We grew too fast— and ran out of money
David Zack
Copperstate Metal Co.
Phoenix, AZ
Growing too fast put Copperstate Metal Co. into bankruptcy in 1990, says David Zack, 63, former co-owner of the scrap and recycling business he started with two brothers in 1978. “We didn’t have enough money to finance all the business we were doing,” says Zack. “We were trapped in a situation where we had to keep on doing more business, even though it was barely profitable, just to stay alive.”
The problem started small, Zack explains. “We kept building the business over the years—we went from doing $30,000 to $50,000 of business a month, to $100,000 by the early 1980s, to $1.5 million by the mid-1980s. As we grew, the profits weren’t always there. We needed more money to support our growth. We needed to hire more people and buy more machinery. But money wasn’t always available. This was during the time Arizona banks were experiencing problems with real estate and the Charles Keating thing. Banks were recalling loans and not making new ones. It was impossible to get money. Eventually it caught up with us.”
After they racked up $6 million in debt, banks would not renew their loan, and they were forced to file under Chapter 11. The Zacks managed to get back on their feet, however. They hooked up with another troubled recycler, and, together with their new partner, did twice the business with the same number of people. “They gave us money to operate, which made our lives easier. When there’s money pressure, you do business just to take care of the money problems. It forces you to concentrate on taking care of banking and other obligations, instead of on doing business. Every day, three-quarters of the day’s work was spent just taking care of financial problems. It was a vicious cycle.”
In 1993 the partners found a third investor experienced in the industry. They jointly created a new company and rolled it into a public shell on the NASDAQ. The Zack brothers netted cash and stock in the new company through various transactions and, while no longer controlling owners, they work for the new firm as consultants. Today the company operates in 15 states with more than 55 facilities.
I was too timid about taking on debt
Erwin Zaban
National Services Industries Inc.
Atlanta, GA
What Erwin Zaban calls his biggest business mistake was hardly fatal. But he regrets that during his years as CEO he wasn’t willing to borrow in order to finance faster growth, even though many businesspeople would envy how his family company grew over the years.
Zaban took over his father’s industrial chemicals company and merged it with a much larger linen supply company in 1962. He went on a major buying spree in the mid-1960s and early ’70s, acquiring companies in mundane industries such as envelope manufacturing, insulation, farm equipment, safety products and furniture leasing. Each of the divisions he acquired grew largely by taking over other companies in their respective industries, financed with cash and equity, but no debt.
In less than a decade Zaban acquired a dozen businesses, catapulting the company from $89 million sales after his first acquisition in 1964 to $380 million at the end of his buying spree in 1972. Now 77, Zaban is chairman emeritus of the $2 billion New York Stock Exchange Company.
But Zaban’s successes are mixed with some regrets. Looking back, he contends: “We could have been more aggressive. I can’t explain the reasons why I wasn’t. We would have had the board’s support for more acquisitions. Perhaps I was a cheapskate—I was nervous about overpaying, and that might have been a mistake. Or I might just have been a little too timid.
“We made a number of bad acquisitions that we disposed of, but I wish we had made many more acquisitions. We’d have had more failures, but we’d have had more successes. If every time we made four acquisitions two had been bad, we would have had two more good ones. So I’m saying if we had 10 more, we’d have had 5 more good ones. It’s costly to unload your mistakes, and we did take a few losses on disposing of the few businesses we didn’t keep, but it wasn’t monumental.
“We would have been a much bigger company if we’d been more aggressive in those days,” adds Zaban, who still comes to the office every morning. “There were good values in the 1960s and 1970s.”
It is ironic, observes Zaban, that in today’s heated market, with extremely high price-earnings multiples, people are more aggressive. “Having a good balance sheet doesn’t mean as much today as I thought it meant 25 years ago. I guess it’s just my nature that I never liked to owe money.”
We didn’t pay enough attention to costs
Pat Tracy
Dot Foods Inc.
Mt. Sterling, IL
Pat Tracy is the second-generation CEO of what claims to be the largest food service company in the United States, a middle-man providing food products and ingredients to small distributors and retail outlets seeking volume discounts. Pat works with his parents, who founded the business, 7 of his 11 siblings, and two brothers-in-law. The worst mistake he can think of has to do with cost control.
“Our biggest mistake was assuming that growth would naturally bring economies of scale that would dramatically lower the company’s costs,” notes Tracy, 47. “Unless you have a specific mission and culture for reducing costs, as you grow your business a lot of additional expenses that support your higher sales volume offset any economies of scale you might have gotten.”
The company launched by Robert (now the semi-retired chairman) and Dorothy (who remains secretary of the board) opened in 1960 with a single station wagon. Over the last 20 years Dot Foods has been doubling in size every four to five years, and today it has a fleet of 400 tractor trailers, 800 employees, and revenues of $900 million.
Pat says the family’s mistake was putting the lion’s share of its financial resources into sales and marketing, while neglecting operations that accounted for its greatest costs: transportation and warehousing. “After a number of years watching our sales increase substantially and seeing total expenses increase at same rate, we became disappointed that we were not achieving incremental net-margin improvement,” Tracy explains. Dot Foods eventually achieved greater operational efficiency and brought costs under control. Ironically, they did it by spending more rather than cutting back. They invested in new electronic systems and personnel development, which led to gains in productivity.
Big health-care providers give us nightmares
Willie Osborn
Osborn Drugs Inc.
Miami, OK
Willie Osborn can’t think of one big mistake he’s made at Osborn Drugs Inc., but he has a continuing nightmare. Osborn co-owns 10 drug stores with his son, Bill, 39, and several nonfamily partners, in Oklahoma, Kansas, Missouri, and Arkansas. Osborn has been struggling to deal with third-party payers such as health-maintenance organizations, hospitals, and insurance companies, which are big enough to dictate the prices they pay for drugs. If Osborn objects their prices, the big boys threaten to take their marbles and play elsewhere.
