The unspoken truth is that 100% of all privately-owned companies eventually change hands, including those in the restaurant industry. It is just a matter of how and when this happens. Successfully running a privately held company requires a tremendous amount of time, energy and focus, making succession planning a challenge and leaving one of the most important personal, family and professional outcomes to fate. To properly plan and position yourself, your family and your company for an eventual exit, there are several key financial items to consider in addition to your personal and family goals.

  1. Build Your Team

Surround yourself with a team of trusted advisors well before you anticipate any ownership change in developing your succession plan. An ownership transition will involve several parties, including accountants, business attorneys, estate attorneys, bankers, financial advisors, and insurance advisors. Interview and select team members in these various disciplines when embarking on your succession plan. Having a good team of experts can help take the emotion out of such an important process and save you money in the long run by being informed of financial and tax consequences. It is also recommended to select a member of the team to “quarterback” the process to keep everyone organized and on track.

  1. Define Your Financial Goals

From the outset, knowing your goals – from personal, family and financial perspectives – is important. Knowing what you need financially to retire and maintain the lifestyle you desire is critical. For example, restaurant operators may own the operating companies and the underlying real estate associated with the restaurants. Selling the company does not mean you need to sell both the operating entities and the real estate associated with the restaurants you may own. One option is to sell the operating entities but retain ownership of the real estate holdings.  This option provides an ongoing source of passive income for the owner where the real estate investment is retained and rental income is collected on the rents paid by the operating company. Poor financial planning could result in “giving away the golden goose” prematurely, inefficiently or without long-term thinking. If you do decide to sell or transfer the real estate with the operating entities, make sure the real estate is valued separately from the operating entities.  Lumping them together frequently results in a financial detriment to the seller and a substantial upside to the buyer.

  1. Know Your Succession Options

Assess all of your succession options as part of the process. Know all of the ins and outs of a family transfer, ESOP, management buyout, partner buyout and third-party/private equity sale. For insight regarding trends and outlooks relating to restaurant ownership transitions, click here.

  1. Family Succession – Gift & Estate Tax Planning

Many family business owners strongly desire to keep the business operations in the family and preserve wealth to the next generation. A family transition can be accomplished by gifting and or selling ownership. Selling the business will provide liquidity (and a taxable event) to the seller. In contrast, gifting provides no liquidity and, in some cases, can be done tax-free for both the donor and donee. For operators with large estates, a taxable estate may exist. Currently, an individual may have a taxable estate if their personal net worth exceeds $12,060,000, or $24,120,000 for a couple. If you pass and leave an estate above these values, the excess value is subject to 40% federal estate taxes. To create an efficient transfer of wealth, many individuals with a taxable estate will establish trusts to gift assets into to pass assets onto the next generation tax-free, utilizing their lifetime gifting exemptions ($12,060,000 individual/$24,120,000 couple). Estate and gift tax planning is critical to evaluate as part of any family transfer.

  1. Get The Financial House In Order

Take a detailed review of the current ownership structure. The ownership structure may be straightforward (i.e. one operating entity owned by one individual) or more complex (i.e. multiple operating entities owned by numerous related and non-related individuals). We see related entities set up for real estate holdings or management purposes. These entities may or may not be relevant anymore or could complicate succession planning. As part of succession planning, the current ownership structure should be evaluated to see if changes are required to have the desired post-transaction result and ownership structure. In addition, any inter-company advances or loans should be evaluated and cleared up before the transaction to minimize inter-company balances existing between different owners after the transaction has concluded.

Selling or transitioning the business to the next generation also provides an opportunity to review the current financial picture of the company. Often, in family-owned businesses, personal expenses may be paid by the company, which are not valid business expenses. Additionally, owners may have loans to or from the company. Prior to any transition, it is best practice to eliminate any items paid through the company which are personal in nature. Compensation of the owners should also be carefully considered. Companies that have long been owned by the same group of owners may have paid these owners little or no compensation for their services to the company and instead, provided them cash through distributions from the company earnings. After a transition of ownership, the next group of owners may have greater involvement in the company, which would justify a higher compensation amount. Additionally, if the succeeding ownership group is taking on new debt to finance a purchase, compensation and distribution of earnings should be carefully analyzed since there will be an increased need for cash to service new debt. Other financial clean-up items to consider would be to obtain a financial statement audit, review tax filings (especially state/local), prepare budgets/forecasts, develop a strategic plan, settle any pending legal matters and review and document key employment contracts. Whether it is a sale to an unrelated third party or a family transfer to the next generation, getting your financial house in order will create value upon sale or help insure success to the next generation.

Closing a successful transaction typically comes down to one thing: being prepared. Succession planning is not an event but a process; follow these tips to ensure a successful transition. Who is empowering your growth? Contact members of GBQ’s team to explore ownership transition strategies and ensure succession planning success.


Article written by:
Kaz Unalan, CPA
Director, Tax & Business Advisory Services

Ryan Kilpatrick, CPA
Director, Tax & Business Advisory Services

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