The IRS says you can't sell out to your children and stay involved in the company. The founders of Color Art discovered a way to do both.
For a Color Art Inc. sales meeting, it started out as a pretty tame affair. Fifty-five members of the company's management and sales teams had gathered in the audiovisual room of the company's office-furniture division, not far from the St. Louis airport, for the annual "sales contest" skull session. Unlike most such company get-togethers, staged histrionics were not part of the agenda. Nobody fired blanks from a handgun at critics of his sales quota as one overexuberant salesman had once done. Nobody hid an onion in his handkerchief, the better to blubber melodramatically over an account that had slipped away. While not exactly funereal, the mood around the conference room was at best subdued.
Given the number of clandestine management meetings in the previous few weeks, that wasn't surprising. Change was in the air, and the sales force sensed it. Rumors had surfaced here and there that the company might be sold. To whom and on what basis, no one knew for sure, but even a whiff of that sort of rumor was unsettling. In a company that had always put a premium on forthright communication, this cloak of secrecy was a little threatening. And in a company where easy access to top management and generous participation in the profit-sharing pool were the rule, not the exception, the prospect of a new owner was a gloomy one indeed.
When he got to his feet, Bob Reim, Color Art's founder and chief executive officer, did nothing to dispel the sense of unease. Quite the opposite: Departing from his usual text, the 62-year-old Reim inexplicably began reviewing 37 years of ownership and management history. His address recalled the fact that Color Art had been born in Kirkwood, Mo., a St. Louis suburb, on February 12, 1946 -- the day and the hour f the birth of his eldest son, Gary, Color Art's executive vice-president, who was sitting nearby. He reminded his audience that the company had grown from humble origins to a $20-million-a-year combined printing and office-furniture business, and that it had owed at least some of its success to a principle of creative nepotism, including hiring many members of many families and selling stock to offspring and other longtime loyalists. Reim spoke of how he, a Navy veteran with no college education, had operated the company without benefit of formal business training or large infusions of outside capital; and of how there always came a time when the worth of any privately held company -- that is, the actual dollar value of the paper stock certificates -- had to be measured. His words drew a knowing smile from Gil Lorenz, Reim's partner and co-owned (sharing 85% of Color Art's equity). Close to Lorenz sat his son, also named Gary, the president of Color Art's printing division.
Reim's talk created two moments of intense emotion. The low point came shortly after he had ended his preamble. Some three months before, said Reim, he and Lorenz had received a serious purchase offer for Color Art. The offer had come from a New York City-based holding company called Renco Corp., and had arrived completely unsolicited; nevertheless, Reim said, it was a good offer, in many ways an outstanding one. At a minimum, it was enough to ensure that he and his partner would cash out of the business as million-aires, and the management team would get long-term contracts, including sons Gary and Gary. Renco, added Reim, was known to have an excellent reputation for hands-off ownership. So even though he and Lorenz had not been courting retirement, here was a ready-made package that would let them go out gracefully.
Gary Reim remembers the reaction in the room to his father's words. "People's faces just kept getting longer and longer," he says. "It was as if everyone there was glimpsing the death of the company and didn't know how to react."
The second moment of emotion came just after Reim had finished his paean to Renco. With a trace of a twinkle in his eye, he went on to say that the offer, while highly attractive, had led him and Gil to consider a broader question: If the two of us are prepared to step down right now, might there be another suitor that could make a competitive bid? The answer, he added, had turned out to be a ringing affirmative. Another group had already stepped forward with a buyout deal that would guarantee strong leadership and reward the stockholders handsomely as well. The group included Gary Reim and Gary Lorenz, their brothers, sisters, and inlaws (many of whom had salaried positions with the company), and executives John Dodson and Bob Fox. It was they, the familial core of Color Art, who would be stepping into the ownership breach, a beaming Reim announced.
With that, the mood of the meeting turned abruptly from depression to euphoria. "They stood up and actually began to applaud," recalls Gary Reim. "You could feel the electricity in the air."
Electricity: It was hardly surprising. For Color Art's employees, Reim's words were as sweet as a last-minute reprieve from the governor. For members of the new ownership team, they were the culmination of weeks of hush-hush conferences and touchy negotiations with the Internal Revenue Service. And for founders Reim and Lorenz, they expressed a wish that many founding fathers hold but are unable to implement.
"Let me put it this way," said Bob Reim as he looked back on the transition months later. "How many companies go under trying to pass ownership from one generation to another? It's not an easy thing to do. We've gotten many calls from companies wanting to know how we did this, and we've seen a lot more where the second generation either wasn't equipped -- or wasn't allowed -- to step in and really run the show. Our kids were, and they have. So much so that this company just had a record year -- without us."
