Succession planning

Abraham Salloum is proud of his pizzeria. In 1976, a few short years after emigrating from Lebanon at the age of 17 with only a few dollars in his pocket, and having worked tirelessly at the Halifax docks to establish himself, Salloum purchased Tony’s Famous Pizza and Donair. Now, 40 years later, after establishing Tony’s as one of the city’s best-known restaurant landmarks, he’s stepping back and handing off operations to son Leo and his siblings. It’s time.

But that doesn’t mean it’s easy.

Handing off the business to another – even to your child – is a prospect every successful pizzeria owner will face at some point. It takes a lot of time, money, perseverance and patience – as well as a fair share of tears along the way – to build a successful pizzeria. It’s therefore understandable that many pizzeria owners will want to pass on the product of all their hard work – their legacy, if you will – to their offspring for the business to continue. It’s the next step in the business and family cycle.

But it’s not as easy as simply passing one’s children the keys to the business. Sadly, only about 30 per cent of second-generation businesses survive the transition. They’re often sold by the inheriting family members or fail outright, often as a result of poor succession planning.

“Oftentimes people are not prepared for the significant planning that is required in passing on a business to a second generation,” explains Alex Shteriev, partner at Beacon Mergers and Acquisitions. “Quite often people are simply not prepared for laying the foundation for succession.”

As Shteriev suggests, there’s a lot of work and planning involved in passing on a pizzeria to an heir, and it’s not without its complications. But the rewards, for both generations, make the effort worth it.

We’re here to make the process smoother and less stressful by providing some tips and advice.

The first step is to decide who will take over the business. This is a straightforward decision if you have only one child, or only one who is interested in the pizzeria. But hold on for a minute. Before making any decisions, you need to be honest with yourself: is your heir business savvy, passionate about the industry and capable of running the pizzeria? If the answer is no, perhaps it’s best to sell the business to a key employee or outside buyer instead. Similarly, your heirs must be truthful in answering whether or not they want the heavy responsibility of being a pizzeria proprietor.

Things get more complicated when multiple family members have an interest in remaining active in the business and are capable. This is the situation the Salloum family faces. “The restaurant is Halifax’s longest-running family-owned restaurant so it’s important to Dad that my siblings and I – there are four of us – continue the business,” says Leo Salloum, who graduated from Dalhousie University with a degree in kinesiology but always knew his future lay in running the pizzeria. It’s a future he has happily embraced.

Document preparation is vitally important when it comes to financials and other legal matters. PHOTO: © Dmitrii / adobe stock. ICON: FLATICON.COM/FREEPIK

“When multiple children are inheriting the business, you need to formalize a new business structure with projected roles of each child to prevent conflict between family members. My Dad wants the business to continue, naturally, but he always says family comes first so we’re making sure everything is spelled out.”

Of course, you also need to consider and clearly document how other heirs not involved in the business will be compensated. Many succession plans include a buy-sell agreement that allows heirs who are not active in the business to sell their shares to those who are.

Similarly, document preparation is vitally important when it comes to financials and other legal matters. “When you pass on your business to an heir it’s no different than selling – you should ensure the business looks good in terms of its short-term and long-term outlook. Your financial statements need to be pristine, clean and accurate,” Shteriev explains. “Additionally, if the pizzeria is a franchise, you need formal approval before the business can be passed on. And you also need to get formal permission from the landlord to ensure there aren’t any issues with transferring of assumption of the lease.”

You wouldn’t sell your business with tons of debt, so why would you want to pass a debt-ridden business to your children? Similarly, why would you expect your kids to want to take on a business weighed down by debt? So before considering any transition, make sure to reduce your debt as much as possible.

“I recommend outside assistance when it comes to preparing financial and legal paperwork,” Shteriev says. “There’s no doubt that the size of the business affects their ability to afford lawyers and financial advisors – most pizzerias can’t spend tens of thousands of dollars on outside assistance – but you should get whatever you can afford. At a minimum you’ll need a lawyer and an accountant who have assisted people in similar situations. Be sure to ask up front whether they have the relevant experience. You don’t want them to be learning on the job because there are so many things that can go wrong.”

Employees are the foundation of any small business, so during succession transition proper communication is absolutely vital. As much as possible they should be kept informed throughout the process and assured there will be no adverse effects with the change in management.

Finally, heirs should not be afraid to lean on their parents during any transition – institutional knowledge is one of the key advantages of a family business passed down from one generation to another. “I always keep in mind what my Dad has accomplished and the wisdom he can provide from 40 years in the industry,” Leo Salloum explains. “Transition can be hard because sometimes different generations don’t see eye to eye, but I think it’s important to take a step back to see how we can compromise and blend the best of the old generation and the new. Things are always moving forward, but older generations still have important knowledge to share.”

Passing on a pizzeria from parent to child can be difficult and emotional, but with proper planning and sensitivity the murky waters of transition can be successfully navigated. Done right, everyone wins: parents have the joy of seeing their legacy continue, while children gain the undeniable benefit of inheriting a thriving restaurant.