By Pat Stanton and Jeff Dalebroux
Rob and Laura Gordon opened their first restaurant, Top Five Dishes, in Chicago's Wicker Park neighborhood in 1984. The business now has 15 locations across Illinois and more than 600 employees.
The Gordons' whole family has worked for Top Five. The oldest son, Barry, played a key role in the expansion of the business downstate—selecting locations, managing construction and supervising the restaurant openings. Rob always assumed Barry would be his successor. But Barry's wife recently had triplets, one of whom has special needs. As a result, in the near term, Barry cannot devote the time necessary to serve as CEO. The Gordons' tech-savvy daughter, Anna, has helped the family increase its marketing efforts on social media to great success, and recently took her first hands-on management role in the company's offices. But Anna is not ready to take the reins. Nick, the Gordons' youngest son, is a high school teacher and does not want to be involved with the business.
One non-family employee might be able to run the business. Marie DeSalle started with Top Five as a server 19 years ago and has worked her way up to the company's CFO position. Marie has held many management roles in the company, oversaw the openings of several Top Five locations and is more involved with day-to-day operations than any employee besides Rob and Laura, the founders. Marie is the Gordons' most trusted employee and has proved herself capable at every position assigned to her. Yet while Barry and Anna trust and like Marie, it may be hard for them to take direction from someone other than a family member.
After 30 years spent building a successful restaurant group from the ground up, Rob and Laura are ready to retire. But they have not decided what to do with their business. The Gordons had always imagined that it would stay in the family, but Barry's recent decision to remove himself from the operations and Anna's lack of management experience have given them pause. They are considering whether it would be better for everyone if the company were sold.
A common dilemma
The decisions facing the Gordons are not unique. Many family-owned businesses confront these dilemmas—whether to sell, to pass the business on to a family member (even if he or she is not really equipped to run it) or to transition management to non-family members. These are difficult, personal and sometimes acrimonious issues. Continued family harmony may depend on choices made with respect to continued ownership, comparative percentage ownership and continuing salaries through employment. More than one family has been torn apart by poorly made or communicated decisions on these issues.
The key to transitioning a closely held business is planning for when the owner will step down from the day-to-day operations. Ideally, this planning should begin many years ahead of the transition.
• Management. Whether the transition will be to family members, employees (through an ESOP) or by sale to a third-party buyer, a business owner should identify and train successors early on. It takes time for future leaders to learn all aspects of the business, take on various responsibilities and begin charting a strategic plan for the company.
Whether the business is sold or not, it will need strong leadership. If there is no leadership and strategic plan in place, a buyer will likely offer substantially less for the company. If, on the other hand, new leaders have already been identified and are managing the business successfully, a buyer will have greater confidence going forward. This will maximize value at sale.
If the owners intend to hold the company after retirement or pass it on to their family members, much of the family's wealth will be tied to the success of the business going forward. Ordinary prudence would dictate that leaders should be identified and trained to carry the business into the future.
Consider the Gordons' situation: Rob and Laura always expected that their son Barry would take over their business, but Barry's family situation will not allow him to do so. A good plan would identify several possible future leaders. Fortunately, it appears that Marie DeSalle may be equipped to run the business. This should not be left to chance, however.
The succession plan should be shared with and understood by the family. In the Gordons' case, Barry and Anna should endorse Marie as a leader of the company. If they do not, the transition plan may be doomed to fail, since both Barry and Anna can undermine Marie's authority as leader. If Barry and Anna support Marie, she will be even more empowered to lead.
• Estate and tax planning. The sale or transfer at death of a family business could have enormous income or estate tax implications for families. For instance, if the owners sell the company for cash, they will pay taxes on the gain from the sale. If and when the net proceeds from the sale are passed on to the owners' children, an estate tax may be imposed upon the value of the estate. In other words, the transfer of the value of the business could be taxed twice! Given enough time, a tax or estate planning lawyer can design a plan that achieves the owners' transition goals but minimizes the taxes due.
Moreover, a clearly defined transition and estate plan will reduce the chances that a dispute will arise among the owners' family members after death—every parent's nightmare. The owners should share the plan with their children so that they understand what will happen after the parents retire or die.
• Cleaning up the books. Many family and founder-owned businesses have their own unique ways of doing business that have evolved over the years. Sometimes, however, those methods will be unrecognizable to a buyer or a bank considering an investment in the business. As they work toward a transition, family business owners should consider employing professionals to review the company's accounting and corporate recordkeeping practices to ensure that they comply with generally accepted accounting principles (GAAP) as well as applicable corporate law and best practices—or, if not, that the company's practices at least may be clearly identified and understood by a prospective buyer. A buyer or investor's first real exposure to a company will be via examination of the financial statements. If the financials are in order and comply with GAAP, the buyer will be more likely to make an investment. Financial statements that are not in order, or are idiosyncratic, will raise questions and doubts about the business.
• Long-term growth strategy. Most financial investors/buyers, such as hedge funds or venture capital funds, are not looking to manage the business they acquire; they are seeking returns and growth. As such, they will pay a premium if they believe that the company's profits will be achieved and will grow after their investment. Thus, though it may seem counterintuitive, a family business owner should be planning a growth strategy for the company that extends past the date that he or she retires. The plan should be in place and have buy-in from the current management team.
Pat Stanton, leads Dykema's Business Litigation Practice Group and is the former office managing member of the firm's Chicago office. Jeff Dalebroux is the director of the firm's Business Services Department and a member of the Family Business Transition Team (www.dykema.com).
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