If your family business has never hit a low point, consider yourself lucky. And if your profits have done nothing but grow since day one, make that extremely lucky. Even so, you're apt to find yourself in financial difficulties at some point, for any of several reasons. For instance, you may misjudge the market, hit an economic downturn or simply have insufficient capital.
Some families in business are able to work through the hard times, while others aren't as lucky. A number of factors may contribute to failure, according to Gary Brooks, chairman of Allomet Partners Ltd., a risk assessment and crisis intervention firm in New York. Some business owners may throw in the towel because they lack extra resources, are unwilling to expose the family to additional risk or simply lack management skills. Others are overly optimistic and remain in denial until the company is forced to go out of business. In difficult times family members may fight and blame each other. And in extreme cases—often involving dysfunctional families with a long history of jealousy and animosity—family members can end up suing each other.
Then there are the families who pull together during times of financial struggle. The Shaws, owners of the Coffee Beanery chain, based in Flushing, Mich., and the Pomerleaus, who own Augusta, Maine-based NRF Distributors, are two families who experienced a major business setback, were determined to meet the challenge and ultimately were able to evade the wolf at their door. Their stories serve as a primer on avoiding financial stumbling blocks.
Too many commitments
The Coffee Beanery got its start in the mid-1970s, when coffee drinkers shifted loyalties from freeze-dried (instant) coffee to freshly brewed. The company found itself at the forefront of a trend. Over the next 15 years, it expanded to 25 stores in five states. JoAnne Shaw, 60, serves as CEO; her husband, Julius, 67, is chairman of the board. Their two sons are vice presidents. Kurt, 42, is in charge of franchise development. Kevin, 40, is head of the real estate division.
In 1985, riding a wave of success, the company began franchising its stores. In 1998, the first international Coffee Beanery location opened. The Shaws also have a few wholesale accounts and a small office coffee business.
In the 1990s, the Coffee Beanery's corporate-owned stores were becoming a headache. JoAnne Shaw freely admits that trying to oversee 25 stores in a five-state area was a stretch. “We were simply not good at managing that many,” she says.
In 1995, the Shaws faced another problem. You might think it was competition from the publicly owned, ubiquitous Starbucks chain, but that wasn't the matter. The Coffee Beanery had committed to mall leases for about 60 franchisees and had helped with financing when necessary—a big mistake, JoAnne says. When their franchisees experienced problems, some tried to increase sales and work their way out, but a number went bankrupt or just walked out and left the Shaws holding the lease.
Between being burdened with leases and overloaded with corporate stores, the company had amassed liabilities that far exceeded what was reasonable. To remedy their situation, the Shaws negotiated with their mall landlords and sought advice from Ernst & Young, the firm that does their yearly audits.
When the family realized they were in trouble, they adjusted their plans to focus on one goal: improving their balance sheet. They stopped guaranteeing ten-year leases and, when possible, transferred leases to franchisees as they came up for renewal. Ernst & Young advised them to take a hard look at their real estate holdings and formulate a plan for paying down debt. That's when they decided to shed some of their corporate stores and tighten up their lease agreements. Still, “it took almost ten years of weathering the storm,” JoAnne says, to achieve the profitability they were after.
When anyone asked how business was during this time, JoAnne recalls, she painted a rosy picture. “Business is great,” she would say. “We have 40 stores in development. Our current franchises are expanding, and we have a lot of interest internationally.” She firmly believed there was a way out and projected that confidence.
Not all family businesses are so focused, notes Ernest A. Doud Jr. of Doud Hausner & Associates, family business advisers in Glendale, Calif. In Doud's experience, when money problems hit, family members often let their ego get in the way of taking action. “An important part of family business success is the ability of family members to put family and business purpose ahead of personal power and pride,” Doud says. “That is certainly true when money problems hit. It will be more difficult to correct the problems if individuals are more intent on protecting their positions than on working collaboratively to find solutions.”
Resolving to improve the balance sheet is one thing if you're in over your head, but without the necessary skills to do so, a company may find itself floundering. In many companies, the family member in charge of company finances may have a sales and marketing background and lack the financial acumen to solve a money problem of any magnitude, Doud says. Ideally, a family member or non-family manager should have a core competency in finance, the consultant says, but barring that, the family should be willing to ask for help from an outside source, as the Shaws did. The Coffee Beanery also has a chief financial officer who helps manage the relationship with the banks and with Ernst & Young, and Julius Shaw oversees the company's finances, checking to ensure that they don't make mistakes like double-paying bills. When the company was in trouble, Ernst & Young served as outside observers who provided an impartial view of the situation.
After a faltering family company agrees to work on finances and determines a strategy comes the hard part—actually facing the people banging on the door. “In the short term, you've got to buy yourself time with your creditors,” Doud advises. “Don't alienate good suppliers; work to get their forbearance.” On the other hand, you don't want to tell them too much about your troubles. “If it's bad enough that you need to seek relief,” Doud says, “go to your trade creditors first and ask them if they can extend your book. It's more powerful if you can also say, ‘These are the steps we're taking to correct the problem.'”
It's best to be open and honest with everyone you deal with, says JoAnne Shaw. “Make your suppliers your partners in working through the problems; don't go it alone,” she says. The Coffee Beanery's long-standing relationships with suppliers counted for a lot during the company's rough period, she notes. The Shaws asked some creditors for an extra 30 days and were never refused.
While they were putting on a happy face for their creditors and competitors, the Shaw family was bolstering each other. “Our whole family is very committed to the business, so we were all involved in the plan to work through the problem and were encouraging each other to do whatever it would take” to get back on track, JoAnne says.
By 2004, the Coffee Beanery had closed or franchised all but four stores, which are now used as R&D units and as training sites for franchise owners. Franchising now accounts for 97% of the Shaws' business. JoAnne Shaw declines to disclose the company's annual revenues but says they run in the multimillions.
