2011 March: Succession Plan – Passing the Torch

What do you want to be doing 10 years from now? If you’re the owner of a family-owned pizzeria, and your dream is to kick back on a sunny beach with an umbrella drink in your hand while a suc­ceeding generation continues the business, then it’s not too early to start planning.

Ample time, along with open, honest communication, are key elements when it comes to pass­ing the legacy of a family pizzeria from one generation to the next, according to experts who consult with family-owned businesses.

The risks of not planning a suc­cession are great. Only about 30 percent of family businesses sur­vive into the second generation, 12 percent are still viable into the third generation, and only about three percent operate into the fourth generation or beyond, says Wayne Rivers, president of the Family Business Institute, a North Carolina-based firm that consults with family-owned businesses.

The demise of businesses from one generation to the next also has been noted by Andrew Keyt, executive director of the Loyola University Chicago Family Busi­ness Center. “There’s huge at­trition,” he says. “It’s not due to business issues. It’s due to family issues.”

Rivers says 10 years is how long it takes to plan a succession and work through any of the many kinks that may arise. “It gives you time to weather economic storms, fam­ily crises or the revelation that your kids can’t handle it,” He adds. “Just because your children know how to bake a pizza doesn’t mean they know how to run a business.”

Expect the unexpected is how Keyt would describe preparing for succession. “You can’t have a succession plan that’s written like a book that you follow,” he says “There are always new issues that come up.”

Transferring ownership between the generations is usually the easy part. Deciding who will manage the busi­ness is a bit harder. “The key element is deciding who’s going to run the operation profitably in your absence,” Rivers says.

Mark Malnati, owner of Lou Mal­nati’s Pizza in Chicago, knows what it’s like to face a difficult transition. His father, Lou, who founded the company, died in 1977 at age 48 — without making a succession plan.

Malnati was a newly minted college graduate so his mother, Jean, took a lead role in the business while he operated one of their stores.

“My mom got really involved,” Malnati says. “And we had two people who were like family in management. Between my mom, me and them, we rode out the storm.”

The storm included nearly fil­ing bankruptcy. The company had opened a store just before the elder Malnati died that, unlike two other sites that were thriving, was operating in the red.

Eventually, the failing store was closed and the Malnatis worked out an arrangement to re-pay $500,000 to vendors over five years.

Having been thrust into a large role and responsibility in running a pizza business, which he luckily loves, Malnati says he has some ideas about how to plan for succession.

“You have to start the conversation early and continue it, and you have to judge talent and skill level,” he says.

Anyone in the family who wants a role in managing the business needs to prove they will be an asset.

“Your relatives have to earn their place just like anyone else, otherwise they won’t have the respect,” says Malnati, whose company has grown to have 30 restaurants.

Patty Tubbs, president of Italian Fiesta Pizza, which has five stores in Chicago’s south suburbs, says suc­cession was easy from her parents to the current generation because she was the only one of her siblings who was really interested in running the business.

She has a sister who is a school­teacher and is not in the business at all, as well as a sister who keeps the books for the business and is an equal owner in it.

“It was only fair to do it equally because our father owned it,” says Tubbs, who nonetheless acknowledg­es that she has all the say-so in terms of business operations and decisions.

Rivers says when deciding which of your children will take the lead in the business, and which will not, “you’ve got to find a way to treat them fairly and equitably, but probably not equally.”

Deciding who will manage the business takes time and observation. Leaders will tend to emerge, Keyt and Rivers agree.

“They way you know who is (the next leader) is by increasing their responsibility and seeing how they handle it,” Rivers says. “Mom and Dad need to get out of the way and give their kids responsibility in the business. They need to be working themselves out of a job.”

Tubbs says she is currently in the phase of seeing who may show them­selves as her company’s next leader. Her son and nephew are working for the company.

She says she would never force her children or any other family member into the business.

“It has to be in their heart,” she says.

Being open to the new ideas from the younger generation also is a way of testing and challenging them. Tubbs remem­bers when she was young, struggling to convince her father to computerize aspects of the business such as pay­roll. She says Italian Fiesta recently started accepting credit and debit cards at its newest store because her son and nephew pushed the idea.

Still, with two young people inter­ested in the business, Tubbs, 52, says she is worried that the “transition won’t be as easy as the one I had.”

Rivers would urge her and others who will make succession decisions to use a bit of tough love. Don’t underestimate the next generation. He said they often already know whether or not they are suited to successfully taking the helm of the business. “You’ve got to have blunt conversations with your adult chil­dren,” Rivers says. “They’re not babies anymore.”

Malnati says his business, which has 30 stores, has grown to such a degree that his children may decide not to be involved in the day-to-day operations when he decides to step aside.

“It’s grown to such a size that we’d likely employ professional manage­ment,” he says. “We have a great team that could continue.”

Annemarie Mannion is a freelance writer living in the Chicago area. She specializes in business and health stories.

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