Family Business

FAMILY

Company MEETING THE CHALLENGES UNIQUE TO FAMILY BUSINESSES

Presented by:

Petitti’s Grows From Family Roots AJ Petitti’s take on balance, succession and family culture

More Inside:

CRAIN CONTENT STUDIO C l eve l a n d

+ ShurTech’s Transition Lessons Learned + Funding Challenges in Family Firms + Making it Work Across Generations

FROM THE CEO

Family businesses should prep for ACA and FLSA changes ahead

I

n just a few short months, we’ll be gathering with our families to celebrate the holidays and the arrival of 2017.

Meanwhile, our family businesses will be preparing for the new year too, which will be a time of tough new regulatory challenges for employers of all kinds, but with added complexity for family-owned firms.

Let’s start by taking a look at the Affordable Care Act: the country will soon have a full two years of ACA under our belts, and nearly all of us have felt the impact of the legislation so far. Get ready for the next step come Jan. 1, when the government begins its lookback period for 2016 to see who’s complying and who’s not.

But family businesses need to be especially careful of their approach to ACA compliance.

That starts with the definition of an ALE — that’s applicable large employer, not Great Lakes Christmas Ale — that most business owners know is defined as a company with at least 50 full-time equivalent employees.

But what you may not know is that your spouse and other family members do not count as full-time employees, nor do any partners who own more than 2% of an S Corporation or more than 5% of a C Corporation.

How to know who’s family and who’s not? The ACA defines family as any child, grandchild, sibling or step-sibling, parent, grandparent, step-family members and in-laws, nieces, nephews, aunts, uncles or a spouse of any of these.

Another wrinkle that family firms need to watch out for is the definition of a controlled group, those companies that operate related but separate businesses with

‘‘

The new year will be a time of tough new regulatory challenges for employers of all kinds, but with added complexity for family-owned firms.”

a common owner. In the eyes of the ACA, those companies are considered a single employer when it comes to determining if they’re an ALE. The definitions of controlled groups can get complex.

In the simplest terms, they include Parent-Subsidiary Groups where one or more businesses are connected through stock ownership with a common parent corporation.

Jeff Ahola Brother-Sister Groups include two or more corporations with five or fewer common owners with a direct or indirect controlling interest in each, and a Combined Group is a group of three or more corporations in which each is a member of one of these other groups.

There’s another significant challenge on the horizon for family businesses — the new revision of the Fair Labor Standards Act, which goes into effect Dec. 1. It raises the threshold for determining which employees are entitled to overtime pay from $23,660 per year to $47,476, which will impact about 4.2 million workers nationwide.

That doesn’t just apply to the hours your employees spend in the office.

Compliance with this new regulation will require you to rethink how you interact

with your employees in off hours, what they do during meals or rest periods, how you’ll track travel time and how you’ll structure your payroll practices.

For family businesses, where the lines between home and office are more blurred, these conversations can become more complex. It’s especially important when it comes to employees who are under 16 working in the business. If you are younger than 16 years old, there are specific exemptions to FLSA provisions that could allow you to work any time of day and for any number of hours if the business is owned by your parents.

It’s enough to make any small business owner’s head spin, but that’s especially true for the family businesses we work with.

Our approach centers around creating what we call a PayDNA™ Genogram. Think of it as an organizational chart but with the special needs of a family-owned firm in mind. From government regulations and human capital management to hiring and interpersonal communications, the Genogram approach can help a family business develop the best strategies for their unique needs.

With the new year will come new challenges, and now’s the time for you and your family to get prepared.

Jeff Ahola, CEO The Ahola Corporation

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The elder generation has to be clear with the younger generation.

Keeping everything in a black box isn’t healthy.”

On the Grow

AJ Petitti and dad Angelo reap family business success communication and a lot of trust is what it really takes. Dad gave me a lot of responsibility early on. He was not afraid to throw me into the fire, and you learn a lot that way. It’s that sink-or-swim mentality. I’ve seen other situations where people are shielded from that adversity.

The elder generation has to be clear with the younger generation. Keeping everything in a black box isn’t healthy.

By BARRY GOODRICH

A

s a college graduate fresh out of Miami University, AJ Petitti had an epiphany while making a flower delivery to a downtown office for his family’s business.

“I had never been in a skyscraper before,” said Petitti. “I was delivering poinsettias. And when I walked into the lobby I saw a sea of cubicles. I got so claustrophobic so quickly. I realized I had taken for granted working where everybody was happy and you’re surrounded by beautiful things all day.”