A few years ago, Willie says, the company lost 20 percent of its business in one day when a company he used to fill prescriptions for decided to send its patients to a mail-order operation.
“The Federal Trade Commission was set up to protect small purchasers from big sellers. I’m a small seller dealing with large purchasers,” explains Osborn, 64. “If I were to get together with one of my competitors to set the prices we charge, it would be a violation of the law. Yet purchasers who may have as many as 100,000 patients can say, ‘We’re going to pay you X dollars to do business—take it or leave it.’ If I don’t take it, I’m in a position of losing whole groups of businesses.”
His solution: Work harder and invest in cost-efficiencies. Some of Osborn’s investment dollars have gone into “computerizing everything in the world, so we can do more business with the same number of people.” He adds: “In our smaller stores in small towns, we only need one pharmacist, whereas 20 years ago we would have had two. Pharmacists tend to be so overworked, but by computerizing and maintaining the latest software and hardware, we have a four-second turnaround on claims. Before, it was a minute. When you add that up all day long, it becomes a significant time-saver.”
How troubling is his nightmare? “If my revenue eroded to the point where I couldn’t make a profit, and I could make more money investing in the stock market, I guess I could just quit. But I don’t see that happening. Over the long run I feel like it’s a good business for us.”
We don’t make time to plan
Luahn Hutchinson
Joia
Northampton, MA
Like many mom and pop shops, Joia operates by the seat of the pants of its three owners: Luahn Hutchinson, her husband, Jeff, and her mother, Myra Shahan. The store, which sells high-end fragrances, soaps, and other natural and beauty-care products, has grown and expects to achieve $400,000 in revenues this year. Yet Luahn says the three owners still don’t keep adequate records, or set aside time for planning the business’s future.
“Because we’re a family,” says Luahn, “we patch things together. We don’t have to put things on paper, or be as clear. We just do things as we need to. For instance, when we needed money, we took cash advances on our personal credit cards. Over the years, it got very tangled up. It’s not always clear who’s owed what, who’s responsible for which job. Also, we don’t pay ourselves by the hour. It’s all on an as-needed basis. That’s how it had to be in the beginning, but those days are long gone.
“Whoever is available does what needs to get done; whoever needs money takes it. It has put a lot of strain on our relationships over the years. Everything we’ve done has been almost like crisis management. There’s not much planning. There’s just a lot of give-and-take. If there were someone we had to be accountable to [such as a board], that wouldn’t happen. The flexibility is great, because it allows us to take advantage of opportunities quickly that would otherwise slip by. But it comes with stress.
One new project on Joia’s table—opening a second store—has been put on hold until “we sit down to write down our needs and vision.” Then what? “We’ll probably talk about that and see what we need to do. We have talked about hiring someone from the outside to help us sort that out.” But guess what? “We haven’t even thought that far ahead,” admits Hutchinson.
We didn’t anticipate the end of a boom
Mark Cantor
Jendell Construction Inc.
Kensington, MD
During the building boom in the 1980s, Jendell Construction, a remodeling company, closed down the small handyman unit it had set up to do small jobs such as fixing plumbing leaks and repairing decks. Mark Cantor says the company lived to regret the decision. “The handyman unit was a billing nightmare but it was fairly successful,” recalls Mark, 43, who started Jendell Construction in 1982 with his brother, Phil, 37. The company is named after their grandmother, Jenny Delinski.
Jendell’s main focus is on major remodeling projects at homes and office buildings. In 1986, it became the first remodeling firm to set up a handyman unit in the D.C. area. When the boom started rolling and bigger jobs were flowing in, however, the handyman jobs suddenly didn’t seem worth the hassle. The Cantors gave it up in 1990.
Soon after, the boom ended and the construction business went into a tailspin.
“I didn’t even know what a recession was,” recalls Mark. “I remember in detail how slowly, week by week, things took a turn for the worse. First I thought we were doing something wrong. Then I called lumber yards and other suppliers, and they, too, said business was very slow.” Instead of suffering a 20 percent decline in revenue, he says, the handyman business “could have carried us through. We could have used our phenomenal customer and referral base to generate smaller jobs, which would have become a major part of our business.”
Jendell ended up having to go through a tough retrenchment. During the crisis, Mark called one of his former fraternity brothers from Penn State, complaining that he didn’t understand what was happening in the business. “He asked me what Joe Paterno, Penn State’s football coach, would do if he started out in a losing season. I realized Paterno would have gone back to basics: ‘Do the things you do right. Block better. Run down the middle.’ It made a lot of sense. So we started trimming waste, became more efficient, and more aggressive.
“We jumped on it in enough time to adjust. We had some people who were making too much money and weren’t producing. We had to get rid of them. My brother and I became more active as hands-on managers. “Any time a company grows, there are certain things that are not tended to. The main thing the recession did for me personally was put the fear back into me that things won’t always be so good. We’ve got to always be prepared instead of waiting for it to slap me in the face.”
As for handyman jobs, the Cantors still get requests for them. Some of their competitors now offer these services, and Mark says Jendell may one day want to get back into the business. But restarting the handyman unit would take time and resources, and the brothers don’t envision doing it anytime soon.
Jayne Pearl, a former senior editor of Family Business, is a freelance writer in Amherst, MA. Her book, “Kids and Money: Giving Them the Savvy to Succeed Financially,” was recently published by Bloomberg Press (www.kidsandmoney.com).