Adds John R. "Jack" Barsanti Jr., the attorney who helped structure the buyout arrangement for the Reim and Lorenz families: "The numbers were important, but the intangibles were more important. What I'm saying is, Bob and Gil's leadership in helping this deal [happen] was every bit as important as the leadership that built the company in the first place."
Today, a year and a half after Bob Reim's announcement, Color Art does indeed show the signs of a successful transition.
"They haven't missed a step," avers Jack Schreiber, vice-president of Centerre Bank, a major source of capital support. "If anything, they seem to have more management depth than before."
"Seems like we really opened the four-barrel [carburetor] when they took over," says Color Art production manager Ralph McNabb, a self-described country boy who started out driving a delivery truck for the company in 1956. McNabb has three brothers, a nephew, and a son currently drawing Color Art paychecks, a situation not uncommon at what insiders like to refer to as Nepotism Inc. "Like I said once to Gary [Lorenz]," McNabb remembers, "if you've got the guts to take over, I've got the guts to make it work. And I'd say it is working."
Saying anything else would be hard. Both corporate divisions -- printing, with income of $12 million last year, and office furniture, which did $24 million (up 64% since 1979) -- have set 12-month revenue records. Color Art has stepped up its acquisition activity and will be opening two retail outlets for office furniture. These and other yardsticks suggest that business is humming along nicely, thank you.
There is, of course, a simple explanation for this success.
"Momentum," says Reim pere, laughing. "No, seriously, I never doubted they could do it, assuming they could come up with the money. Hell, these guys were already running the company in many respects, and had been for four or five years."
More than a few sons (or daughters), though, have appeared to be running more than a few companies -- only to run them into the ground when their parents tried to pass on the reins. And a lot of parents, wittingly or not, have gotten in the way of their offsprings' efforts to keep a company going. Color Art somehow avoided both traps, plus a few others set by the IRS.
Momentum is probably about half the explanation. The transition of management at Color Art did take place over a deceptively long period of time, and was thereby destined to be mimimally disruptive. "I've been with my father's company 26 years and bought stock in it every chance I could," Gary Lorenz observes. "I don't consider myself second-generation management at Color Art. I'm first generation."
The other half lies in the fact that the actual buy-sell decision was touched off by the possibility of an outside buyout. It thus eliminated any doubt as to whose hearts -- and wallets -- were really in the company. No boss's son took over just because he was the boss's son; rather, the two Garys and their partners had to come up with a no-nonsense, competitive bid.
However you read the results, details of the deal are illuminating. Over lunch at a seafood restaurant not far from company headquarters, Gary Reim chronicles the key events leading up to the transfer of ownership.
"You really have to back at least three years," says Reim, an outgoing, rugged-looking man who once flirted with a career in professional baseball, "because at that time, Color Art was a company with no -- and I mean no -- long-range planning. Whenever we met with our bankers, I felt a little uncomfortable. Dad and Gil were great at building this company, but they'd never taken [the bankers] anything of a planned nature. It was always a case of going in there every six months or so and negotiating a loan to buy a new piece of equipment we needed quickly.
"Gary and I helped change that, and our relationship with the bankers changed accordingly. Early on, for example, I recommended a long-range planning program, even if we copied it straight out of the simplest textbook we could find. There was a lot of resistance to this 'high-falutin idea' -- 'Why waste our time when we could be out there selling?' was one reaction; 'Aw, let's humor the boss's kid' was another -- but they went along with it. Our first five-year plan turned out so well, we changed it to a three-year plan."
Having been instrumental in Color Art's retooling, the founders' children were understandably disturbed about the prospect of losing title to the company. Some of their concerns were practical: The fate of Color Art's generous profit-sharing plan was a big question mark, for instance, as was Renco's appetite for investing capital in new companies instead of in printing machinery. Some were emotional, reflecting the fact that, between them, Gary Reim and Gary Lorenz had spent more than 45 years at the company, and that they had several siblings and other relatives on the payroll. Ultimately, though, the source of their unease was less important than the fact that the kids wanted a shot at running the company themselves. So, while encouraging their fathers to take Renco's offer to the table, they quietly requested a 30-day grace period before any agreement was signed.
"Buying Color Art presented only one problem," says Reim with a chuckle. "We couldn't afford it."
Enter Jack Barsanti, an old crony of Bob Reim's from Reim's days as mayor of Kirkwood. Like Color Art's bankers and auditors, Barsanti was impressed with the kids' management credentials. He also suspected that there were some ways to leverage their paper assets in Color Art into a legitimate buyout mechanism, provided there was unanimity of mind among the family members. Time was short, however, and the IRS would surely put a microscope on an deal they worked out.
What the IRS is watching for, Barsanti explains, is a deal in which a company founder nominally transfers ownership to his offspring but remains in control. That is an appealing arrangement from the parent's perspective: He cashes out, treats the money as capital gains (thus paying substantially lower taxes on it), yet keeps running the business. To prevent such shams, the IRS often requires that sellers transfer all their interest in the company and never set foot on the premises again.
