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Family Business Can Mean Trouble

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Photo: ©iStockphoto/Steve Debenport

Howard Scott |

PEMBROKE, Mass. — As many of you don’t reside in Massachusetts, I thought I would share a cautionary tale about family businesses.

Charlie Sarkis is probably the most powerful restaurateur in the state. At the time of this writing, he owned 33 restaurants, including 15 Joe’s American Bar & Grill, 12 Papa Razzis, and his flagship enterprise, Abe & Louie’s steakhouse. All together, the company employs 3,400. Three of his children have worked for him, including eldest son Charles Sarkis, who was effectively running the firm. No longer. All three have been dismissed or have left the company. 

Father reportedly tried to get his son thrown off a Back Bay architectural board through a politically connected friend (“erase the job somehow,” Sarkis is reported to have said), and is in the process of selling the business to a private equity group despite the fact that his kids offered to buy the business for more money.

Daughter Amy, who was his events planner, told the Boston Globe, “I worked eight years for my dad, made him millions of dollars, and only had his best interest at heart. All I expected in return was the same and I am heartbroken that I didn’t get it from him.”

This isn’t the only family collapse when it comes to business. The Berkowitz family, owner of Legal Sea Foods, another major Boston restaurant chain, became embroiled in a major lawsuit between father Roger and his two sons. The Demoulas family, owner of the Demoulas supermarket chain, imploded when family members almost came to blows in court. Another Boston landmark, Grand Circle Travel, is having difficulties because the two brothers are feuding.

As these examples show, family business can mean trouble. Not always, but probably 90% of the time. There is something about money and blood that doesn’t co-mingle well. Perhaps it’s the expectations of the parent of their children. Possibly it’s that the first generation doesn’t know how to give up the reins. Maybe it’s that the qualities that allowed the entrepreneur to succeed are the very qualities that don’t make for good management partnerships.

Whatever the reasons, it is a better idea to stay away from family business. Buying the business is one thing. But running the business with one’s sons or daughters is bad policy. The kids should do their own thing. The father should hire good help to run his business.

Such advice flies in the face of many owners’ fervent hopes. Many fathers would like nothing more than to bring their son in the business and gradually let go of the reins and let him make the concern a great success. The father works hard to build up a five-store chain of Laundromats, while his son goes into a different field. Then at 35, his son decides he wants to team up with the father.

The father teaches him everything he knows. The son has new notions. He begins to implement them. The father backs off, appreciative of his son’s superior business acumen. The business expands. In five years, the business consists of two dozen Laundromats, dry cleaners, and a huge commercial laundry. There is so much money pouring in that the father decides to retire at 62. This is the ideal. 

It probably won’t play out that way. The son comes into the business, but can’t live on the initial salary the father can pay him and is resentful. The son pressures the father to open a sixth Laundromat, but they soon find that volume is below break-even, perhaps because it is too close to an existing store. Both locations suffer. Then the son wants to raise prices, and father disagrees.

Reluctantly, the father allows the son to raise prices in two locations in more middle-class communities. But the word gets around that there is price differentiation, and many regular customers are miffed. Meanwhile, the father has to go in the hospital for an operation and needs a month to rehabilitate. When he returns to the business, he finds so many loose ends that he fires his son on the spot.

Scott’s law of management is: family businesses rarely work. Don’t try it.

But if you must, live by the following rules:

Assign Separate Responsibilities to Each Family Member

Make sure that tasks are divided. One management team member does all the inside work, including maintenance and handling store issues. The other family member is in charge of marketing, hiring, and cash control. Allowing everyone to do everything invites confusion.

Give the Arrangement Time

Let one year pass before the twosome evaluates the success or failure of the merger. It takes a while for a newcomer to learn the ropes and to focus on how to improve matters. You agreed to combine forces. Now give the novice time to prove themselves.

Respect All Management Members

Yes, your son doesn’t work as many hours as you do. Yes, he isn’t as good with the customers as you are. And yes, he can’t fix a broken pencil sharpener, while you can repair almost any dryer problem. But show the person (disregard the fact that he’s your son or daughter) respect.

Give him responsibility and let him exercise it.  Who knows, maybe he is the business genius you always wanted to be. That means be civil with each other at all times. This is hard when you’ve had a frustrating day, but you must hold your tongue.

Agree in Advance on Each Member's Salary

Yes, you’re family, but there could be hard feelings if this issue isn’t resolved up-front. A good idea is to pay the newcomer a low salary to start and re-evaluate the issue a year later. That shows he’s not just doing it for the money. Second, it takes a while for a newcomer to learn the business, during which time he’s not an extremely valuable asset to the firm. During these critical months, such agreement will help determine if the combo is going to work or not.

Never forget that a business is a business and a family is a family. And if your family business works, congratulations, but you’re the exception to the rule.

About the author

Howard Scott

H&R Block

Industry Writer, Drycleaning Consultant, and H&R Block Tax Preparer

Howard Scott is a longtime industry writer and drycleaning consultant, and an H&R Block tax preparer specializing in small businesses. He welcomes questions and comments, and can be reached by writing Howard Scott, Dancing Hill, Pembroke, MA 02359.

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