Taking The "family" Out Of Family Business
WHEN GARY AMATO GRADUATED from Ohio University in 1968 with a degree in business, his father wanted him to come into the family kitchen-cabinet company. But Gary had other dreams. He saw himself as a stockbroker driving in the sunny fast lanes of southern California.
Jeff Siegel, too, had a place waiting for him, this one in the family's prepared-salad business back in Brooklyn, N.Y. He wasn't interested, though. Fresh out of Cornell University, he thought he'd try law school, until a summer job selling office copying machines convinced him he'd found his calling in sales. That was in 1975.
Chad Frost would have been the fourth generation to run his family's ball-bearing company. His degree in engineering from the University of Michigan would have come in handy there, but he just couldn't see going back to the stifling social climate of Grand Rapids. His escape route was to the East, and an aerospace job with Textron Inc.
They are the children of the baby boom -- Gary, Jeff, Chad, and countless others like them. Coming of age during the rebellious decade between 1965 and 1975, they could hardly have been expected to follow too quickly along the path laid out for them by their parents. But life has had its way of catching up with them. Their fathers are all around retirement age, hoping to pass on the legacy of years of work and worry. And the children -- now older and wiser, with children of their own -- are taking a fresh look at their birthrights and business opportunities.
To this antiestablishment generation, Big Business has always been Bad Business. But family business, once disparaged as narrow and bourgeois, appeals to other cherished values: closeness to the consumer, loyalty to employes, independence for managers and executives. "The wallflower is becoming the belle of the ball," is how one writer put it recently. Family business is now chic.
Chic -- and restyled. This biggest, best-educated, most confident generation in American history has not decided to come home again simply to do things as they've been done before. It looks to remake the family business in its own image, according to its distinctive values and goals. Even in quieter times, such transitions are painful and treacherous -- the stories of families and businesses destroyed by intergenerational passions are as old as Oedipus. It's no coincidence that not even one in three established American family businesses is successfully passed on to a second generation. And of that select group, only one in seven will be able to make the business grow.
Gary Amato, Jeff Siegel, and Chad Frost have beat the odds. Despite misgivings, they have come back to the family business, slowly and painfully working out accommodations with fathers who were at first skeptical, and are now admiring. Their family firms today are more aggressive, more productive, and more profitable than at any other time in their recent histories. These are companies that have managed to thrive on growth and innovation -- not, as it once seemed, to resist it. And where once the goal was simply to provide a good living for the family and pass it all on to the next generation, these young owners are out to leave a mark, and make it big.
GETTING OUT OF THE SHOP
Gary Amato, 40, still keeps his dad on the payroll of Alline Laminated Products Inc., the family kitchen-cabinet business, although there's not much 64-year-old Frank can do anymore. For the eight years since the buyout, he's been on the books as a consultant. But each summer when he comes back to Cleveland from Florida, there is less he recognizes about the company that he founded 23 years ago.
Under Frank Amato, Alline was a job shop, 6 employees and $150,000 in sales; today, his son runs a company with 70 employees and sales of over $4 million. Frank had built cabinets with hammer and nails; now they're made with automated routers and computerized optimization cuts. Frank had run a cash business, keeping the books under lock and key; today the company is on its third round of bank loans, secured by the new equipment. Frank had always been tight-lipped about his business, and was practically married to his shop. What would he make of a chief executive officer who gave away equity to his managers, consulted an outside board of advisers, and thought nothing of taking an occasional afternoon off?
At 3:30 on a sunny Wednesday afternoon, Gary Amato flips off Creedence Clearwater Revival playing from his office stereo, slips off his tie, and whistles himself out the door, off to buy the soda pop for his 13-year-old daughter's softball team.
"I was a pretty fair athlete growing up," he remembers, tossing his jacket by the golf clubs in the back of his white sports car. "But my father never saw me play. He was always too busy. I don't work as hard as he did. But I work smarter -- and that's why I can keep those golf clubs in there."