His epiphany: “Could I work in an office? No way. No how.”

From the age of 7 through high school, Petitti grew up in the family business founded by his father Angelo in 1971. He witnessed the growth of Petitti Garden Centers from a small greenhouse in Oakwood to a 250,000-square-foot facility in Avon as well as seven other Northeast Ohio locations.

AJ Petitti spoke with us about the challenges and benefits of working in a successful family-owned firm.

Q: How does family leadership influence the work culture at Petitti’s?

A: There is a different dynamic having a father and son working together. Sometimes there are differences of opinion but communication is the key to the whole thing. The organization takes on the culture you set. It’s very family-focused. We don’t micro-manage. We empower people as much as we can and when you do that, it’s amazing what you get in return. We’ve got people who have been with us for 25 or 30 years. It’s a wonderful place to be.

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Q: How has your succession plan worked out?

A: We’re in the middle of it now. I became president two years ago and dad moved up to CEO. It’s pretty much my father and me, and that makes the process a lot easier. A lot of Dad’s friends are going through the same process so we have people to bounce ideas off of.

COURTESY PETITTI FAMILY

AJ Petitti helped in the garden center his dad Angelo founded from the age of 7, and two years ago became president.

Q: No two of your stores are alike. Why? A: They are all laid out similarly but the architecture is very different in each store. We have 60-foot ceilings in Avon which is something we can’t do in Oakwood. In Strongsville and Mentor we built from the ground up. Each of the stores is a family. We try to foster that.

Q: How have you made a successful transition between your father’s generation and yours?

A: There’s family dynamics involved. …Everyone struggles with that. Whether it’s my sandbox or his sandbox, good

Q: What was the biggest challenge you faced as a family business and how did you deal with it?

A: We acquired a wholesale division in 2007 just before the downturn.

Navigating those waters was difficult but my hands were on the wheel alongside my father’s. He had seen this before. It was a challenging time but I learned a lot by just seeing him react to certain situations with perseverance and persistency.

Q: How have you and your father balanced your work and family lives?

A: We’re getting a lot better at it. About five years ago, work was the main conversation at Sunday dinner. We still talk about work a little but now there are grandchildren to talk about. Family is always the most important thing.

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All in the Family Crain’s Family Business Forum convened today’s and tomorrow’s leaders of top family companies to talk challenges, advantages and the future

By JENNIFER KEIRN

B

efore retiring from the family business Manco, now ShurTech, Jack Kahl left his son John a framed photograph of Neil Armstrong stepping onto the surface of the moon.

It’s the photo the elder Kahl pointed to in 1997 when Wal-Mart buyers requested camouflage-printed Duck Tape and Manco executives were puzzling over how to make it happen.

“He said, ‘if we can put a man on the moon, we can make camo Duck Tape,’” John Kahl recounted to the nearly 200 attendees of the recent Crain’s Family Business Forum, adding that the photo still hangs on his office wall as a reminder of the family’s core principle of perseverance.

As keynote speaker of the forum, Kahl shared his family business’s story, which started with his father’s purchase of a small industrial tape distributor in 1971, manufacturing the duct tape that Manco began selling as Duck Tape in 1980. Kahl joined the Manco sales department in 1985 right out of college — though he didn’t plan to stick around long — and two years later found himself as national sales manager before he felt ready.

“Many times there’s not someone ready [to advance], but do it anyway,” he advised the family business leaders in attendance. “Don’t stand around until you think you are capable. Push the company along.”

Kahl then recounted the company’s journey through three challenging transitions. In 1998, the family chose to sell the business to the German adhesives giant The Henkel Group, though the Kahls retained leadership. In 2000, Jack retired and John stepped into the CEO’s office. Then the company was sold again to North Carolina-based Shurtape

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ABOVE: Crain’s Family Business Forum keynote speaker John Kahl of ShurTech Brands

LEFT: Panelists Melissa Register, Fifth Third Bank; Roy Messing, Ohio Employee Ownership Center; Richard Perry, Pinkney-Perry Insurance Agency Technologies, also a family business, in 2009, to become ShurTech Brands.

“We learned a ton,” Kahl reflected.

“I found out I measured up pretty well against the world.”

Kahl pointed out to attendees a number of common mistakes that family businesses make, like failing to maintain communication with employees outside the family. “Communicate everything,” he said. “If they know the score of the game, they’ll be more likely to help you win.”

Also common, he said, is a bottleneck at

the top: “The scourge of a family business is everything running through two or three people. It slows everything down.”

