Succession Planning Can Help Company Grow
Zlaket’s Market opened for business in 1927 in the once-quiet farming village of Garden Grove. Leo Zlaket and his wife, Mary, ran the general store through the Great Depression and World War II.
Two of their sons, George and Leo Zlaket, who were raised in an apartment above the Main Street shop, took over in the 1950s. Leo bought out his older brother in 1988 and then struggled as the aging shop almost sunk under the weight of the recession of the early 1990s. Changing demographics and eating habits in the now-bustling city of Garden Grove didn’t help.
He and his wife, Virginia, considered selling the business but instead launched its first marketing and advertising campaign, fine-tuned its product mix and created an online presence.
Today, their son, David Zlaket, 34, answers the telephone at the store, now known for its gourmet foods, deli, catering and specialty meats. Plans for opening a string of delis are in the works as David Zlaket and his father, who still owns the six-employee operation, look to expand the franchise.
Discussions are ongoing about how and when ownership will pass to the third generation.
“I’m here to stay,” said the younger Zlaket, who worked in the music industry after graduating college. “It’s tougher to do business these days, but this is my home and I’ve grown up with generations of customers here.”
Such successions are rare: Only about 10% of family-owned and -operated businesses make it to the third generation, experts say. About 30% of family businesses survive each generational transition.
To boost the chances of a successful handoff, consultants recommend creating a plan that goes beyond simply picking a successor.
But planning is just the thing many entrepreneurs have little time or patience for. Most business founders are ill-prepared, emotionally and strategically, to hand over control of the companies in which they have invested so much of themselves and their finances.
“It’s the most significant financial event they will probably experience in their lives,” said Jay Mattie, a partner at PricewaterhouseCoopers in Boston, who specializes in succession issues. “The way they do it will have a huge impact on the rest of their lives from a financial standpoint and a significant impact on the company itself.”
Done right, succession planning will steer a company toward growth. Handled badly, it can mean the end of the business, Mattie said.
Choosing a successor is one part of a successful plan. The best plans also cover tax, legal, financial, strategic and management issues.
“Strategic planning is statistically shown to be correlated with family business longevity, but neither estate planning or succession planning alone are,” said Craig Aronoff, principal of Family Business Consulting Group in Marietta, Ga., and coauthor of a series of books on family business.
To start, a family business owner needs a realistic understanding of the business and its prospects, Mattie said. That includes identifying the key value drivers -- the products, services and skills that attract and keep customers -- and discerning how the competitive environment and the company’s markets are evolving.
With that foundation in place, business owners need to take a hard look at where they want to be in five or 10 years, how involved they want to be and how much money they want to take out of the business, through a salary or the sale of private stock or both. The timing of those decisions can have profound tax and financial implications for a company and its owner, Mattie said.
For example, it might be best to transfer ownership within the family when sales are down. That is when the company’s value will probably be relatively low, as will the tax on the transfer.
The successor should be chosen well in advance of an owner’s retirement, whether voluntary or due to a sudden illness.
“You really need to take a hard look at which of your children are going to be driving the business, which really have the capability to run it given the direction you want it to go,” Mattie said.
A frank discussion among family members about their expectations and the succession plan is crucial. A family council, or meeting, can be a formal venue to share this information and build support for the plan.
“You need to bring the group together to help them understand the moving pieces of the plan and the owner’s intent for the legacy that [he or she is] leaving behind,” said Rachel Owens of Succession Strategies of Santa Ana.
Succession planning can be complicated, but by starting early, an owner, the family and the company have more options and a better chance for a successful outcome.
“The worst time is when Dad has just had a heart attack and everybody is panicking,” Owens said. The best time is when a child has shown an aptitude and interest in the business and, with training, could become a successor.
“Then you can say, ‘Let’s work on this for five to 10 years because then I’ll be 65 or 70 and ready to move on and enjoy the rest of my life,’ ” she said.
As for Zlaket’s Market, David Zlaket hopes he’ll be in that position one day, ready to hand over the business to his son. At 16 months old, the boy has a ways to go before defying the odds to become the fourth-generation Zlaket to fall in love with the business.
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Cyndia Zwahlen can be reached at cyndia.zwahlen@ latimes.com.
