How do I pull out and hand over my business?

It’s a sign of the times, I suppose. I’m getting quite a few calls from restaurateurs and café owners who want to put their businesses under management in order to simplify their hectic lives. As margins shrink and hospitality operators are forced to work harder and harder for less and less return, the option to stand back and get someone else to shoulder the burden of running the business must seem awfully attractive.

Easier said than done

The problem is, it’s a lot easier said than done — and I should know; it’s a specialty of the consulting side of my business and we’ve been doing it for 35 years. I’ve come to understand that it is not practical or feasible for many businesses to be run under management, and there is a kind of checklist I go through to assess the suitability of a business and its owner.

To begin with, the business must be large enough to support the cost of a manager without reducing the return to the owner to the point where the whole exercise is pointless. As a rule, I believe that any food and beverage business that takes under $2 million per year is unsuitable to be placed under management without sacrificing the profit, and if the owner of a business taking less than that really wants out, the only option is to sell it. Otherwise it is a prison from which there is no escape.

Good managers are expensive and hard to find

Good managers are expensive and hard to find

Managers cost a lot of money. First, a good manager will demand a reasonable salary. Exactly how much is dependent on the size and complexity of the business. As a rule of thumb you’ll need to pay somewhere in the range of $70k – $200k per year to get the skills you want. Cheap managers are like cheap Ferraris — they won’t last long and they’ll cost you a fortune.

Skilled managers demand good pay and are worth every cent of it, and at present they’re really hard to find. Their salary is not the end of it. By the time we add all the on-costs and other support costs of employment, they can easily cost you double what you pay them.

This can wipe out a large lump off the bottom line of any small business — this is why businesses have to be of a certain size before we will even consider the process.

Next we have to consider what we have to replace if the owner wants to leave. This can be tricky indeed. It’s not unusual for us to find that the owner has been functioning as a ‘benevolent dictator’ — i.e. the sole creative genius, HR manager, maintenance manager, sales manager, cost controller, mine host, waiter, emergency cook and cleaner; in short, a ‘jack of all trades’. To boot, they’ve been working 80 hour working weeks in order to fulfil all these roles, which is why they want to escape and get someone else to take over.

Be realistic about what your manager will be prepared to do

Now, is it realistic to think that an employee manager on $90k per year is going to kill themselves in order to fulfil a job, when there is no potential pot of gold for them at the end of the rainbow (the eventual sale of the business), as there is for the owner? In my experience very few managers will put in the hours, dedication and attention to detail that an owner who has their house on the line will do.

This means that there has to be some kind of supervisory structure in place below the manager to help carry the leadership load over the full range of opening hours, before the manager is put in place. Business owners who started the business and have nursed it as it grew, tend to not like to let go of anything in case it destroys the ‘magic’ and often do not have an effective supervisory structure in place.

You need to know what is happening when you withdraw

You need a system of control before you can withdraw or operate in multiple locations

Moving on, the next issue in order to put a business under management is that there must be systems of control and monitoring in place so that the owner knows what is going on and knows when they may have to step-in and intervene to protect their investment. At the very least there needs to be accurate monthly profit and loss tracking so the financial performance of the business can be monitored and downward trends can be checked before they go too far. My experience has been that most small businesses in this industry do not have monthly profit and loss statements, and these can be troublesome to install.

Next, there has to be strict tracking of the volatile relationship between sales and labour, on a daily and weekly basis. Wage costs can blow out very quickly and there needs to be a timely alert that the manager is not controlling things as strictly as needed. Putting this in place often requires a complete overhaul of the business’s bookkeeping system as this requires cross correlation between the payroll system and the POS system.

Listen to your customers

You need an objective measure of your customers' perceptions

You need an objective measure of your customers’ perceptions

Finally, there needs to be systems in place to monitor service standards, product quality and the physical presentation of the business. This is normally achieved by the installation of some form of ‘Mystery Diner’ program — which we believe is the most important of all the management control systems. You control money, stock, etc — but do you measure the very thing that will drive your business growth — customer perception?

Interestingly these are the same systems required to operate multi locations. It’s logical when you think about it; the systems required to keep control of a business while you are not there are also the systems required to keep tract of multiple business sites. So, if you’re dreaming about putting you business under management some day, you probably better start the process sooner than later — it could take some time and require a reasonable investment.