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FAMILY BUSINESS

Splitting Heirs

In which two brothers take over the third-generation family wine-selling business. They quarrel, as brothers do. And now it isn't a family business anymore.

Then There Was One Brian Rosen restructured the family business: more business, less family.


Courtesy Sam’s Wines and Spirits

Case History The original Sam’s store in Chicago’s Lincoln Park in 1954, when the neighborhood was on the wrong side of the tracks


Chicago Sun-Times

Hanging Tough Darryl and Brian Rosen keep up appearances in a demonstration kitchen at their Highland Park store in early 2006.

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This family-business story starts, as many American stories do, with an immigrant. The details are hazy; it was 1905, or maybe 1910, and he came because he was Jewish and facing persecution in Russia, or to avoid the aftermath of the Russo-Japanese war. His name was Sam Rosen, and he ended up in Chicago. Sam started sweeping floors and clerking at liquor stores, and around 1942 bought his first bar, on Chicago and Ashland. Twelve years later, one mile east and one mile north, he bought four corners of a block for a bar called Sam's in the rapidly deteriorating neighborhood of Lincoln Park. It had five bartenders working there at 7 in the morning, armed with guns. It had 160 seats along a huge counter and a rotting wood floor. Sam worked hard and was quiet; he never mentioned that he fought in World War I until a year before his death, even when his son Fred joined the Army.

Fred started working at the bar when he was 10 and worked there all of his youth, except for the summer when he was sent to a camp for underprivileged Jewish boys during a polio scare. The bar was a few blocks from the crime-ridden Cabrini-Green housing projects and a few blocks from Chicago's rich Gold Coast. When Fred took over the business in 1956, he figured he could sell to residents of both neighborhoods. He hired a wine consultant and ordered him to buy inventory, establishing a reputation for Sam's as a place to find rare wines. This led to a curious mix of customers--fur-swathed women asking for Bordeaux alongside bums straddling stools and sucking on half pints.

Fred's boys, Darryl and Brian, were born in 1966 and 1970, respectively, and grew up as their father had, working weekends as the bar evolved into a package store. "If I wanted to ever see my father, it was at work. He was at work seven days a week," Brian says. Brian would climb the ladder behind the bar to retrieve a Mad Dog 20/20, or descend into the basement to retrieve a fine wine, or charm customers for tips as he carried purchases to their cars. Darryl, too, liked the feel of Sam's. "I liked coming down with my dad, liked helping him out. I felt a sense of owing him that much," Darryl says. He would sort invoices, load trucks, take deliveries, and work at the register.

This is a tough family, one where the boys' mother died in 1985, where Brian and Darryl call their father "Fred," where Fred says things like "We run a tough ship. There's no wimps in my family," where Brian and Darryl have each run 12 marathons, where Fred plays 70-and-over basketball despite two knee operations and a hernia operation. When the boys joined the business for good in their twenties, the store was pulling in about $13 million a year. The three Rosens expanded the company quickly from there, building on the foundation of Sam's Wines and Spirits as a family business. "It was a benefit to the family to have people you can trust on the payroll watching the dollars, watching the decisions. Family trusts family," Brian says.

Until it doesn't.

Family is the element of succession planning that can't be planned for. For all the paperwork covering who gets what shares and at what price, and who becomes president and who chief layabout, the family part gets everyone stuck. Fathers choose favorites. Siblings remember rivalries. Sisters get infuriated that they're being passed over for their brothers, brothers get riled up that daddy's girl is being anointed, parents refuse to retire. Even well-funded dynasties with the best counsel on retainer mess it up: the Bronfmans of Seagram's, the Murdochs, the Pritzkers of the Hyatt hotel chain, and the Shoens of U-Haul, whose succession issues included a murder, are a few examples of how succession plans can go wrong.

