it to your child or children, that you’ll need to turn that over and let them go and be successful or fail on their own. Certainly setting them up for success is important.
Why is outside help needed when selling to the next generation?
When you get to family transactions, there could be a lot of emotions. You’re dealing with family members, you’re dealing with financial situations and a lot of times, one side or the other will think maybe something isn’t as fair as it should be. So with that, I think it’s important to engage outside help that can really give advice about what this looks like and is this transaction financially, is it okay for both sides to be successful.