A bank asserts its power
In the mid-1980s, while the Michigan-based Coffee Beanery was beginning to franchise its stores, NRF Distributors in Maine was filing for Chapter 11 bankruptcy protection. This 30-year-old family-owned flooring company was on the verge of insolvency in 1986 after the Bank of New England called in a large loan and lowered the company's borrowing power.
Norman Pomerleau, 71, serves as president of the company, and his three children are vice presidents. James Pomerleau, 49, leads the commercial carpet division, Terry Pomerleau Gray, 42, is in charge of marketing, and Deborah Pomerleau Giordano, 46, runs the wood division, the only department established after the company emerged from the filing. In 2002 Norman's brother Roger joined the business as treasurer and liaison with state and local government.
The early part of the 1980s were flush in New England, as they were everywhere, but then the stock market crashed and the economy took a nosedive. The flooring company was just matching what the mills were doing—extending credit up to $100,000 to their customers—and that's how the business got into trouble, says Terry Gray. “It's like what's happened with consumers and credit cards,” she says. “Our customers got in over their heads with generous credit terms.” The bank dropped a bombshell when it told NRF it wanted the company's operations loan of more than $1 million off the books.
“We didn't want to file [for bankruptcy], and we tried to stretch our cash, but we had no choice,” Terry recalls. Although the Pomerleaus kept mum beforehand when anyone asked how business was, in a rather remarkable action, the company alerted suppliers before the bankruptcy filing and canceled all incoming orders. “Our lawyers told us to keep quiet,” Terry says, “but ethically, we felt we had to tell people.” The company was due to file on a Monday. On the Friday before, employees called the vendors and canceled the trucks that were ready to leave for the NRF warehouse.
NRF paid dearly when the news hit. “People told us it was almost impossible to get out of a Chapter 11,” Terry says. “A huge part of our business is sample costs, and in the past, our vendors would help us with financing. When we were trying to get back on our feet, these costs tripled.” The family begged vendors to sell to them, Terry remembers. No one would let them make COD purchases.
And so they started on the long road to recovery.“Our vendors set up a committee to oversee our business, and they helped us finally get out of Chapter 11,” Terry says. “We cut a deal with them, paying 35 to 37 cents on the dollar. We had to build our inventory back up and prove we would survive. It took two to three years.” Yet there were bright spots, she notes. For example, although the family feared they would lose salespeople, the staff remained loyal. Terry attributes that largely to her father's reputation. In addition, employees knew the company had identified the problems and was working toward fixing them. “They had confidence in us,” she says.
Blame and infighting were never an issue, according to Terry. At the time, her grandfather Frank (now retired) and uncle Roger owned a furniture business that sold NRF's products, and Terry recalls her father being embarrassed to tell them about the filing. But Roger and Frank were able to look past the problem, she says. “We were going to help each other through this no matter what,” she explains. “It's always been that way.”
It helps to understand how she grew up. When other families sat around and talked football on Sundays, the Pomerleaus discussed sales. When she asked to borrow the car at 16, Terry relates, her father told her to start to work in the business. “I'm glad he did,” she says now. Another motivating factor in the Pomerleaus' recovery was the family's commitment to the community, Terry says. “It's a small town,” she says. “Our main concern was keeping people employed.”
The experience taught the Pomerleaus not to overextend credit, even in flush times, Terry says. They owned up to their responsibility for what happened to them, she reflects: “It was partly our fault.” Today, she notes, the company's finance and credit departments are much more stringent about terms. Her advice to other businesses in the same boat: In addition to watching out for credit limits, try to obtain personal guarantees.
Terry says NRF has tripled its business since the bankruptcy. Like the Coffee Beanery, NRF will not disclose its revenues; the family will say only that the company enjoys multimillion-dollar sales. The company reports that it's the ninth-largest flooring distributor in the U.S., selling to 3,000 retail stores in eight states in the Northeast; 1,800 of its accounts are currently active. At least 100 dealers are “aligned” with the company, which means that they buy 80% of their stock from NRF. One indicator of the company's level of growth after emerging from Chapter 11: NRF had 25 trucks in the mid-'80s; today, the company has a fleet of 66.
NRF also has a Mannington division—devoted to this national company's vinyl, wood and ceramic flooring—and a supplies division, which includes sundries and ceramics. The company represents 15 ceramic tile vendors. And its full-service graphics department supports its in-house merchandising needs as well as its customers'.
The family doesn't worry about the future, according to Terry. “We have a much better handle on things today,” she explains.
Patricia Olsen is a New Jersey writer whose work has appeared in the New York Times, the San Francisco Chronicle magazine, Financial Planning and other publications.
Five tips for handling difficult financial situations Ernest A. Doud Jr. of Doud Hausner & Associates, family business advisers in Glendale, Calif., offers the following suggestions for family companies facing hard times:
1. Don't wait. If you see a declining sales trend, for instance, jump on it quickly. Numbers can be a good trigger for investigating the whys and wherefores. But don't whip the sales force; it's obvious that what you're doing isn't working, so more of the same isn't likely to fare any better.
2. If your company is small, look into short-term financial help. Your accountant can certainly be an asset, but consider engaging a chief financial officer through a temporary agency. You need someone with an analyst's eye to decipher financial statements.
3. Institute stronger reporting systems to catch any future problems early. Most problems don't crop up overnight, so you need an effective early-warning system.
4. Focus on identifying causes and thinking creatively about solutions rather than pointing fingers. Aggression breeds aggression, and playing the blame game takes energy away from problem solving.
5. Find out what help your vendors can provide. If you have had a good history with vendors and you have a viable recovery plan, chances are they will work with you to temporarily extend payment terms to secure your patronage over the long haul.