Gary had never expected to work for Alline at all. Growing up with the business, helping out in the shop on weekends and over the summer, listening to the endless worries around the kitchen table, he had decided it was too small for his ambitions -- closed, confining, too much work for too meager a payoff. But in 1971, before Gary had had a chance to launch a brokerage career, his father's partner announced he wanted to sell out. With the business on the edge of bankruptcy, Gary felt he had to help his father through a crisis -- if only, he insisted, for a year. But as he barely scratched out a living building cabinets by hand, side by side with his dad, one year stretched into two, then three. And he began to see that Alline could be something more than mere short-term responsibility.
By the 1970s, all the kitchen and bathroom magazines Gary read were trumpeting a new-style cabinet created with a new technology: built as components, custom-cut by computers, and held together by an invisible hinge. The change was forcing the industry into consolidation. And Gary saw an opportunity.
"I had watched my father bust his ass his whole life, and I just hadn't seen the pot at the end of the rainbow being big enough at first," he remembers. "But one day I sat down and said, 'I can make a ton of money here, if I do certain things."
The new technology could be a catalyst, but first he'd need a new attitude. He'd have to build a business rather than just build cabinets -- get off the shop floor and into the office. From there he'd bootstrap, "get out of the local market, develop a product line and a sales organization, then build up the company's productive capacity." The initial challenge would be in transforming the old family business into a new growth business. And once he built the company to $20 million in sales, he would take it public, or sell for a fat multiple.
It all sounded great. But how do you start when you can't get capital? Back when Gary was looking for the company's first loan of $68,000 to buy out his father's old partner, the banker simply laughed at his application. "He looked at the statements and said, 'You don't have enough capital assets for us to lend you anything," Gary remembers. There were only a few hand tools and a small shop at the time, and there hadn't been a profit in history -- by design. "If you looked at the books, the company had never made a penny. The attitude was you never show a profit when you file your tax -- you juggle your inventory."
To finance his expansion, Gary borrowed money from family members, and spent two years working his way out of the hole. After a long day making cabinets, he'd pile the kids in the back of the van and sell cabinets by night, driving from contractor to contractor. He was looking for small-time apartment builders, potential repeat customers that could give him a regular sales base, offering them custom-made countertops at budget prices. Everything except his $125-a-week salary went back into new equipment. When, after three years, he went back to the banks for the cash to expand beyond the Cleveland market, he finally had capital assets and a sales base to show them.
"That's when the trouble started," he remembers. "I had told Dad what I wanted to do, and he had said OK. But we kept butting heads. We were in debt up to our eye-brows, and Dad wasn't used to it. He was always talking about how much he was looking forward to going to Florida someday, and I was talking about how much I wanted to go flat out, borrow another $100,000, and roll the dice. My plan was alien to him. He had run a local company; he only wanted to make a living and pass the business on to his sons."
Gary and his wife, Claudia, had different ambitions than Gary's father. They talked of retiring when he was 50 in order to travel: six months on the golf courses of San Diego for him, followed by six months in the museums of Paris for her. And why would he want to saddle his son, Frank, with the burden of a family business? "If everything goes according to plan, I can say, 'Here's a million, go do what you want with it."
"My father just didn't feel he could be a part of that," Gary says. "He agonized. I agonized. Finally, after a heated discussion, I said, 'Look, I'm not happy. I'm not going where I want to go. Either you have to leave the business, or I do."
Dad left, agreeing to take double the book value of the company, to be paid out over the next seven years. But now the son found himself back in the hole. Alline had lost its best cabinetmaker, "and we were paying him almost as much as he had made when he was here." So Gary started working an extra half-shift each day, closing the shop at four o'clock, then making counter-tops by himself until eight.
Sales was the key, but Alline could hardly afford a salesman at this point. So Gary searched the pages of trade publications for sales representatives who worked for the big companies, and who might want to add Alline's new European style to the more traditional lines that they sold. All the while, he took pains to keep the size of his operation a secret. If a rep or a customer was flying into Cleveland, he'd take him to see some apartments where the cabinets were installed, then apologize that the plant was closed for an "ethnic holiday."
