The food service industry is often a family business. The pizza parlor or that food truck is handed down from one generation to the next, father to son and so on. However, there is an important consideration that few family business owners take into account. It is a factor that can result in buyouts, sales, and other things that no one really wants.
It isn’t enough to say, “we’re an LLC,” or “our shares are held in trust.” The question really is, who is the owner of the company, and how do you define ownership? When you see that custom food truck for sale, who is authorized to make that purchase, and what role do they play in the company? The answer can either make or cripple your business. Here are the five business models for family owned food service, and how each of them works.
The simplest model for a family business copies the original idea of whoever founded the business, whether that was your grandfather, great-grandfather, or whoever opened your food service in the first place.
The control or ownership is kept in one person or couple. That person controls and makes all of the business decisions for the company. Meaning that the owner is the only one able to buy a food truck in the company’s name.
The key for this model to work is that all of the heirs must decide who gets to play this role in a way that is fair. Ownership often passes to the oldest sibling or the one who actually works in the business. This can also be declared by the will of the current owner.
For other families the partnership model works well. Two or more heirs take over the business, but only leaders in the business can be owners. This means they must actively contribute to the business operations and expenses for an equal share in the profits.
This business model works well as long as the partners get along. For partnership to work though, decisions require consensus, and if fighting breaks out or cannot be resolved, the result can be that major decisions are postponed and often if the issues are not resolved, the company must be sold, or the partnership dissolved, and a new business model adopted. This often involves one or more of the partners buying out the rest.
These issues are preventable, however. If the company becomes too large or there are too many partners, there are other models that work as well.
3. Distributed Model
This model works differently in that all of the heirs actually become owners in the company, but the compensation model is modified so that those who actually work in the business get paid more. This works for a lot of families where some heirs want to work in the business and others do not. Generally this makes things more equitable, and can solve a number of disputes.
Unlike the partnership models, all of the parties do not have to agree on decisions. The model can include vesting decision making power in those who actually work in the business with a higher “voting” share. This model is the most common for family businesses, as often most of the family assets are tied up in the business itself.
4. Nested Model
This model is different as the family is divided up into groups. Parts of the family control some assets and decisions while others are owned jointly. In other words, there are small groups within the larger family group, but all are owners with ownership rights.
This is often a good way to solve disputes about certain asset distribution and can help with conflict resolution. Generally speaking, the family runs the core of the operation as a for-profit business, and then pays relatively large dividends to the different branches which use that money to create their own business portfolios.
The risk is that sometimes too much money is removed from the core business to fund the outside investments, and the core is then damaged or forced to sell or go bankrupt. The decisions about how much to pay in dividends must be considered carefully.
5. Public Company
The last option is the public model. This is where a business, even though it may be primarily family owned, is traded publicly with stock or it acts like it is, with each family member holding a certain number of shares. That number of shares determines how much control they have of the business itself.
Going public is often a great model to fuel expansion, but the family must be careful to maintain a controlling interest of at least 51% to prevent any hostile takeovers, and family members must agree to this arrangement. Otherwise, if one family member sells too many of their shares to the wrong person, company ownership will be at risk. This means family should have first right of purchase of any family member’s shares who wishes to sell out.
Your family business must be run just like any other company using the same business models and principles. Though structured a little differently, but knowing how your company is owned and controlled is vital to keepinging things in the family.