Statistics show the same thing. One recent study reported that while 80 percent of the older generation of family businesses wanted the business to stay in the family, less than 30 percent had a succession plan in place and 25 percent deemed the next generation incompetent to take over. That's from a recent survey of 800 family-owned businesses by Laird Norton Tyee, a wealth-management firm. The Family Firm Institute, a research group in Boston, says that only 30 percent of family-owned businesses make it to the second generation, 10 percent to the third generation, and 3 percent to the fourth.

That can't surprise anyone who's sat through a tense Thanksgiving dinner. Family is tough enough to survive without the money, career, and power struggles involved in a family business.

The exterior of Sam's today is scrubbed and suburban, and yuppie chain stores share its parking lot. The staff is sharp. One worker on the retail floor turns out to have an M.B.A., a long career directing advertising at Joseph Magnin, and a degree from the Parisian cooking school Escoffier. It's an upmarket superstore. Sam's Wines sells 24 kinds of Puligny Montrachet, but you have to click across cement floors and navigate around beeping forklifts to reach them.

It wasn't such a big operation when Darryl and Brian joined Sam's Wines after college. There were 20 employees, crusty old fellows who'd worked there for ages, not the 200 or so who work there now. There was a no-frills approach to the business, too. Fred Rosen was a guy who wore sweatshirts and made sure an order had the correct number of bottles, not one who cared about fancy-pants financial analysis. Darryl, a CPA, added some rigor when he came to Sam's, setting up accounts-payable and cash-management systems and buying a scanning system; he went to night school at Northwestern University's Kellogg business school to get a master's in management. Largely, though, all three Rosens just did what they liked. "Fred would organize day-to-day orders, Darryl was behind the scenes, and Brian was outside the store. Brian's very, very good at networking…but they never really had defined boundaries," says Terence Leninger, an employee who's worked there 10 years.

Brian was happy with his social role at first, and he and Darryl--who had essentially raised him after their mother's death--got along well. "My brother was my best friend. My father was working so much; [Darryl] acted as my father figure. He was the only guy here who'd listen to me, give me guidance," Brian says. They worked together on refreshing the store, adding an upscale grocery section and hiring dozens of new employees.

Brian had assumed he and Darryl were relative equals in the business, but he started to realize that wasn't the case. One catalyst for that was an unexpected bid for Sam's by a California company in 1998. Darryl had the title of CFO, Brian the title of COO. (Fred, with his old-school style, eschewed a nonsense thing like a title.) According to the deal, Fred would have remained at Sam's, operating the store. Brian would have helped him. Darryl, though, would have become the California company's vice president of operations, with a board seat. From Darryl's point of view, this was natural; he'd been at the business longer and had a stronger financial background. The deal fell through. But later, as Brian started to consider where the deal would have left him, he started to bristle. "No one told me s---," he says. "But the older I got and the more people I talked with, I realized I got the pretty good shaft."

Until that point, Brian hadn't cared about his future role in the business. But he'd recently turned 30 and gotten married, and he decided he had to hack a path for himself at Sam's. He buckled down and studied the business, and joined a young executives group. He started hurling ideas at his father and Darryl: licensing the Sam's name or doing a deal to sell fancy steaks alongside their wines. More aggressively, he wanted to cut payroll and bring in an outside board of directors. As Brian heard it, Darryl's response was, "This is a family business; we can't just go out and do things." Darryl saw it differently. He was confident in his financial background and wondered what his English-major brother could bring to that side of things. He also was committed to the idea of a family business as one where you took care of your people, bloated payroll or not, and one where the family was in charge.

By the millennium, the brothers' closeness of the early years had deteriorated to what Brian calls "passable friendship." They barely saw each other outside of work, except for a Cubs game here and there, Brian says. Nevertheless, they were smart enough to put aside their problems in 2003 and write a succession plan. Fred was approaching 70, they were about to expand the business, and Fred wanted to pass Sam's down cheaply. "Entrepreneurs and business owners, mortality, they don't want to talk about it. But in a lot of cases if you don't do it properly you end up having to sell the business if something unforeseen happens," Darryl says. He and Brian hired a valuation firm and bought Sam's from Fred in a paper transaction. In exchange for the business's ownership, they issued Fred a note that would pay him the equivalent of what he drew from the business as an owner each year.