Today, Gary is proud to give tours around a plant he boasts is one of the most automated in the country. He is selling three different product lines throughout the eastern half of the country, and can see the day when sales approach the magic $20-million mark. He long ago hired an attorney and an accountant, and developed a board of advisers. He now plays golf with his customers and his suppliers, and is looking to join a country club. Additions and acquisitions are in the works, and he consults not just with bankers, but with venture capitalists as well. The company's new production manager was lured from the cabinet division of Tappan for an option on 5% of the company stock and "more money than my father ever made in his life."
"My father still calls," Gary admits, "and we still have our differences, mostly about personnel. He was old school. He took an adversarial position with people: 'Everybody who isn't part of my family is out to screw me.' But the fact of it is he never ran this business. The business ran him."
LIVING WITH RISK
Seymour Siegel, 57, and his son Jeff, 35, agree that their 10-year disagreement was probably inevitable. When Seymour was growing up, people were saving tinfoil, and apples were for sale on the street corner, two for a penny. When Jeff grew up, people were saving the whales, and Apple was on its way to the Fortune 500. As a kid, Seymour always wanted to be a plumber. Jeff grew up wanting to be a rock star.
"I still have the ability to think poor," explains Seymour, the president of Blue Ridge Farms Inc., a prepared-deli-salad company in Brooklyn. "I was raised during the Depression, and I went to work when I was 10, for $1.75 a week, to help feed the family." Today, at 283 pounds, dressed for work in a rumpled sports shirt and sweat pants, Seymour no longer looks from hunger, as his mother might have said. His name is spelled out in diamonds around his wrist.
In contrast, son Jeff, 145 pounds, shows up at work in a perfectly tailored suit, crisp shirt, and silk tie. "My generation grew up believing that we could do anything we wanted to do," explains Blue Ridge's senior vice-president in charge of sales, and heir apparent. "That's the mentality we brought into the business."
Imagine the conversation between them over the years.
"What's our five-year plan?" Jeff would ask.
"Same as it's been for the last five years. To serve the customer and make the money."
"We need to increase our leverage," Jeff would suggest.
"Leverage is a funny word. To me that means you're hocked up to your behind."
"We need to try advertising."
"Advertising is like dope. You don't know what it does to you, but you don't dare stop."
"It can be a terrific tool."
"Just terrific. I remember reading about one company that spent $33 million in advertising, and made $3 million net. If they'd cut their advertising by 10%, they could have doubled their profits."
Seymour took over one of his family's barbecued-chicken stores, at 79th and Second in Manhattan, shortly after World War II, but soon discovered his customers were less interested in the breasts and drumsticks than in the chicken livers his mother chopped up and mixed with generous helpings of chicken fat. So he decided to branch out from his mother's famous chopped liver into potato salad and egg salad, and began selling the expanded line to delicatessens and restaurants in all five boroughs.
"A nice living," is the way Seymour thought of it.
"Not very glamorous," is how it looked to Jeff 25 years later.
It was a haircut that brought father and son together. At 23, Jeff was happy in corporate sales with Saxon Industries Inc. He knew his brashness ruffled executive feathers, but sales for the office-copier division where he worked had never been higher. So he was very much looking forward to the annual visit by the division's executives from Florida. He had scheduled a sales meeting for them with the New Jersey Turnpike Authority, followed by dinner at a nice steak house and a closed-circuit showing of the Ali-Foreman fight at Madison Square Garden. At the least, he had expected a pat on the back. Instead, he got an ultimatum.
"Get a haircut today," his boss told him, "or you're fired."
It wasn't that he minded the haircut so much as the capriciousness of the demand. If that was corporate life, who needed it? His father took the opportunity to make another pitch. "You've shown you can make money," Seymour told him. "Now why don't you make some for the Siegel family?"
Jeff hesitated for three months before he decided to take his father up on the offer. Seymour's hard work had made the company a modest $4-million-a-year success, but Jeff hated the thought of looking like the typical owner's son, and worried about whether father and son could get along. "But I saw a spot for me. There were marketing and customer problems, something that needed to be done."
