A restaurant owner explains some of the pitfalls of running a family business.
Family members share a history long before they become business partners. Guess which are the ties that truly bind?
Like so many family businesses, mine has been through a horror story. My grandparents founded a successful restaurant, and when the time came to retire, they chose to avoid the hassles of passing along the business to several family members. They wanted to keep succession clean and simple. So they sold the business to me. Yet despite their best-laid plans, I invited my family in through the back door, and within a year all those horror stories we hear about family businesses came to pass.
In 1981 I was 21 years old and felt like a boy wonder. I had just made a great deal with my grandparents for the restaurant -- nothing down and the balance payable over 10 years. Though confident of my organizational skills, I thought my sister Mindy had more flair with food than I did, so I decided to sell part of the company to her as an incentive for her to stay. That was my first mistake: believing that the only way to keep a talented employee was to offer equity. As I learned, employees -- whether family members or not -- may be right for a company only at a certain stage in its growth. Equity, on the other hand, is forever.
My second mistake was to retain my father, a lawyer, to draw up the papers to change my sole proprietorship into a corporation. I got more than I bargained for. There's a maxim in the legal field that holds that a lawyer who represents himself has a fool for a client. That holds true for the sons and the daughters of a lawyer as well. My father tried to juggle my interests, my sister's, and even his interests as a father and as an investor, since he was getting a few shares for himself. I ended up selling 46% of the company to my sister and another 3% to my parents and grandparents.
Things went well for a few years. Then Mindy began complaining about the profits we were pumping back into the company. She began to demand that we take more salary out, run more expenses through the business, and stop trying to grow so grandly. I wanted Wright's to be the next McDonald's. She wanted a healthy source of income. Those were radically different visions for the company, and they could not be easily reconciled.
Our differing views finally came to a head in 1985, when I planned to purchase a computer for the back office. I was shocked when she challenged me by pointing out that our articles of incorporation forbade substantial transfers of corporate assets without the approval of 75% of the shares outstanding. I had no idea our articles had any such provision, because I hadn't even fully read the documents! I had blindly signed where my father had said to sign. I won the computer battle -- it turned out that Mindy's interpretation of what constituted a substantial asset was wrong. But the war continued for a year. Eventually, I met with Mindy and gave her three choices: follow my lead, quit, or be fired. She refused to choose, and I fired her.
A decade has passed, and we still haven't put the pieces back together. How could we? The sloppy manner in which we formed our union and then parted leaves us no closer to a resolution today than we were 10 years ago. Not surprisingly, 15 years ago I would have dismissed stories like ours. I assumed that we would avoid the messy struggles of other businesses because we were family. That made us different. And that's the big lie. Family businesses are not different. They face the same challenges of external competition and internal politics, the problem of employees whose talents no longer meet the needs of the business, and the conflict of divergent dreams. The message I told myself about families prevented me from approaching the deal like a businessperson.
I should have asked myself why our business life would have been any different from our family life. From my earliest recollections, my sister and I fought. Being older and bigger, she often got the better of me until I grew big enough to return the favor, but by that time it was no longer permissible for us to fight that way. Through our teenage years we politely ignored each other. Then we found a common ground in the restaurant. I was elated, thinking I had found the perfect vehicle for us to become true brother and sister.
Instead, I learned the family is the problem for all family businesses. We break the rules of business because we're family, and then we're horrified when we suffer the consequences of our reckless behavior. Family members who decide to be business partners are no different from the couple, struggling to make their marriage work, who choose to have a child "to improve the relationship." Then they learn, much to their surprise and chagrin, that the relationship is even harder to maintain.
A decade has passed since I fired Mindy, and she won't be back. A few years later, after spiritual changes in both of our lives, we even tried to work together again. We got the same results. I don't think it was a lack of faith that failed us. We're very, very different, and we have a long history between us. As Mindy left the second time she said, "This is all too big for me." She was right. A mere business could not fix our relationship. We're still trying to find a common ground, a relationship that works, and we're having little success.
In our own sad way, we try to work it out by trying to negotiate the sale of her stock. About once a year Mindy calls me, wanting to sell her shares. I make what I believe is the best offer possible. She spurns it each time. I'm not sure what is enough, because she doesn't have any hard and fast numbers. We came breathtakingly close to doing a deal once, but at the last moment she demanded another $75,000, and I backed off.
While Mindy and I bicker over selling, I struggle with the dubious wisdom of continuing to build a company in which legal agreements my father wrote keep me or any other shareholder from easily cashing out. That 75% supermajority makes Wright's an uninteresting investment for prudent investors. Yet I keep on personally guaranteeing loans and assuming other risks, despite an asset that's unsalable without my sister's participation. I made a bad deal. How much longer do I stay in it?
In 1981 I bought the restaurant for $100,000, and a year later I sold almost half for only $3,675. I wanted peace of mind and got exactly the opposite. In hindsight, Mindy wasn't wrong, nor was I right. We simply had irreconcilable hopes and dreams. And though you won't see her in the restaurant today, she's there nonetheless. Her whimsical words still describe some of the menu items, and her Seventh Wonder and Apricot Delight remain two of our favorite desserts.
As for me, I learned some invaluable lessons from our painful experience. Perhaps the two most important are these: I actively seek the counsel of outside professionals for major decisions. While I trust my associates' knowledge and wisdom, I know that their decisions -- like mine -- are too colored by a consideration of the consequences of their choices. Outsiders, on the other hand, don't have to live with the consequences of their choices and are thus free to be more at ease with new perspectives.
And I don't confuse family preferences with good business practices. Even today my family would like me to give Mindy what she wants. I tell them I have 35 other people counting on paychecks, and that paying out that much would leave us with nothing to repair or replace equipment, and we'd have no capital for growth. Despite our distance and disagreements, I want the best for my sister. I'm not sure we'll ever work out the relationship mess until we work out the business mess. Or maybe we'll resolve the business mess only when we resolve our relationship mess. No matter what, I do know that my family's business has been the worst remedy for curing what ails us.* * *
Jeffrey Mount is the owner of Wright's Gourmet House, in Tampa.