Succession Planning for Family-Owned Hospitality Businesses: 5 Questions to Ask Yourself

Baby boomers privately-own more than 12 million businesses in the U.S., with many of the owners approaching their mid-70s, according to California Association of Business Brokers. A 2016 survey of small businesses in the U.S. indicates, 72 percent of small business owners DO NOT have an exit plan from their businesses and of those, 54 percent intend to leave the workforce in 10 years.

Business owners are focused on growing their companies and often forget to think about their exit strategy from their business. Do you know where your family-owned hospitality business is headed? Building a thriving hospitality business takes a lot of hard work and succession planning is vital to ensure the continued evolution, growth and promotion of leaders.

Family-owned hospitality business owners should ask themselves these five questions to help them prepare for their succession:

• What should my successional planning process include?
  • Make a list of all positions that must remain staffed, in order for daily operations to continue. You should identify all mission-critical roles within your business. Do you want to hire from the outside market, or is there a family member who would be interested in the position?
  • List key employees who pose the highest risk of leaving their positions within the next five years. This way you can effectively plan for replacements, or a time frame for when to start looking for talented individuals.
  • Create a matrix to select potential internal candidates for future promotions. Do you have family members who are currently working for you, and may be the best fit for a leadership role?

• Do you want to get the highest sales price, or a lower sales price with fewer limitations?
  • Example: Sellers are generally asked to offer assurances or cover risk factors.  However, if you negotiate a lower selling price, you may eliminate the cost for these risks and retire with less stress.
  • Determine a payment strategy that is most beneficial for your situation. Are you receiving a lump sum payment, or will it be paid gradually over a number of years? This will help you plan tax strategies and your retirement income needs.
  • In addition, you should be aware what your business is truly worth. Consider hiring a professional to conduct a business valuation for your hospitality company. 

• Should you create trust funds for the future generations?
  • If the plan is for your children or grandchildren to benefit from the sale of the business, it may be beneficial to establish a trust funded with business interests, prior to the sale. 
  • Trusts can be utilized to pass wealth privately to your heirs. You may also place guidelines on how and when the money will be distributed to the beneficiaries.  You are able to preserve assets for your heirs; therefore, keeping it in the family.    

• Is there an option to pass the business to a family member, who is willing and able to take on a leadership role, and keep the business operating? 
  • In this case, you will want to create a provisional agreement. This may include some additional retirement income for you. 
  • Sometimes shifting control to a family member puts the owner in a situation with conflicting objectives – doing what is best for the company versus what is best for their personal needs. 
  • With proper planning and time to address these issues, an owner can create a strategy to maximize both interests. For example, the owner can gradually transfer ownership to the member instead of an outright sale of the business.

• Are donations an interest to you now or in the future?
  • You can maximize your charitable donations to minimize personal income taxes paid on the gain of the sales of business prior to the sale/transfer of the hospitality business.
  • You can also create a charitable entity from the sale proceeds. This way the family can fund a charity with a common goal. 

Planning for your exit is often one of the hardest things a family-owned hospitality business must do. Contemplating the business you built or help to develop without you is complex, difficult and emotionally challenging. Key issues such as leadership selection, personal financial concerns, the impact succession will have on the business and preparing a detailed strategy are challenging parts of the process. However, when succession planning is executed properly, it allows for the orderly transition of management while protecting the exiting owner professionally, emotionally and financially.

To help family-owned hospitality businesses through the process, Smith Schafer offers succession planning servicesdesigned to help Minnesota businesses create and execute a successful transition strategy. Whether you need help creating a succession plan or assistance with implementing various stages of the plan, our professionals can guide you. Contact us today to learn how we can help you and your hospitality company prepare for the next chapter personally, professionally and financially.