Barsanti immediately set up a series of semiclosed-door meetings to discuss buyout options. One given was that no dads were allowed in the discussions. "It was very possible," Barsanti explains, "that under the terms of the purchase agreement, Bob and Gil would have walked out the front door of Color Art and not been allowed to walk back in. Period." He pauses for emphasis. "As difficult as it is to imagine cutting the cord like that, I found it interesting that once the possibility was raised, every single subsequent discussion I had with the kids began with the understanding that the fathers would not be available."
Working under IRS guidelines, Barsanti boiled down the options. For starters, he said, all unrelated shareholders would have to have their stock redeemed by the company at a universally agreed-upon price; that would be a straight capital transaction. Next, he would seek an IRS ruling allowing such jointly held stock as that of Mr. & Mrs. Bob Reim and Mr. & Mrs. Gil Lorenz to be valued as a 50/50 split. That, Barsanti thought, would allow the situation to fall under a technical definition the IRS refers to as "substantially disproportionate" stock redemption. If the IRS agreed -- acknowledging that the deal truly rearranged the ownership of Color Art -- the fathers could stay attached to the company if they wished, and could still count their income from the buyout as capital gains. Should that strategy fail, Barsanti counseled, they might change Color Art's status to an S corporation and let the company leverage the buyout through income paid to the new principals.
Either way, whether on the payroll or out the door, the fathers would end up having cashed in their control. In return, each would get about $330,000 up front and around $1 million plus interest over the next decade. In any case, stock scattered among a variety of shareholders would be pulled in (or redeemed) and concentrated in two family voting trusts. John Dodson, a longtime employee and now head of the furniture business, would see his equity grow from 3% to 20%.Bob Fox, the new comptroller, would hold another 10%. The two Garys would vote their family shares, for a total of 70%.
Their fathers' reaction to the whole thing was predictable.
"I'd walk by those meetings on my way to the bathroom," says Bob, "and think, 'Uh oh, the parade's passing me by.' Secretly? I hoped this would happen."
"I was happy for [my kids]," adds Gil, "but even happier for the rest of the employees. They responded so positively."
And so it was arranged that an orderly transfer of power would commence. On April 1, 1984, after extinguishing his equity holdings, Gil Lorenz was feted at a lavish party marking his retirement as president. Precisely two months later, Bob Reim was the guest of honor at an equally sumptuous bash -- Color Art loves parties, the bigger and wilder the better -- celebrating his stepping down as CEO. On July 2, Gary Reim moved into his father's office.
One of his first visitors was Paul Laster, a union typesetter with about 20 years' tenure. He drew up a chair opposite Gary's.
"How's the company doing?" asked Paul.
"Rockin' right along," said Gary. "Anything on your mind, Paul?"
"Not really," said Paul. "I just always used to have these little chats with Bob, and I was wondering if I could do the same with you."
Bob Reim himself is now, thanks to IRS amnesty, a Color Art consultant. The position is decidedly part-time, which is lucky: His latest "retirement" project is a national golf-and-travel club he is putting together with Professional Golfers' Association tour star Hale Irwin, a hometown pro. Deeply tanned, Reim recently returned from a month on the links in Hawaii, which is Gil Lorenz's next destination.
Like father, like son, the saying goes, and certainly the old adage lives in the case of these families. While he was at Color Art, Bob Reim was the "idea man." At the same time, he devoted 12 years to local government and has been a visible leader in St. Louis political affairs, all the while cultivating a pretty formidable golf game. Gary Reim also loves sports (he used to publish a monthly St. Louis sports magazine) and politics (he recently ran for the city council in Kirkwood, winning a four-year term), and he enjoys the challenge of reconceptualizing management. Gil Lorenz, says partner Bob Reim, was "the tough guy, the nuts-and-bolts guy," of the company, and served as national president of the Optimists Club International. Cary lorenz, an ex-union cardholder, describes himself as a "hard-line" negotiator when it comes to labor relations; he is a member of various national printing organizations.
It will be left to other generations of Reims and Lorenzes to decide just what was heredity and what was good family planning."I wanna work at Color Art just like you, Dad," one of Garry R.'s sons has already said to him, "so I can be rich when I grow up"; Gary L. has two daughters "who, given the way things are changing, may be running this company someday," says Dad earnestly. Inheritance, happenstance, or cunning, the passing of torches at Color Art should be remembered around the Kirkwood area for generations to come. It isn't that often, after all, that families can pull this sort of thing off.
"For it to happen," says Gary Reim, "a little bit of letting go has to happen, and that's painful. A little bit of reaching out also has to happen, and that's also painful.You have to be ready to give something."
Yes, but look what you get.