Layoff Wounds Persist for Family Businesses
by Shirley Leung
Staff Reporter of The Wall Street Journal
This article is reprinted by permission from StartupJournal.com.
Raymond Covarrubias first sensed tough times coming in August 2000, when his business, which makes blueprints for construction projects, slacked off 30% from the year before.
There had to be layoffs at the family business. During solitary walks, Mr. Covarrubias considered several of his 12 employees, but he kept returning to his younger brother, who had been at the firm for 30 years. Bobby, the office manager, oversaw everything from billing to blueprinting. But with no wife, no kids and no mortgage to pay, Bobby could manage without a paycheck.
Raymond, 60 years old, didn’t have the heart to tell his 55-year-old brother at the office of Davis Blue Print Co., where the two worked side by side. Four times he drove by Bobby’s house to break the news, but he timed his visits, he later realized, for when he knew his brother wouldn’t be home. Finally in December, on a Sunday afternoon, he caught up with his brother and told him. He left shortly afterward, unable to look his brother in the eye.
“The only way it’s easy [is] if it’s corporate — the faces you never see,” says Mr. Covarrubias. “Anybody can do that.”
Bobby Covarrubias declined to comment, though Raymond says the layoff hasn’t hurt their relationship. But the whole episode is a painful reminder of a simple, searing truth: A layoff from a family business involves all sorts of traumas and considerations that would never surface in another sort of company. “Unless they have a real well-thought-out plan of what they’re doing, it tends to rip at the fabric of the family,” says Joe Astrachan, a principal at Family Business Consulting Group, in Atlanta. “If you exclude them from the business, you’re essentially kicking them out of the family.”
Sometimes layoffs can’t be avoided to keep an enterprise alive. And when there isn’t agreement among the family members about what steps to take to revive a business, the pain can be long-lasting. That’s what the six siblings of the Reynoso family learned after the 1992 riots in Los Angeles and the recession cut into their produce and dry-goods business. Their father and two uncles had started the business 30 years earlier.
As sales slowed, the three brothers and three sisters worked at half-pay for a year. Then, one day, John Reynoso, the president, called his siblings into an office. The future looked grim; it was best if some members of the family left, he told them, because the company couldn’t afford to pay all 50 employees. Over the next several days, three relatives — two sisters and one brother — volunteered to leave.
Debbie Reynoso says she raised her hand because after 18 years with the family business, she had enough experience to land another job. Her last post at the family firm was as a $70,000-a-year office manager overseeing payroll.
Another sister, Dora Perez, a mother of four, decided to leave because she couldn’t risk going without a paycheck and wanted more reliable work. Brother Rene packed up, unwilling to take part in the other painful decisions that would be required to keep the business going. For it to survive, the family had to break up the company among the various relatives who had stakes in the business.
The split, which happened in 1996, was awkward. Having worked side by side for so long, the once-close siblings grew apart as they left the venture, they say.
Today, the three Reynoso siblings still in the business run a spinoff called Latin Food Source LLC. With 15 employees, the $4 million company is healthy, with sales up one-third from a year earlier, but much smaller than the $80 million, 300-employee company it was once part of.
It took two years before Debbie Reynoso could find a steady job. Now 42, Ms. Reynoso recently left her post as a sales executive at International Distributor LLC in Vernon, Calif., to go back to school to take computer classes. Her sister, Dora, works in sales for the department-store chain Robinsons-May, a unit of St. Louis-based May Department Stores Co. Rene Reynoso is in real estate.
“We knew the whole thing would come down if we didn’t make the right decision,” says Debbie. “There are no regrets. Each of us has come out ahead in a different way.”
But John Reynoso, president of Latin Food Source, senses that there’s still tension with his brother Rene. He has only spoken with him once or twice since then, and relatives are careful not to bring up the breakup. “He wanted to stay with the food business,” says John. “We divided it up. He didn’t want to divide it up.” Rene Reynoso couldn’t be reached for comment.
In some instances, however, family sacrifices go relatively smoothly. Mike Scobee, chief executive of Scobee Foods Inc. in Dallas, found that he had to restructure his business, which ran lunch trucks for construction workers. The business, started by his father in 1955, began to suffer in 1987 and worsened when the stock market tanked in 1989, along with the Dallas real estate. That year, Scobee lost money for the first time, and the company laid off 20% of its 120-employee work force.
The Scobee family didn’t come out unscathed. Mr. Scobee, then vice president, volunteered to take a 20% cut in his $70,000 salary. His sister, Carol, left in 1989, to pursue a career as a probation officer. His father, M.M., retired that year at age 70, taking another salary off the payroll. At his request, the younger Mr. Scobee’s wife, Dorinda, who had left her job as a pediatric nurse to become a full-time mom, joined the family business, overseeing the human-resources department at the cut-rate wage of $6.50 an hour.
