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Should succession planning be on your menu?

What you need to know before transitioning ownership of your restaurant business

Restaurant owners inevitably confront the need to transition ownership and management of the business to others.

Whatever form this transition takes — to the next generation in a family business, to a management team buying out the owner, or to a third-party buyer — it involves a new set of risks and opportunities that differ from those encountered in normal operations. An owner must be prepared to meet these challenges through a process of succession planning.

Here are some key considerations to keep in mind when considering a succession plan:

Know yourself. Are you ready to put your restaurant business in someone else’s hands? Your restaurant is your baby and your life’s work. Take the time to think through these “soft” issues.

Know your objectives. As with most things in life, you won’t get there if you don’t know where you are going. Define your objectives. Realize that there will be inherent conflicts among these objectives. You can’t walk away from your restaurant with maximum value and minimum risk while also keeping it in the family. Determine your priorities and make compromises to resolve these conflicts.

Plan ahead. No business is perfect, and each will require work to prepare for succession or an exit. Maybe you need to beef up the management team, or improve your financial reporting systems. All of this planning takes time, and the need for the succession plan may be driven by factors beyond your control, such as personal health issues or availability of financing to a potential buyer. Develop your plan three to five years ahead of when you hope to implement it.

Know when to go. Owning and operating a restaurant has its ups and downs. It is tempting to hang on when things are going well, but that is the best time to sell. You don’t want to exit when profitability is down. You want it to be a transition, not a turnaround.

Understand value. The value of a restaurant derives from various factors specific to that restaurant internally or factors affecting the market or the economy as a whole. Understand the key value drivers for your business and how to use them to your advantage when planning your succession.

Get your house in order. Risk — real or perceived — reduces valuation, and the succession or sale process will highlight every risk in the business. Assess and address these risks, with a particular focus on quality financial information. If a buyer or a lender can’t trust the numbers, a good result is unlikely.

Be ready for non-business issues. Particularly in a family business, some of the most vexing issues have nothing to do with the business and everything to do with the people involved. What if the heir apparent to the family restaurant doesn’t want to take over and run it? Anticipate and prepare for these non-business issues.

Know your buyer. Few business owners walk away with a bag of money and no other concerns. Most will have an ongoing relationship with the buyer, and it’s important to know something about him or her. How does the individual handle issues that inevitably arise? What about your earn-out, or your employees? Do your own due diligence. Talk to others who have sold businesses to your buyer and learn from their experiences.

Change is never easy, nor is it avoidable. Systematically addressing these issues with a team of competent advisors will position a restaurant owner for success. Regardless of succession or exit considerations, these actions will result in a stronger business.

J. Benjamin English is a partner with Hirschler Fleischer, based in Richmond, Va. English helps growing companies develop practical solutions to legal issues. He also advises on structuring entities, and provides guidance related to business plans, capital structure, financing, shareholder agreements, employee compensation and benefits, and intellectual property matters. He can be reached at (804) 771-9544, or at [email protected].

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