Brian didn't read the succession document carefully; he says he assumed the deal was fair. Had he paid closer attention, he would have discovered it wasn't a balanced handoff. Although the ownership split was 50-50, voting shares weren't: Darryl had 66 percent of voting power to Brian's 33 percent. The document gave the brothers outs in case they wanted to sell, but again, Darryl had more control. A right of first refusal dictated that if a brother wanted to sell his shares, he had to offer them to the other brother before an outside buyer. A "drag along" clause said that if the majority shareholder--Darryl--wanted to sell to an outsider, and the other brother failed to exercise his right of first refusal, the majority shareholder could force a sale. Brian didn't get such clout. ("We all read the agreements and we all knew what was going on...I was running the company and I had the full support of Fred," Darryl says.)

The sale didn't improve their relationship. By 2004, Brian had set up his own office at the back of the store, away from the second-floor offices of Darryl and the rest of the managers, and away from the desk he'd shared with Fred since he'd joined Sam's full-time. Darryl and Brian were speaking less and less. Adding to the tension, in December 2004 the Illinois Liquor Control Commission slapped Sam's with a 15-count citation, saying the company took illegal paybacks from distributors and operated an illegal warehouse. The Rosens responded furiously, saying they were innocent; still, the case dragged on until May 2006, when the Rosens paid a $300,000 fine, a record amount for the state commission.

As the brothers were fighting, Sam's as a whole was going in new directions--which led to more arguments. After decades with the single store, the Rosens opened suburban stores in Downers Grove in 2004 and Highland Park in 2006. The move helped Sam's keep pace with big chains like Trader Joe's, Costco (NASDAQ:COST), and Whole Foods (NASDAQ:WFMI), which were opening stores within a few blocks of the Sam's flagship. The Rosens' three stores were making almost $70 million a year and employed 215 people. Still, Brian thought it could get bigger. Darryl thought they should slow down and absorb the growth. "You can't stay in the middle. Once you start expanding a business, it's very hard not to expand anymore," Darryl says. "My plan was to take a year to retrench and absorb the growth that we had. We had three generations in one store, and now we had three stores. We're not Crate and Barrel. We're not Costco. We're smaller businesspeople and were better served taking our time."

Brian, who felt like he'd spent years screaming and not being heard, was reaching his limit. "We were the family hardware store when Home Depot came to town," he says. "Competition is everywhere with the Internet and a global economy. You have to be able to prepare to play on that level or you're going to get crushed. I wanted to do all those things. And no one in my family did." Beyond just the growth, Brian was railing for corporate structure like his colleagues in his young executives group had. Darryl had maintained the casual approach to the business, with no five-year plan, for example. Brian thought this was absurd, while Darryl thought it was efficient. "The fact is," Darryl says, "when you run a business like ours, you have a level of diligence to yourselves and to the bank, and when you don't have outside investors, the bank is what determines the level of what kind of accounting you do. If the bank is happy with doing an inventory three times a year, and producing a financial statement three times a year, that's what you do. If the bank doesn't care about vacation accruals, you don't do vacation accruals."

With all the internal and external competition, sales were growing more slowly than they had in years. Employees were noticing the brothers' friction. "People just saw they can't talk to each other....it was obvious, just them being physically separated all the time," says Carrie Wachendorf, an HR manager. "It's sad to see conflict between brothers," says Terence Leninger. "Brian had a different vision, Darryl was more conservative. Is caution the right way to go? I don't know. Maybe there's a middle ground."

The brothers' idea of family was changing, too. Once it had been them, their sister (who never worked in the business), and Fred. Now Darryl and Brian both had their own wives, children, houses, and plans. Brian thought Darryl's conservatism meant his family wasn't getting the money it deserved. "It came to a point where Darryl was making decisions that affected my family," Brian says. "I've got to protect my [own] family." It was time, Brian decided, to seize power.