Kahl’s keynote address at the Crain’s Family Business Form was followed by a day of educational panels for family business leaders ranging from succession planning — from both the next and current generations’ perspectives — to finding the right support team and preserving family relationships in the business.

The most important element to successful succession planning, the

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MAKING I T W ORK:

Kristin Chapman, Chapman and Chapman

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o matter what’s going on, if you can’t communicate in a way that’s open, honest and respectful, everything else will break down. It’s a complicated dynamic in a family business. We often take things more personally. It’s not just a job. I can’t just go home and be with my family and shrug it off.

At the end of the day, it’s family first. Family businesses are there to be a resource to provide success for that family and to enable that family to grow based on the success of the business.

There are legacies in a family business, and I think that can be an opportunity and a challenge as well. When a next-generation family member comes in and wants a certain role in the business, that can be great because that family member will be given opportunities and get on a leadership track.

At the same time, what happens when the family member isn’t the most qualified for that job? It can be a challenge for a current owner to realize there’s someone better than my child. It’s a balancing act of when do you do what’s best for family and when do you do what’s best for the business?

panelists agreed, is to start preparing early: panelist Keven Prather of Skylight Financial Group recounted his experience of flying to Florida to finish a succession plan for an ailing family business owner, who died just hours later. Chris Goebel, former president of his family business Lakefront Lines, now consults with other family businesses on succession planning and emphasized the importance of clearly defining the family’s goals and objectives.

Concurrent to that discussion focused on current-generation owners was a panel of next-generation owners including Kristin Chapman of fifthgeneration Chapman and Chapman, Lauren Good of Technology House and Sarah Zimmerman of residential real estate developer Gross Builders.

It was notable that all panelists were women, highlighting a trend toward increasingly selecting daughters as the next generation of family businesses.

They agreed that having a parent who’s supportive but not micro-managing is key to smooth succession.

Another panel tackled the difficult Crain Content Studio

Chapman and Chapman Location: Aurora Founded: 1886 Generation: 5 Family in the Business: 2

My dad used to tell us, “you’ll always have a job.” It may not be the highest paid job, but he would always make sure he had an employment opportunity if we wanted one. Being able to say, “I can give you a starting place” is a nice advantage.

I have total trust in my family members in the business.

I know without a doubt that they have my back. That’s such a great feeling that a lot of employees [at other companies] don’t necessarily have, walking into work every day knowing that the owner wants the best for me and is going to give me every opportunity to succeed.

Panelists Jon Pinney, Kohrman, Jackson & Krantz; Keven Prather, Skylight Financial Group; Chris Goebel, former Lakefront Lines relationship issues that arise in family businesses. Consultant and researcher Kathy Overbeke shared her perspectives from working with clients going through such challenges, helping them create individual vision statements then working together toward a family mission statement, while family business leaders like Alan Gillmore of Gillmore Security and Michelle Stein Hirsch of Brunswick Com-

— as told to Jennifer Keirn

panies shared their experiences of striking work-family balance.

Lastly, a panel of experts including Roy Messing of the Ohio Employee Ownership Center and Richard Perry of Pinkney-Perry Insurance Agency discussed the importance of assembling a support team around a family business that can address such issues as wealth planning, succession, tax implications and insurance. A critical part of that support team, agreed the panelists, must also be a board of directors or advisory council that can provide outside perspectives. Panelist Melissa Register of Fifth Third Bank said that at times family businesses would even benefit from having a family counselor.

The event wrapped up with a luncheon open only to family business leaders, who gathered for tabletop discussions moderated by Linda Bluso of the Adaptive Knowledge Institute on their biggest succession planning concerns, the strengths of their current- and next-generation leaders and their most valuable takeaway points of the event.

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Finding Funding Attracting investment requires a special touch for family firms

By VINCE GUERRIERI

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or most businesses, capitalization is as easy as a stock issuance or getting a loan.

But it’s not as simple for family businesses, because either of those options tend to cede control or bring in other partners. And even if the owners of a family business have reached the point where they want to sell, it can still be complex.

“Family-owned businesses — just like most families — have unique situations,” said Andrew Kuhar of Partners Private Equity.

“The first question we ask is ‘what’s your goal?’ You’re most concerned about the intent of the family. It’s easy to understand the intent of the buyer, but there has to be alignment.”

Kuhar says most private equity firms are interested in short-term ownership, between three and 10 years, but even then, if the owners want to sell the business entirely, there has to be a transition plan in place.

