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BUYING A SMALL BUSINESS

Case Study: When a Married Couple Disagree

Tom Pastorius wanted to buy back his business, Penn Brewery. His wife Mary Beth was not so sure.

MR. BEER Tom Pastorius traveled to Germany to purchase these domed copper kettles for his Pittsburgh microbrewery.

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Tom Pastorius had turned 65. It was fall 2008, and he had just retired from Penn Brewery, the company he had founded, then sold, then worked for as president. Tom's retirement suited his wife, Mary Beth, just fine. The couple had had a great run building the local Pittsburgh microbrewery and restaurant. But the time had come to kick back a bit and enjoy life.

Before long, though, Tom was feeling bored. What's more, he was frustrated with the new owners and the direction in which they were taking his company, 20 percent of which still belonged to him. He longed for the early days, when he and Mary Beth worked endless hours to get the brewery up and running. So when, in the spring of 2009, the new owners offered to sell him back his brewery for a small fraction of what they had paid him, Tom couldn't believe his good fortune.

There was just one problem. How would he persuade his wife? He knew Mary Beth would be against buying back the brewery. She had been at Tom's side, helping him run the brewery for 17 years. But she still felt pangs of guilt at the memory of her two young sons sleeping on a couch in the brewery office before she would carry them to the car in their pajamas. She had endured those years, but now she had had enough. There was no way she was going back to the brewery.

For weeks, Tom put off the talk. Then, last July, he offered gingerly: "There is this opportunity to buy back the brewery." Mary Beth shot back with a scowl, "You are nuts." When Tom brought up the subject again, Mary Beth would walk away without a word. Or she would simply say, "But we have a nice life."

She was right. The Pastorius family had survived several shakeouts in the craft beer business and built a successful microbrew brand, making 15,000 barrels a year with $3.5 million in sales. Over the years, Penn Pilsner, Penn Oktoberfest, and other labels under their brand had racked up 14 medals at the Great American Beer Festival. Then, in 2003, they cashed out, selling to Birchmere Capital, a Pittsburgh private equity fund. Tom retained a 20 percent stake and stayed on as president for five years. The sale allowed the couple to pay off their mortgage, put their two sons through private colleges, and still have plenty left over for retirement.

But Tom had been miserable working for the new owners. "I am not a good employee," he says. "I'm a solo act." It wasn't the new owners' strategy that bothered him. Tom agreed with the goal of turning Penn Brewery into a regional player. It was the way they went about it that he felt was flawed. He fought over details such as installing a cooling system that he argued was too big for the operation. He unsuccessfully lobbied against a $120,000 billboard campaign. "We couldn't make enough beer to pay for it," he says. Sales went up, but expenses went up even more. (Jack Isherwood, managing principal for Birchmere, declined to comment on the firm's strategy for the brewery.)

Soon after Tom's contract was not renewed, the new owners dropped a bomb: They would outsource manufacturing to The Lion Brewery in Wilkes-Barre, Pennsylvania, laying off eight of the 10 brewery employees and offending many Penn Pilsner fans. "For beer people in Pittsburgh, Penn Pilsner was the Holy Grail," says Paul Cosentino, leader of the Boilermaker Jazz Band, which often played at the brewery's restaurant. "If it was no longer made here and it didn't taste the same, why should we buy it?" Tom winced at the headlines in 2008 and 2009. Sales were dwindling. Birchmere closed the restaurant and sold off much of the brewing equipment. "It was so hard to sit back and watch this place sink," says Tom.

In 2009, Birchmere put the brewery up for sale. Tom dreamed about buying it back. He would sneak up to the third floor of his house, out of view of his wife, to work on his business plan, jotting down a risk-benefit analysis. On the negative side, the brewery was almost $1 million in debt. He would have to absorb the loss. The brand was tarnished. And he wasn't exactly young. Still, he had plenty of experience and energy. He would much rather make beer in Pittsburgh than golf in Florida. He had a chance to add value to his 20 percent stake, now worthless. With his reputation, he knew he could bring the luster back to Penn Pilsner if he returned production to the Victorian-era redbrick building in which it had started in 1986.