In July 2006, backed by a lawyer he'd just hired, Brian called Darryl and the Sam's corporate counsel, representing Darryl, into a meeting. There, he contested the succession document. Brian's lawyer, Howard Davis, had advised him that the document was weak; corporate counsel had an obligation to represent all buyers in a sale agreement, Davis said, and since Brian had agreed to a minority voting share without realizing it, he might have grounds for a lawsuit. Brian asked his brother to give him equal voting power, and to carve out a role whereby he could take on the company's growth. Darryl wouldn't budge on the document and offered only to consider Brian's growth ideas. Davis remembers understanding where both brothers were coming from: "Darryl had a whole speech where he was trying to explain why he did the things he did, and it was emotional....He was focusing on the financial stability of the business, and Brian was focusing on the growth." Finally, Darryl said that if Brian didn't like the arrangement, Brian could buy him out.

Brian's options were limited. The business had debt, and a bank loan was out of the question. He saw private equity as his only choice for a quick deal that might get rid of his brother. It would mean sacrificing Sam's as a family business. He was willing to make that sacrifice.

After the July meeting, without telling his brother that he was taking Darryl's challenge seriously, Brian wrote a 45-page business plan and began asking for referrals to private equity firms. He knew Darryl had voting control and could quash the deal, but he didn't care. "Thinking that far ahead, would Darryl acquiesce if I got his number, was way beyond my capacity at the time. It was, let me first find a guy who'll take my phone calls," Brian says. "I was hoping the combination of the difficulty of the process, the difficulty of the family situation, and the difficulty of wine retailing on the national level would beat him down."

And it did. The succession document gave Darryl the power to turn down any deal Brian brought. But the fight with the Liquor Commission had exhausted him. The situation at Sam's seemed untenable, with the fighting over every tiny decision.

When Darryl learned Brian was arranging deals--Brian didn't tell him immediately, but it was obvious when he began requesting pro forma statements and old financial records--he served his brother with tough terms. But he didn't kill the sale. "I took a good long look at the business, and I thought, 'You know what? I'd rather have the money," Darryl says. He named a price for his exit, insisted there be no audit and limited due diligence, and required a fast turnaround. "I was not doing an audit," he says. "That's an expensive, long-time-frame type of obligation, and we had never had an audit before, and I was never gonna do that. We tried to get it done as quickly as we could for all parties. I don't like limbo; I don't like the effect that it had on our associates."

Brian, who'd been talking to 20 private equity firms, settled on a local outfit called Arbor Private Investment Company. "They were willing to put up with the family dynamic that makes buying a family firm a little more difficult than buying [another] company," he says. Arbor pushed back on Darryl's demand for limited due diligence; it didn't do a formal audit but got the reviewed financial numbers it needed. In January 2007, in the Sam's Wines lunchroom, Brian, Fred, Darryl, and the Arbor representatives shut the door and hammered out the basic terms. Brian held on to 20 percent of the business, and would make no money from the sale. Arbor worked with him to get Darryl the price he'd named within the restrictions he'd set, and gave Fred some cash as well--some of the payment he'd taken in 2003 was in long-term debt, which the Arbor money satisfied. "Fred wasn't money driven. Fred just wanted peace in the family," Brian says.

The deal moved fast, and rumors flew among the Sam's employees. First it was that Darryl was buying out Brian, then that the business was being sold, then that everyone would be fired, then that the store would be shut down. The company split into camps; the Darryl loyalists questioned what Brian brought to the store, and Brian's people wondered whether Darryl had the skills to talk to employees. Everyone started watching what they said. The rumors reached frenzy pitch in March, on what some staff later dubbed Bloody Thursday. One by one, 20 employees were called by intercom into Brian's office and fired. Three days later, on a Sunday, Brian finally called a meeting to explain what was happening. The employees learned that Darryl was out. Brian didn't tell them the terms of the deal, though: Arbor now owned 80 percent of the recapitalized company. Sam's Wines was no longer a family business.