For the first year, he worked on salads in the kitchens ("my father gave me an office, but it was just a place to eat lunch"). But he was working on Seymour at the same time. His father's attitudes were too old-fashioned, he argued: 80% of their business was with one customer, without contracts, on a good-faith basis. So why not let him go out and get some new accounts?
"For a start, we'd argue about whether there was enough money to do it," Jeff remembers. "But he was really afraid that his one big customer would leave him if he sold his product to other customers. He was distinctly threatened. He had something that he'd built, and now this little pischer, his son, was going to threaten it. It used to be that I couldn't even eat lunch with him, my stomach would just get so knotted up."
Time and success would ease Seymour's fears. Over the next five years, with a broadened account base and scores of new products spurred on by Jeff's marketing efforts, both sales and profits were climbing 20% to 30% a year. Sales to the prime customer, which Seymour handled personally, rose as well, even as its importance waned.
But seven years later, they were still fighting. It was 1982, sales were up to about $20 million, and Jeff thought it was time to convert their commodities into products. For years, grocery stores had kept Blue Ridge a secret from customers, selling its salads unlabeled, as if they had been made by the grocer on site. But today's consumer wanted a brand name, he argued. Why not Blue Ridge Farms? They couldn't label the salads, but they could create point-of-purchase displays and distinctive product signs. And all it would take would be a little investment in advertising.
"To my father, an investment was a new mixing machine," Jeff recalls. "Advertising was a luxury. And we were back to the same mentality. My father knew only one thing: he was in control of this one big account, and he could live off of it. They were still 30% of our business, and if we advertised, we were going to offend them and lose it.
"He fought me. He hated me. He loved me. He told my mother I was going to kill him -- but he gave me my head."
Jeff got a few thousand dollars for radio ads, and Seymour got an immediate increase in the monthly sales figures. Seymour also got a kick hearing his name on the radio. So Jeff went back to the well for enough money to do it right -- on television.
"Dad, listen," he said. "I need a million."
He got half that. The kickoff came during the annual deli trade show, when he bought simultaneous time on all three New York affiliates, hoping he would catch the buyers sitting in their hotel rooms. Then he sat back and watched as the Blue Ridge Farm booth was mobbed.
It looked like a great success. The spots ran from September to December, and sales shot up another 30%. But when Seymour looked at his six-month statements, he discovered that profits were down $24,000. "I was scared," he remembers. The ads stopped, but six months later, when the next statements arrived, the news was very different. Sales were still climbing, and profits were back. It's been that way ever since.
"Volume," Seymour now muses, "can overcome anything."
Thanks largely to Jeff's aggressive marketing, Blue Ridge today sells $50 million worth of salads to grocers in 30 states plus Canada. An in-house staff now handles the advertising. And with the help of a fancy Manhattan public relations firm, the story of Blue Ridge Farms has now appeared in The New York Times, Forbes, and New York magazine. Instead of worrying about their one big customer, the Siegels worry about holding market share against such new-comers as Orval Kent Food Co., or such potential rivals as Campbell Soup Co.
Actually, with his younger son, Richard, in charge of production, and with Jeff as the marketing maven, Seymour doesn't worry much at all these days. He's learned to relax and spend his time creating the perfect cheesecake, or playing with his 1929 Duesenberg, his '65 Rolls-Royce, and his '84 Maserati.
"My only job now is to keep the kids from getting a tit in the wringer," says Seymour. "I know sons have always thought their fathers were too conservative, but I seem to be getting smarter as they get older. I say to them: 'Look, I've got my money. It's your money you're using now."
EMPLOYEES AS FAMILY
Jan Swatzell, with 13 years on the shop floor, knows what the transition from Ruben Frost to young Chad has meant at the Grand Rapids manufacturing plant where she makes overhead conveyor-trolley-bearing rings. It's given her a future.
