Smart Answers

Whether to Shutter a Struggling Family Business


A good friend’s dad runs a store that has been losing money to the many big-box stores in the vicinity. The store sells a few specialty items but little else. Many of its vendors require payments every month for inventory that does not sell but is supplied anyway. The store is kept open for sentimental reasons, as it has been in the family for a couple of generations. My friend asked me for advice. Do you have any suggestions? —G.R.K., Los Angeles

A family business that is bleeding cash is a very expensive hobby. And unless this family has unlimited wealth, there’s almost no way to justify keeping the store operating for sentimental reasons.

There’s not much positive sentiment, at any rate, in losing money every month, fighting with vendors, and retaining the potential liability involved in owning a retail business, says Micah Solomon, a customer relations consultant and speaker and author of Exceptional Service, Exceptional Profit. "These are not things to be done if one’s heart is not in the venture," he says.

Your friend should call a family meeting, perhaps structured as an intervention, and lay the store’s financial documents out on the table. If her father can be made to see the long-term drain this hobby is creating, he may take it more seriously, says John A. Davis, faculty chairman of the Families in Business Program at Harvard Business School.

FACING REALITY

"The business model either needs to change to become cash positive, or it needs to be sold or closed. Your friend needs to confront her father with the consequences of continuing to run the business at a loss; if he refuses to face reality and change how he is managing it, your friend needs to try to protect family assets from his use," Davis says.

Seek out a local family business consultant or SCORE.org counselor who can be brought in to explain, he suggests. Often, a neutral third party can help immensely in an emotionally charged situation like this one.

What to do with the business and the property in the future? The easy answer is a properly managed, going-out-of-business sale that would provide an opportunity to recover some of the company’s recent losses, says Robert Kramer, a longtime retail consultant and author of Revolutionary Retailing. If the family owns the building in which the store operates, they can sell it outright or perhaps lease it to another retailer to create future income.

EXCITING THE PASSIONS

An alternative plan might be to revamp and revitalize the store, provided your friend or another family member is interested in keeping it open on a profitable basis. "Figure out what would excite your friend’s passions," Solomon says. "Is there any set of products and service circumstances that would be both of interest to your friend and potentially commercially viable with the customers who can be expected in the store?"

The answer may be to specialize and offer a truly full range of items within that specialty. A winning formula for small retailers usually involves finding the right niche and location and offering the kind of welcoming service not often in evidence in big-box stores, Solomon notes.

Making the store over from the ground up will be a big job, given how far it has fallen, says Dave Ratner, president of Dave’s Soda & Pet City, a Massachusetts retail chain. "If you’re not carrying merchandise the public wants, and you’re not open the right hours, and you don’t have parking—you’re not going to do any business," he says.

NEW BUSINESS PLAN

Furthermore, your father’s suppliers should not be forcing inventory on him. "If it’s not selling, why would you accept it?" Ratner asks. "You need a clearer understanding of the business. If it has been there for generations, the location that was great in the 1950s and ’60s may not be so great any more."

Create a new business plan that revisits every aspect, from location to customer service to product line and retail focus. Have a professional look over the plan and give you an honest opinion about its viability.

If your friend decides to move forward, she can go back to her father’s vendors and attempt to get better terms and more involvement from them, Solomon says. "Nobody knows a product line better than the vendors themselves, yet most retailers treat vendors with a high level of contempt. If your friend can be the exception, it may be amazing the level of assistance and knowledge she can pick up from her formerly adversarial vendors."

If the business is beyond its prime and there’s no family interest in making it over, your friend’s family should close down the store, encourage her father to retire, and let everyone else move on without the financial headache the store is causing.

Karen_klein
Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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