Business revived when the company began distributing sandwiches through convenience stores and airlines. Now profitable, the firm, which includes older brother Steve as chairman and Steve’s two sons, has $13 million in annual sales.
“The purpose of [family businesses] is to support the family,” says Mike Scobee. “You go into a recession — you have to make adjustments.”
Still, even when there’s no bitterness, family layoffs are awkward and painful.
Davis Blue Print, being tied to the construction business, has had to contend with tough economic times before. It also wasn’t the first time that Raymond Covarrubias had to lay off his brother, Bobby. During the recession in the early 1980s, Bobby was laid off for more than six months. Then in a recession 10 years later, Bobby worked just part time for nearly a year. With business still slow in 1996, Raymond had to lay off one of his own twin sons, Tony, for about a year.
“It’s not a personal thing,” says Tony, now 40 years old, who spent his year off going back to school to get training in printing technology. His father “knew in his lifetime this is what it takes to survive.”
Tony’s close relationship with his parents is something far beyond most any other employee relationship, of course. “I had to do this for my dad and mom — they kept me alive,” adds Tony, recalling how he and his twin brother, Ray Jr. suffered severe asthma during childhood. “We were so sick when we were young.”
The layoffs would have broken up a less tight-knit family, but they seem to have brought the Covarrubias family closer. Much of that, say Mr. Covarrubias’s sons, is because of how their parents got started.
Growing up in a poor family with five siblings in a rough neighborhood of Lincoln Heights, just east of downtown Los Angeles, Raymond Covarrubias started working at age seven, shining shoes. When he was 16, a high-school guidance counselor recommended him to Leslie Davis, who ran Davis Blue Print & Equipment Co., and Mr. Covarrubias began delivering blueprints around the city for Mr. Davis. By the time he was 22, Mr. Covarrubias ran the place when Mr. Davis went on vacation. When Mr. Davis decided to retire in 1967, he lent Mr. Covarrubias and his wife $500 to buy the company. He was 26, his wife, 25.
Several years later, Mr. Covarrubias’s brother, Bobby, who had been working in sales at a fire-safety company, offered to work for his older brother if he needed the help. Bobby soon joined the company.
The firm struggled for many years, even branching out to sell office furniture when construction slowed. Still, the Covarrubias family expanded the business and built its own office building in 1987.
During the boom times of the late 1990s, Mr. Covarrubias nearly doubled his staff to 25 with temporary employees. The firm made blueprints for Walt Disney Co.’s new theme park, California Adventure; the headquarters for the Los Angeles County’s Metropolitan Transportation Authority; and the Los Angeles sports arena, the Staples Center. It also saw more business come its way because it’s a Hispanic-owned firm and could take advantage of state and federal government policies that favored hiring minority firms in public contracts. In 2000, the firm raked in nearly $1 million in sales.
But in August of that year, as the economy started to slow, Mr. Covarrubias started to cut overhead costs, such as ordering less paper. But it wasn’t enough; he had to cut his payroll costs. He thought about pay cuts, but he was concerned about morale. Mr. Covarrubias believed laying off just one person would lessen the feeling that the business was in trouble.
“You kind of have to play chess,” he says.
The hard part was deciding who in the family would leave. His wife, Thelma, is co-owner — so he couldn’t let her go. And his three sons in the business are the only ones who know how to operate the new digital printing machines. His grandson, David, 20, worked only part-time. That left his brother.
“I don’t worry about Robert,” says Mrs. Covarrubias. “He can survive. He’s a thrifty person.”
Bobby Covarrubias — who used to make “well over $2,000 a month,” according to his brother — collects unemployment now. He still has a key to the office and drops by from time to time to pick up his mail. Sometimes he even comes in on the weekends to help his older brother with unfinished work. Divorced, he lives in a modest Lincoln Heights home his parents left the family. The mortgage has long been paid off, relatives say.
“I leave him alone,” says Raymond Covarrubias. “I’m not going to chase him out.”
Mr. Covarrubias and his wife aren’t sure when business will turn this time, but it won’t take much — three big projects each earning $15,000 a month will stabilize the company. Then, perhaps, the Covarrubiases can pick up on plans to open branch offices in Orange County and possibly Las Vegas.
The shaky economy, though, makes expansion iffy. In recent months, at least 10 construction projects the family had planned to pursue have been pulled or delayed. If things worsen, the family may decide to cut health benefits, saving about $500 to $700 a month. The company could also lay off nonrelated employees for the first time and have the family work harder. The Covarrubiases are trying to diversify by offering graphic design, and printing posters and brochures.
As for the strain on family ties, Raymond Covarrubias says he and his brother remain close. According to Raymond, Bobby tells him “he understands.”
This article is reprinted by permission from StartupJournal.com, © 2002 Dow Jones & Co. Inc. All rights reserved.
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