Legacy Restaurant? Succession Plan!
High start up costs, narrow profit margins, shifting food trends, staffing challenges, and customer quirks are just some of the many reasons why it’s difficult to own a restaurant. For those who’ve succeeded, and sustained a beloved restaurant, continuing the legacy requires careful succession planning. Read on for pointers from pros.
Recipes, Permits, Payroll…
Though usually drawn to the restaurant business by a love of interesting recipes, the secret sauce for a convivial atmosphere, or perhaps the thrill of the latest cocktail or pastry trend, most restaurant owners are quick to point out that a large share of their time ends up being spent on the inner workings of the business. As Forbes reminds us, running a restaurant proves to be harder than most people think:
Behind the curtain of every restaurant’s hospitable facade is a world of problems waiting to happen or happening. Owners have to make sure that the bank accounts and taxes are working, that they’re going to be able to meet payroll, that all the permits are in order and that any issues that arise are fixed. And every role that isn’t staffed by someone else falls squarely on their shoulders….But, despite the difficulties, the stress, the labor, the physical, mental, and emotional wear and tear and the potential for failure, people around the country continue to open restaurants. According to Oysterlink,…roughly 50,000 new restaurants open each year in the U.S….Those who’ve found success say that the love of the job, of providing a warm experience, serving food and drink that’s savory and creating a safe and welcome environment for all is the only north star that will get you there.
Given the personal passion that goes into creating and sustaining a successful restaurant, it’s important for owners to consider how best to ensure a lasting legacy. Toward that end, as attorneys at Davidoff Hutcher & Citron point out, it’s wise to take succession planning seriously: “For restaurant owners, business succession planning is crucial to ensuring a smooth transition of ownership while protecting the legacy of their establishment. Whether the goal is to pass the restaurant to family, sell to a trusted partner, or transfer ownership to employees, a well-structured succession plan can prevent legal disputes, financial instability, and operational disruptions.” A well thought out succession plan for a restaurant may involve the identification and preparation of new leadership, a buy-sell agreement, and even the establishment of a trust. Done carefully, a succession plan can help restaurant owners accomplish a diversity of goals, as it:
- Ensures Business Continuity – Prevents operational and financial disruptions if an owner retires, becomes incapacitated, or passes away.
- Minimizes Legal and Tax Issues – Reduces estate taxes, business valuation disputes, and probate complications.
- Protects Family and Employees – Provides financial security and clear leadership transitions.
- Increases Business Value – A structured plan makes the restaurant more attractive to potential buyers or investors.
Toward a strategic succession plan for a legacy restaurant, Davidoff Hutcher & Citron offer a range of ideas, based on the circumstances and intentions of the owner. Tactics for ensuring a restaurant’s ongoing success include:
Establish a Trust for Business Succession
- Revocable Trusts allow business owners to maintain control while ensuring smooth ownership transfer.
- Irrevocable Trusts protect assets from creditors, lawsuits, and estate taxes.
- Dynasty Trusts help maintain the business within the family for multiple generations.
Consider Employee Stock Ownership Plans (ESOPs)
- An ESOP allows employees to gradually acquire ownership, incentivizing loyalty and business continuity.
- Provides tax benefits for both the seller and employees who become owners.
Create a Buy-Sell Agreement
- A Buy-Sell Agreement legally outlines the process for transferring ownership.
- Specifies conditions under which an owner’s share can be sold or transferred (e.g., retirement, death, or voluntary exit).
- Often funded with life insurance to ensure the buyer has the necessary capital.
Update Legal and Financial Documents
- Ensure wills, trusts, and operating agreements reflect current business succession plans.
- Review partnership agreements, vendor contracts, and lease agreements to avoid legal complications during transition.
Good To Know: Trust? Trustee?
Trusts are useful and flexible anchors for many estate plans, and can be customized based on circumstances and goals. Investopedia offers this quick summary of trust basics as a foundation for planning:
A trust is a legal entity with separate and distinct rights, similar to a person or corporation. In a trust, a party known as a trustor gives another party, a trustee, the right to hold title to and manage property or assets for the benefit of a third party, the beneficiary….A living trust, also called an inter-vivos trust, is a written document in which an individual’s assets are provided as a trust for the individual’s use and benefit during their lifetime. A trustee is named when the trust is established; this person is in charge of handling the affairs of the trust and transferring the assets to the beneficiaries at the time of the trustor’s death.
When choosing a trustee and successor trustee, it is important to consider a reliable person who deeply understands the intentions of the trust and can be counted on to administer the trust accordingly. If the assets placed in a trust are complex (say for example a legacy restaurant!), financial expertise, via the appointment of a professional trustee, may be wise. Ultimately, whether a friend, relation or professional is selected, the trustee has a fiduciary obligation to the beneficiaries, and must always exercise reasonable care and skill in managing the assets of the trust. Accordingly, the trust agreement may require a trustee bond, which is a specific type of fiduciary bond that protects the interests of the trust and its beneficiaries in accordance with the law. As a leading national provider of all types of fiduciary bonds, Colonial Surety Company makes it easy and efficient to obtain a trustee bond. Just get a quote online, fill out the information, and enter a payment method. Print or e-file the bond from anywhere.
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