Start preparing for the next chapter of your pizzeria
Linda Connolly always knew that her son, Will, would one day take over Linda’s New York Pizza in Rochester. The change of hands started slowly in 2015, but when Linda had a knee surgery scheduled about 2½ years ago, the family viewed it as a deadline.
“That was her quiet retirement,” says Jamie Sheldon, Will Connolly’s partner and co-operator of the business.
While Will has been working in the business since he was a child – and managing the location for about 10 years – he says the formal transition took between two and three years to execute.
Priorities for Succession
The same period is recommended by Minneapolis-based attorney Aaron Hall, whose specialties include estate planning and business succession.
Hall says restaurant owners often pass their business on to their children hoping it will be a blessing, “and it instead is the exact opposite” – creating resentment and fighting between family members. A well-developed succession plan avoids such disputes by spelling out who is responsible for the business and how conflicts will be resolved.
When the owner has multiple children working in the family business, it is important to decide who will be in charge if they are forced to step away. Hall points out that it is typically a health event – not a death or retirement – that forces owners to cede power.
“It’s far better to make a transition to the new operator of the restaurant while the owner has time to train them, assess their skills and fill in any areas where the operator has needs,” Hall tells Pizza Today.
CONFLICT MANAGEMENT
Not every family has a clear successor like Linda’s New York Pizza, and that can create conflict when the restaurant is under new leadership.
“If the business is very successful, the child who made it successful typically feels they’re owed more compensation because they brought about the improvements,” Hall says. “And if the business fails, the children who are not involved often blame the one who is running the restaurant.”
To avoid such conflicts, succession plans should outline how the family will make decisions, such as deciding who will be tie-breakers, or have voting rights attached to shares.
Getting Succession-Ready
During the change of hands at Linda’s New York Pizza, Sheldon asked Linda Connolly what she might have done differently when reflecting on the decades since she started the pizzeria in 1991. “She said she did not take enough time off work,” Sheldon recalls.
Whether the owner is planning to have a family member take over their pizzeria or sell it, the best place to start is by getting the business to run on its own. “That means, if the owner takes a two-week vacation, the restaurant can generally operate on its own, because they have management in place who can make tough decisions and handle issues that come up,” Hall says.
Once the business is able to run on its own, Hall says owners often decide they no longer want to sell. “What they realize is they weren’t tired of owning a business, they were tired of working in the business every day,” he says.
Planning to Sell
Making the owner’s position unnecessary is not just valuable in terms of the ability to take time off, it also increases the value of the restaurant. “Having the right processes and people in place … that increases the purchase price they get paid,” Hall says.
When creating a valuation for the business, the owner needs to calculate what salary would be required if they were a payroll employee and deduct that amount from the annual profit.
“If the owner is working in the business doing a job that would be a $60,000 chef-type job, we need to consider that the new owner will need to hire that out,” Hall says.
Generally, valuations are created using a multiple of annual profits. Hall says restaurant valuations generally are multiples of two to four times that number. But if the business is high risk – for example, construction is planned that will make it difficult for customers to access the pizzeria – a one-year multiple might be more appropriate.
Concerns When Selling
The two biggest concerns when selling a pizzeria – or any business – are getting paid and not getting sued, Hall says. The best way to ensure you get paid for your business is to require cash up front. If the owner instead agrees to payments over time, those should be backed by personal guarantees so the new operator cannot reduce payments based on performance or disclosures.
“We’ll put in the contract that the buyer has done its own due diligence” he says. “By doing all of that, I can make sure my clients get the purchase price they’ve been promised.”
Taking Over
One of the benefits of assuming ownership over building out a pizzeria from scratch is “buying turnkey operations,” Sheldon says, adding that she and her partner have benefitted from “deep-rooted guidance from the owners beforehand.”
That said, she and Will Connolly have worked to fine-tune operations, such as implementing third-party ordering apps. Connolly advises successors to both shadow the original owner and visit other pizzerias to see how they do things differently.
“Sometimes you don’t realize how you could be doing something better, more streamlined, until you actually see it in action,” he says, adding that some former employees have returned and appreciate the changes under new management. “All of those changes have led us to have a more consistent and efficient workplace.”
What Not to Change
While Tuesday is slow at many pizzerias, it is one of the biggest days of the week at Linda’s New York Pizza. The original owner established Tuesday as the day for slice specials, and the community has embraced it ever since.
“We have customers that have been coming in for that special since we opened,” Will Connolly says, adding that the dining room typically is full of customers getting $1 off slices and sampling some of the specialty pies available only on Tuesdays. “I wouldn’t change those specials and the different fun things that we do.”
As for what’s next at Linda’s, Sheldon and Connolly hope their college-age son aspires to something other than running the family pizzeria – although he says that is what he wants to do.
“He’s been working here since he could push the buttons on the screen,” Sheldon says.
Pizzeria Transitions to 49% Employee Ownership
One-hundred-fifty employees at Spinato’s Pizzeria & Family Kitchen are about to become pizzeria owners. The Tempe, Arizona-based pizza company has been owned by the Spinato family for more than 50 years, but at the end of this year, employees who are at least 21 years old and work more than 1,000 hours per year will be eligible for ownership through an Employee Stock Ownership Plan (ESOP).
The Spinato family will retain 51% ownership, and eligible employees will own the remaining 49% through their shares. President and CEO Anthony Spinato tells Pizza Today the family hopes to help employees achieve their financial goals amid nationwide inflation and wage discrepancies.
“We’re trying to … get them to really think like owners,” he says on The Hot Slice podcast produced by Pizza Today. “We’re going to invest in each individual differently than we ever have.”
The company plans to launch employee-led committees dedicated to communication, culture, labor and waste to reinforce that the new owners have a stake in the decision-making process.
“We’ve done about everything we can to feel like we can grow more successfully,” Spinato says. “Here we are, 156-plus family and employee owners charging forward.”
KATE LAVIN is Senior Editor at Pizza Today.