Eight days after the deal closed in May, Brian was in his office at the Sam's flagship, practically wriggling with glee. On the floor of the store, he'd already made changes: a discount tent, a different shelf layout, more lighting. He'd also made internal changes, hiring a CFO, renegotiating fees on the company credit card, and starting plans to open more stores in Chicago and then elsewhere in the Midwest. He was packing up his tiny office, getting ready to move into the new space he'd bought with the Arbor money.

Brian also was under an immense amount of pressure, answering to boss-owners for the first time in his life. He'd wanted corporate-style structure, and he'd gotten it. Still, he was finally CEO, finally alone at the top. Alone, except--

Crackle. "Brian, I got the top real estate guy in town in, come meet him."

It was Fred on the intercom.

Brian ignored it.

Crackle. "Brian, come now." Brian gave an exasperated look. "He doesn't work here! What can you do?" And he went to heed the call of his father. The fact that the spotlight was still on Fred seemed to bother him. "He got written up today. My dad," he said a bit later, annoyed.

Brian's been a salesman since he was a kid, and now he's selling a story. He wants this not to be about a family conflict. It's about a tenacious young guy, getting his chance at last. It's about the future of Sam's.

But the future is just a chapter in the story of Sam's Wines. Brian is at the helm of the company because he scrutinized his family business and chose the business over the family. He made what seems like a questionable deal--delivering a third-generation family company into the hands of an outside firm, and cutting his stake by more than half without getting any cash--to escape his older brother's shadow. It's possible that Brian will institute the aggressive growth he wants, and exit the business a rich man whenever Arbor sells it. It's also possible that he'll struggle and the private equity firm will get rid of him. (Brian wouldn't comment on the terms of his employment with Arbor, except to say he has a contract he's happy with.)

Brian and Darryl aren't talking, nor are their wives and their kids. Darryl, who's starting a customer-service consultancy, initially cooperated for this story, but he decided not to sit for a photograph. He didn't want his family's issues in the press. It's Brian who gains by promoting Sam's now.

You can say the brothers could have gone to family-business counseling, or separated their duties, or talked about their goals when they put together their succession plan. You can say they could have been kinder, listened more, found a way to make it work. But it's family. It's not that simple. Ask Darryl why he took the role he did, and it's, "I was always the older brother." Ask Brian the same thing, and it's, "I was always the little brother and he was the big brother, and that didn't change, no matter how many good decisions I made." It's impossible to escape the family dynamic, and changing the destiny of Sam's would have required changing how the family interacted. The Rosens are marathoners, triathletes, knee-surgeried basketball players, and talks about their communication style are not part of the family mien.

Still, it's hard not to see Fred as a reminder of what could have been--in large part because he's refusing to leave Sam's, and can be found at his desk right inside the front entrance every morning. "It made my life a little easier when your own people are your backup people, when your own family is your backup," he says, as close as he gets to being sentimental. He talks about how great it would be if Darryl's or Brian's kids started working in the store and Sam's became the only fourth-generation liquor store around. Either he is dissembling or he doesn't realize the implications of Brian's deal, with the likelihood that the private equity firm would flip the company altogether within a few years.

Fred can't talk for long, anyway; he has work to do. He's no longer technically an employee of Sam's Wines, but there he is, still in his sweatshirt and cap, still coming in at 5:30 to load boxes at the cash register, still barking at employees, and still--even though Lincoln Park has become one of the most prosperous neighborhoods in Chicago--keeping a gun inside a paper bag at his desk ("the new administration wants me to put it away," he says). The fact that both boys went to college and have nice wives and good kids and own their houses and have some money means the Rosen family is doing okay. Brian and Darryl may not be talking, and they may not have their family business anymore, but at least they're still family. As Fred puts it, "They're pissed at each other. That'll pass. They'll all come to my funeral."

Stephanie Clifford is a senior writer for the magazine.

IMAGE: Jeff Sciortino
Last updated: Aug 1, 2007




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