Editor's note: Over the next few days, enjoy an 8-part series on disruptions that may affect your business in 2018 and beyond. They are:
Part 2: Ownership & Planning for the Next Generation
Part 7: Commodity vs Expertise
Part 8: Food Trends for 2018
Check back often for the next installment!
“Family businesses generate nearly 50% of the gross domestic product of the U.S., and nearly 60% of all jobs in the country. Yet generational succession is a challenge for nearly any family business,” said Carl Sacks, during the executive summit of the Leading Caterers of America in November 2017. In attendance at this summit session were owners and some of their family members, be it blood family or business family. According to Forbes Magazine, only a third of all family businesses successfully make the transition to the second generation. The other two thirds are sold off, dissolved, or fail. “Not planning for succession is, in reality, planning to fail,” said Paul Neuman, president, Neuman’s Kitchen, New York, NY. “If you want your business to survive past your generation, decisions—and even sub-decisions—need to be made.”
While some of the LCA members in attendance were first generation owners, others spanned up to four generations of transition.
“Generational transition in the catering trade is harder than if you own a factory making widgets or even a small business like a dry cleaning store,” said Sacks. “This is because of the complexity and ‘personal touch’ nature of this type of business.”
What challenges and disruptions are faced when transitioning a company from one generation to the next? Here, are some of the main issues:
Alignment of family interests. Alignment of interests between current owners and others can become more disputatious as founders retire and turn over control to the new generation, while at the same time looking to the company for their retirement income.
Balancing of financial returns. Creating family buyout agreements is challenging. When the retiring generation looks to the value of their interest, they might have an unrealistic view of what the company can afford to pay to buy them out.
Lack of interest on the part of the next generation. Not every family business will attract succeeding generations to stay in the business. Sometimes members of the business family may be the most logical successors, but in the catering business they may never have been paid well enough to be able to afford to buy out the founder, even over time.
“I put the idea of selling out there for five years before we actually did it,” said Linda West, founder of Melange Catering, Houston, TX, now retired. “It gave us time to figure out what was wrong and what skills needed to be worked on. I was not interested in creating a new owner in my own image, so I brought in a business coach to work with three key people in the company.” West did not sell to her children, but to Greg Bess, a long-time Melange employee, who made an offer for the company he was comfortable with, and then details were negotiated from that point.
Interfamily disputes. The interest of one family member may not be aligned with that of all other family members. These situations can become even more difficult where there is, for example, a divorce of a family owner or a death and the surviving spouse is holding stock (and voting rights) but is not involved in the business.
Kelly and Vince Early of Thomas Caterers of Distinction, Indianapolis, IN, pointed to the book, Dirty Little Secrets of Family Business: Ensuring Success from One Generation to the Next by Henry Hutchinson for essential information regarding entitlement, transitioning, exit strategies, and compensation. They suggested buying the book on audio and listening to it, chapter by chapter, with those involved in the transition, and together discussing the points raised to promote candor between all parties.
Estate and Inheritance issues. These include taxes and probate delays upon the death of a company owner, if no succession plan is in place. Sacks pointed to those companies where only one person, the owner, has all the financial power, and how damaging that can be when a situation arises where alternate financial authority is necessary. “You have to get a court order to open up a bank account so that the company can continue to operate,” said Sacks.
“As employers, we have a great responsibility to look at every employee and say, ‘Is this someone who should continue in the company or is this somebody who is holding a space and now I can’t hire the appropriate people as a result?’”—Jan DeMarzo
Control of the company. Often the founders don’t want to cede control of the company that they have built. They retain office space as part of a buy out and drop by on occasion, much to the disruption of the new ownership. “My advisor told me to pack up my stuff and go,” said West. “The business changes when you sell it—to whatever the next owner’s vision is—and you have to be ready to accept that. But you know what? Retirement is nice—it’s really nice.”
Willingness for the next generation to work as hard as the founders. In our industry in particular, the amount of work required to be successful can be brutal. A common question is, will the next generation be as willing to work as hard? The difference between starting a company in your kitchen and building it into a lucrative and established business is a different experience than taking on a business after purchase.
Anticipate disruption: “You need succession planning in your business,” said Jan DeMarzo, vice president of development, Neuman’s Kitchen. “I think every employee that you hire, you really need to have a plan set and then evaluate it. You need to look at your company and say, ‘does the leadership that I have in place—is that the next generation?’
“I don’t think it matters if it is family or whomever, it’s the health and the structure of the business that really counts. As employers, we have a great responsibility to look at every employee and say, ‘Is this someone who should continue in the company or is this somebody who is holding a space and now I can’t hire the appropriate people as a result?’”
Come back tomorrow for part 3!
Register for Catersource! Click here for more information!