In the old days, Swatzell had punched in for an eight-hour shift stamping out parts on a machine bought during the Eisenhower era. Grime lined the walls, and scrap lay around in piles, unattended. "This place was a real hole," she recalls, "both the way it looked and the way people felt." Then Chad took over, promising to build "the most automated factory in the world," and Swatzell got a new job. With a team of all other "shareholders," she is responsible for one of the 14 computer-controlled manufacturing cells that run somewhat autonomously in Frost Inc.'s Grand Rapids plant.
"Back when Ruben was here, they would never let a woman work on a new machine," says Swatzell. "We would have been told, 'No, you're not capable." But under Chad she's been turned into an expert, taught not just how to run the machine, but to program the computer and monitor the robots as well.
It's the little changes about "the new Frost" that Swatzell notices most often, though. She no longer has to strain to hear herself think above the din. There's fresh paint and a clean floor; there's a new cafeteria, and a wellness center on the way. The time clocks are gone, too: Chad put Swatzell on salary, like all 117 shareholders, working for productivity-based bonus and profit sharing and her share of the action when he takes them all public.
Swatzell can see the results of the changes firsthand. In the old days, it used to take up to 12 hours to reset the old machines; with automation, her team can write a new program and have it running in minutes. Quality control used to reject 1 out of 4 pieces the company manufactured; now the figure is 1 out of 200. Before automation, sales per employee at Frost were $80,000 annually, slightly above the American manufacturing norm; now they're above $150,000, more than most Japanese firms.
"We all feel like we're just one unit now," Swatzell says. "It used to be the managers would just walk around and ask how come things weren't done, but they never listened to what we had to say. But Chad got rid of them. Now we're asked every day about how things are going, and we all roll up our sleeves together."
Chad Frost, the 42-year-old CEO and majority shareholder, has become somewhat of a hero these days, but not just on his factory floor. With so many Rustbelt manufacturing firms failing because family owners are unwilling or unable to reinvest in new equipment, Chad has shown them it can be done. Told by the consultants it would cost $12 million to $15 million to automate his factory, Chad brought it in in less than three years for $5 million. Now he's even spun off his own consulting firm to help others modernize their plants.
But it's not the technology that makes Chad most proud, or the recognition by the Small Business Administration as Michigan's 1985 Innovation Advocate of the Year. His biggest accomplishment, he says, has been in transforming the attitudes and values at Frost developed over 74 years and four generations, mainly by getting his family out of the business.
It was the teenage Chad who first dismissed the idea that his family or its business had a special place or legacy in Grand Rapids. "We were brought up as if we were the elite because our name was Frost, but I never bought it," he says. "I always thought achievements had to be real to be worth something, but there was nothing real there. I'd seen the same vague shows of authority in Vietnam and with Nixon."
Two summers working in the factory only confirmed his rejection of the family business opportunity. The company was a dying beast, he decided, doomed by lack of leadership. His father ran the archaic factory like a fiefdom, avoiding decisions and afraid of change. Because Ruben kept hard information to himself, managers couldn't very well manage, and they turned to fighting among themselves. Of course, they weren't exactly professional managers to begin with: they were born to the job mostly, relatives who frittered away much of their energy competing for titles and worrying about their individual net worths.
At least that's how it looked to Chad, and he wanted nothing to do with it. When he graduated from college in 1967, he fled East to Textron and aerospace. But three years spent wrangling with corporate bureaucrats over such things as time clocks and unauthorized overtime soured him on big business as well.
In 1970, he came back to the family company -- "reluctantly" and with rules. Chad agreed to try turning around an acquisition in Cleveland his father had mishandled; his father agreed to provide all the funds that Chad thought necessary, and promised that no one from Grand Rapids would ever set foot inside the door. Within two years, Chad had managed to get the subsidiary in good enough shape to consolidate it with the company's main operations. Now his father was asking him to try his hand as general manager of the parent company, which by then was losing money.
Chad was still reluctant to say yes, and still insisted on a free hand. Despite having control of everything but finance, however, he found he could do little to change the management philosophy. Oh, yes, he was able to hire a few professional managers, eliminate some obvious inefficiencies, and boost sales enough to get the company back in the black. But real growth would require much more. Ruben was intrigued, but Chad's uncle, who worried about taking too many risks with cash flow and reinvesting too much of the profits, was not. "It's him or me, Ruben," Chad's uncle announced one day in 1973.