But then there was the matter of Mary Beth. She seemed determined to talk Tom out of buying back the brewery. And she had certainly earned a say in the matter. When Tom opened the brewery's restaurant in 1989, the manager was so overwhelmed by the crowd on opening day that he walked out the back door without so much as saying goodbye. Panicked, Tom called Mary Beth, who was home caring for their two young sons. "Dear, we are having a little problem," he said. "Do you think you can come down to the brewery and help me get it straightened out?" Seventeen years later, she was still there, selling potato pancakes and bratwurst from the traditional German menu she had developed.

Their disagreements weighed on the couple all through last summer. By then, their two grown sons had been pulled into the dispute. "They ganged up on me," Mary Beth said. "They were proud of the brewery. It had been part of their childhood. They wanted to save it." But Tom Jr. says he also sympathized with his mother. "She knew it was a slippery slope," he says. Mary Beth had already launched a new business of her own, restoring historic buildings. She felt liberated away from the brewery. "It is the baby who never grows up," she says.

The Decision All summer long, the couple would hash it out at their big rustic kitchen table. Tom argued he could rebuild the company and their financial stake in it. Mary Beth countered that gambling with their retirement was foolhardy. "We don't have the luxury of time," she would say. "It's too risky at our age." But Mary Beth soon realized there was no reasoning with Tom. "I know Tom," she says. "He's very stubborn. If he is determined to do something, he will do it." Finally, after several more weeks of going around in circles with her husband, she relented: "If you want to do it, you are crazy," she told him. "But keep me out of it."

Mary Beth had another condition as well. Tom could buy back into the business, but only if he found investors to share the risk. Tom agreed. He spent the next month tracking down potential investors, but most lost interest as the financial state of the brewery continued to deteriorate. Then, last September, he met an entrepreneur who co-owned a medical records business. The group had originally wanted the brewery building for its business, but Tom suggested investing in the brewery instead. "The brand has suffered, but the fact that Tom is coming back pushed us over," says Corey Little, one of three outside investors, who, like Tom, now each owns a 25 percent stake.

Beer lovers braved a February snowstorm to come back to the brewery for a Mardi Gras preview night to down beer, pretzels, and Cajun food. The place had the same wooden tables and benches that Tom had built years ago and the same oversize copper kettles he had imported from Germany. But this time, Mary Beth was not by his side. A few weeks later, though, she agreed to return for one year to help Tom restart the restaurant. "I've been dreading coming back for months," Mary Beth said on her first day back. "I thought I would take one look at the place and run. But it wasn't as bad as I thought."

In early May, Tom reopened the restaurant, with Mary Beth by his side. She then proceeded to work two back-to-back shifts. "Ah, Tom," she said. "The deal was that I didn't have to work the evening shift." Then Mary Beth saw another customer and put on her game face, greeting him inside the beer hall with a big hello. So much for retirement.

The Experts Weigh In

A Good Move

This is the right time for craft beers. It is the only segment of the U.S. beer industry that is growing. It is an affordable luxury. There is a new sense of loyalty to supporting your local brewery. It's not the same when you are not making it in your backyard. Pittsburgh needs a local production brewery. And people love a comeback story. Penn Brewery is a great story. Building a business from nothing is very difficult. Pastorius moves on and decides he is not happy. He buys it back. People in Pittsburgh really appreciate that he took strong pride in what he was doing.

Al Spinelli
Director of Operations, Sierra Nevada Brewing
Chico, California

The Value of Candor

It is never easy to recover from mistakes that were almost fatal. There are very few successful second acts. That said, the Pastoriuses have one strategy to play out -- candor. The brewery should admit the beer was mucked up and that they decided to bring it back and do it right again. They should run an advertising campaign that says, "Under old management." They should say, "We can't stand our wonderful beer being undermined, so we brought it back. We are doing it the old way." But they have to spend a lot of money advertising that. Most of these little breweries don't have money to run with the big dogs. That could be a problem for them.

Jack Trout
President, Trout & Partners
Old Greenwich, Connecticut

Healthy Dysfunction

This is their push-pull dynamic. In Round One, he drags her into the business reluctantly. She is a martyr, except she is a total trouper in her martyrdom. He is in the "please, Honey" role. She does it. He says "thank you." Of course, she has a choice this time. She could stay home. But she likes being needed. Given their track record, I think they are going to be very successful. They seem healthy in their slight dysfunction. Everyone has their dysfunction. This is a good one, since it is good for business.

Lauren Zander
Chairman, The Handel Group
New York City

IMAGE: Greg Ruffing
Last updated: Jul 1, 2010




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