“You don’t want your customer relationships to walk out the door with the owner,” he said. “What happens when the owners are no longer maintaining those relationships with customers, vendors and employees?”

Another option if the owners want to divest themselves of the company is an employee stock ownership plan, or ESOP. While that can offer tax benefits, it can also be expensive.

Roy Messing, director of the Ohio Employee Ownership Center at Kent State University, said it can cost at least $50,000 to set up an ESOP, and depending on the complexity of the company, costs could get over $100,000. Messing said that for smaller companies that can’t make an ESOP work, there’s also a plan for a worker-owned cooperative.

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Andrew Connors of Fairport Asset Management advises family businesses to hold on to equity when seeking funding.

An ESOP sets up a trust to hold shares, and that carries with it annual administrative costs, which Messing estimated between $10,000 and $15,000 in addition to the initial cost of setting it up.

“If you sell to an outside entity, you might use a business broker for a smaller company or an investment banker for a bigger company, so you’d pay some of that cost anyway,” Messing said.

The limitation of an ESOP, Messing said, is that it can’t pay more than an established market value. So if you’re a company experiencing exponential growth, it might not be your best course of action.

Capitalization without giving up too much equity is the big challenge for a family-owned business, says Andrew

Connors, a partner at Fairport Asset Management and the chair of the family business owner practice group.

“You always want to hold on to equity,” he said. “There’s nothing worse than having people benefit disproportionately from your hard work.”

But that can be complicated by the family dynamic, he said.

The ownership generation can become more risk-averse because of the equity they hold, while younger generations might want to pursue more opportunities.

Connors suggested family offices, which can be more patient investors than a bank or private equity, and can bring a level of sophistication and accountability to a family business that might not have it.

He estimated there are as many as 100 family offices within about a 90-minute drive from downtown Cleveland. The problem? “They don’t hang signs on street corners,” Connors said. “They don’t advertise. They don’t sponsor. They’re not in the Yellow Pages. Everything is done by referral or word of mouth.”

Connors said that’s why it’s important for a family business to have good advisors, because those lawyers, accountants and others can be leveraged to find those kinds of offices.

Messing also added that many companies are crowdfunding — particularly for new products — by taking to the web to ask for money, offering the product or other company perks in return (think Kickstarter or GoFundMe).

“It’s not going to be huge funding but it can work,” Messing said. “We’ll see those if someone has a new product and they’re having a hard time getting funding to get that product out the door.”

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MAKING I T W ORK:

Travis Mlakar, Millcraft

T

he keys to success are having clear communication within the family and setting expectations early. How is the business going to be run? Why does the business exist? Is it there to provide income for all family members whether they are involved in the business or not? Or is it going to be managed as a privately held business that just happens to be owned by a family?

In a family business, business is personal. It’s one thing to sit down with a boss and have them do your performance review and identify a weak spot you need to work on. But it’s a whole different thing when it’s your brother or sister or mother or father saying you are weak in a particular area. It’s the same message, but it’s how you react emotionally to it.

We’ve been fortunate enough to use a consultant who would interact with me and my father and make sure we were focusing on communication and relationship between us. He was instrumental in saying to my dad, “Hey, you need to stay out of this. This is a boundary.”

Likewise, he would say to me, “This isn’t your area.

You need to back off.” He was a trusted resource so it

Millcraft Location: Cleveland Founded: 1920 Generation: 4 Family in the Business: 4

wasn’t an emotional conversation.

There’s something fulfilling about being able to add to a legacy, to look back on your career and say, “I helped add to the success that previous generations have built.” It’s not like being in a large company, where you look back and say, “Did anyone notice what we did?”

You have to view the business as a separate entity. You have to see the business as having a life of its own. You can’t choke the business for family issues or financial desires. You have to think of it as a living, breathing thing that is there producing jobs for — for us — 246 families.

— as told to Jennifer Keirn

MEET THE NEXT GENS

88 PERCENT

70% WORK OUTSIDE THE FAMILY BUSINESS BEFORE JOINING 29% believe family firms are slower to adopt new technology

61% 88% think it will be difficult for the current generation to fully let go

say they have to work harder to prove themselves than a non-family member

WANT TO LEAVE THEIR STAMP OR DO SOMETHING SPECIAL IN THE BUSINESS Women

Men 93%

100% 80%

67% 55%

60% 40%

77%

44%

30%

20% 0 Next Gens on the Board

Expect to Run the Company Some Day

Current Gen Is Confident in Abilities

SOURCE: PwC 2016 International Family Business Survey

Crain Content Studio

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