That's when the exodus of family members began. Later that year, with a line of bank credit, Chad and his father bought their relatives out, uncle and cousins alike. In 1977, they set aside some preferred stock for Chad's brother and sisters, and held the rest for themselves: Ruben as majority stockholder, Chad with an option to buy him out eventually. Although Chad was named the company's new president, he was not satisfied to leave it at that. There were still questions of succession to settle -- when, and under what conditions his father would finally bow out. And to reassure his new professional managers, Chad won hard-and-fast guarantees that there would never be family claims on the business again -- not from brothers, cousins, uncle, or even his own children.
Actually, it took four more years, and the specter of the recession, before Ruben Frost finally decided to step aside. Only then did it become Chad's company, but it didn't look like much. Realizing that what the economy did not need was yet another decaying plant turning out another product that fewer and fewer people wanted to buy, Chad invested some $500,000 to diversify his line -- on lawn-mower spindles that he couldn't make to spec or on time, and on precision machining that the engineers couldn't design and the salesmen couldn't sell. Nor was he much more successful in implementing new management techniques. "I had a head full of ideas of how to revolutionize the workplace, yet not one of them worked," he admits.
Although Chad had banished the family, he had not banished the family business culture. "I didn't realize that everyone was so comfortable with the traditional way of doing things, or that change was perceived as a threat. This company had been a classic family business, and that was the problem. To change that, I'd have to undo all the stuff that was done all those years."
After a month of soul-searching, Chad decided the only hope of saving the company was to force radical changes in the company's culture. His focus, as it had been once before, would be on new technology and new management techniques. Only this time he would do it right. Appointing an acting CEO, he stepped away from day-to-day management, and for two years studied the success of automated plants in Japan and the United States. He returned in 1983 with a concept he called "Technetronic."
"It was 'Katy bar the door' when I started," Chad remembers. "I knew I was risking everything." From then on, there would be a minimum of hierarchy at Frost: no more secretaries, support staff, or closed doors. Eleven formal and six informal layers of management were replaced with a simple four-tier structure: 6 top managers, 25 functional managers responsible for such areas as procurement or outside sales, and everyone else (but no titles on business cards, please). Except for salaries, there would be no corporate secrets, and in-house communication would be facilitated by personal computers on every desk. Most important, the company's most vital numbers -- sales, expenses, productivity -- would be distributed in a timely fashion throughout the plant. Chad wanted people to work hard, and to see their labors having an impact.
Not everyone thought it would work, however. His banker was skeptical of the benefits of automation. And there were those inside Frost who balked at the new workplace democracy. By the time he was finished, almost a third of the staff would be given professional outplacement services.
For those who stayed, the transition is something they'll never forget.All employees became owners. And with ownership came new responsibilities and duties. All employees would have to enroll in "Frost 101," a course in the whys and wherefores of progress, productivity, and profit. Monthly "let's talk" sessions were devoted to such topics as the company's business plan or why the payroll was being moved to another bank. And continuing education became part of every job, with the average shareholder taking 40 hours a year in math, engineering, or programming classes, taught on site by an instructor from the local community college.
These were not reforms simply meant to make people feel good. Chad meant to take them right to the bottom line. "You can wave all the excellence flags in the world," he says, "but if you aren't making money, it's not worth anything." Apparently, at Frost it's worth quite a lot. Sales at the company have climbed close to $18 million, up 30% a year since 1983. Gross margins have doubled, up to 35%. And while the company is selling more bearings than ever, at prices down 20% from 1982, new products have been introduced that now account for a third of Frost's total sales.
"This is no longer a family business," Chad states proudly. But it is not simply the absence of relatives that defines the difference. "My father was in the business for personal wealth. I like personal wealth, but I know I'm not going to get it if everyone here isn't successful. It never would have occurred to him that people on a factory floor could want to succeed as badly as he did."