Economic difficulties complicate keeping restaurants in the family

Economic difficulties complicate keeping restaurants in the family

The planned year-end closure of the Blackhawk [3] in Wheeling, Ill., after 40 years in operation highlights some of the difficulties now facing family-owned restaurants.

Given the tough economic environment, family-owned businesses need not only interested successors to remain viable, but also a firm grasp of what the business is worth and a structured succession plan for turning the enterprise over to the new generation, experts say.

The Blackhawk, opened in 1969, will close on Dec. 31 because no family members are interested in pursuing a restaurant career.

Ann Roth, widow of founder Don Roth, said, “With my 90th birthday on the horizon and none of my children in a position to assume responsibility for the family business, it will be better to close Don’s last restaurant while it still is a going concern.”

Even for family restaurants with interested heirs, succession planning has become more tangled because the recession has pushed down the values of real estate and affected cash flows from business.

“The first thing someone should do is visit with a professional, whether it be their CPA, their attorney or their financial planner, and ask what are the ways other businesses hand down the baton to the next generation,” said Bob Moses, principal in the Beacon Financial Group in Dallas.

“And then they need to get a valuation of the business,” Moses said. “The value of what they think it is, versus what it really is, can be really two different points of view. That needs to be done by an independent third party, so there’s an arms-length transaction.”

For many restaurant families, the business is the largest asset in the estate. For example, the Cozy Corner Restaurant Inc. [4] in Memphis, Tenn., has three generations of the founding family working in all parts of the business. Desiree Robinson, widow of Raymond Robinson, who founded the barbecue spot in August 1977, said, “It seems like all members of the family eventually work here. It’s like a family legacy.”

Even in two-generation families, succession planning is fraught with challenges.

“They may have one child in the business and other siblings outside the business,” Moses said. “We’ve assisted the parents in starting to gift to the siblings outside the business other assets not involved in the business so there’s some equalization among siblings.

“It’s a sensational time to gift,” Moses said. “The IRS allows you to do it on a discounted basis, called a GRAT, or a grantor-retained annuity trust. It’s a significant way of getting one asset to another party on a very, very discounted basis.

“The success of the GRAT transfer depends on the interestrate environment,” Moses added. “Interest rates are so low right now that a parent can gift to the next generation and all the appreciation goes to that next generation and it’s not in the value of the person giving the gift’s estate. We’re passionate about finding ways to help people reduce their estate tax. The GRAT method is one of the best, especially in family-owned restaurants.”

The GRAT is set up so the donor receives an annual payment from the annuity for a fixed period, at the end of which the remaining value is passed on to the beneficiary, who must be a family member. The gift value is set on the initial contribution plus a theoretical interest rate, which is based on the federal mid-term rate in the month the GRAT was established.

Partnerships are another vehicle in estate planning. Rose Arnold, co-owner of Arnold’s Country Kitchen in Nashville, Tenn., has five children, and at busy holiday times they all return to help in the business.

She said she has been thinking about the transition of the business to the next generation, because they have been part of the classic Southern “meat-and-three” vegetables restaurant since it opened in 1981, when her first daughter was born.

“My daughter was working the cash register when she was 10,” Arnold said. “She knew all the presidents on every bill and coin.”

Her son, Franz Arnold, received a college degree in criminal justice but went to work in the hospitality business, in both fine-dining and more casual restaurants.

“I didn’t want him to think he had to be in the business,” Arnold said. “I didn’t want him to think this was something he was forced into. If they come back, it should be on their own terms.”

A new generation is like a fresh set of eyes on the business, she said.

“Since he has been back, he has added so much to the restaurant,” Arnold said. “He has wonderful ideas and energy.”

His innovations include lighter, nonfried fare, such as tilapia, and “spruced-up salads,” she noted.

Without interested next generations, many restaurants are facing the tough decision of selling or shuttering. The Blackhawk in Wheeling, which already housed much of the Roth family’s Big Band memorabilia from the original Blackhawk restaurant on Chicago’s Loop, which closed in August 1984, faced the latter.

“It’s an unfortunate but necessary business decision,” said Bob Vorachek, general manager of the Blackhawk in Wheeling, who began working for Roth Restaurants in 1986. “While our restaurant is still very busy, we would need to embark on a major renovation to maintain the standards and quality our customers expect. Without the third generation’s direct involvement, Roth Restaurants cannot continue as a family enterprise.”

But some family enterprises have found ways to grow in the second generation.

Rico Valencia and his sister, Vienna Valencia Molder, who are principals in the Cyclone Anaya’s Mexican Kitchens [5] in Texas, are building new stores in Houston and Allen, Texas, expanding their father’s original concept to seven units.

Cyclone Anaya’s are named for Valencia’s father’s wrestler character name. The Houston-based company has three stores in Houston and two in Dallas.

“My dad started the restaurant in 1966, and I started working in the business full time in 1980,” said Valencia, who began expanding from the original Houston store seven years ago. The Cyclone Anaya’s locations are generally 4,200 to 5,000 square feet with large patios. They each have about 250 seats and a blended per-person check average of $25.

“Our transition went very well,” said Valencia, 47, who is the youngest of the founder’s five children. “My dad passed away, but my mom is still very much involved.”

Many recipes are from his mother, Carolina. Valencia has two children in college, and they work in the restaurants when on break.

“My parents were really great about not forcing the business on us,” Valencia said. “I would really recommend for succession that the next generation have a genuine interest. It could even be a niece or nephew. Whoever it is, they have to have a passion for the business.”

There is also a sense of family honor, he noted.

“I feel honored to carry on what my father has done,” Valencia said. “I feel whoever is next in line has to have the same passion, otherwise it won’t translate into a great dining experience.”— [email protected] [6]