A farm family goes high-tech

Three generations of the Petz family live on the farm that Leroy Petz Sr. inherited from his father, but they no longer plow the fields. Fed up with the uncertainties of farming, they leased out most of the land 20 years ago. These days, Leroy Sr., 68; his wife, Glenna Sue, 67; and their sons toil long hours sitting at their computers. Their family business, Petz Enterprises Inc. (PEI), provides technology and services for consumers and tax professionals, including tax preparation, electronic filing, tax-related financial services and electronic benefits delivery systems.

Located in Tracy, Calif., 60 miles east of San Francisco in the San Joaquin Valley, PEI occupies four sections of a one-story office complex built on a country road. Across the street is open farmland; next door is a housing development under construction.

Leroy Sr., PEI’s chairman and CEO, and Glenna Sue, the company’s executive vice president of administration, have been business partners since they married a half-century ago. When their four children were growing up, they helped with chores, too. The family’s farm heritage—and the good luck of having children with distinct talents and interests —contributed to their smooth transition from agriculture to technology. Leroy Jr., 46, an engineer, is senior vice president of technology and chief technology officer; Charles, 44, a CPA, is vice president of tax compliance and professional services; and Craig, 40, is vice president of corporate marketing and sales operations. Daughter Sharon, 39, who once worked in the business doing secretarial work, is now a personal trainer; she stops by the company headquarters periodically to give the family massages.

“We knew how to work as a team from running the farm,” says Leroy Sr. “This is how families used to be.”

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The family’s metamorphosis from farmers to high-tech entrepreneurs began in 1964 when Leroy and Glenna Sue, with a growing family to support, looked for ways to supplement their income from the farm. A few years earlier, Leroy, trained in accounting, had streamlined his farm’s accounting system. Like other farmers, the Petzes had been frustrated by the tedious task of manually computing federal and state taxes for farm payrolls. Leroy and Glenna Sue came naturally to the idea of supplying accounting forms and wage/tax charts to farmers in the San Joaquin Valley to simplify and accelerate the payroll process. They called their company Agricultural Computations (Ag-Comp), and ran it from their kitchen table.

Over the next decade, Leroy and Glenna Sue expanded the market for their products to agribusinesses nationwide. It was the dawn of the computer age, and the demand for outside computing services was growing. In partnership with a local university, Ag-Comp started a computer service bureau focusing on payroll tax processing and reporting. The Petzes moved their office from the kitchen to a double-wide trailer in their yard.

When Leroy and Glenna Sue learned that a local trade-school teacher was leaving teaching for farming, they swapped one of their tractors for his personal computer. Building their own in-house data center for processing payrolls, they added manufacturing, distribution and construction businesses to their customer base. Leroy Jr., then a teenager, was crazy about computers. He tutored his parents in their use and, during summer vacations, helped with the programming. In 1974, Leroy and Glenna Sue incorporated the company as Petz Enterprises Inc.

As personal computers became more affordable, the demand for the service bureau business model declined. PEI shifted gears again, becoming the West Coast distributor for Peachtree Accounting and Payroll Software in Atlanta. By the 1980s, PEI had established itself as a professional services firm building, installing and maintaining custom accounting, payroll and tax management systems for mid-market companies throughout the Western U.S.

“At one point, we were running three businesses simultaneously,” says Glenna Sue. “In 1984, PEI became our sole source of income, and we stopped farming.”

For 20 years, Leroy and Glenna Sue were remarkably agile in adapting to the changing market and recognizing business opportunities. But it was their sons who had the vision and skills to catapult PEI into cyberspace. In 1986, middle son Charles, a CPA, was sent by his employer to attend a meeting organized by the IRS informing tax preparers about a forthcoming shift to an electronic tax filing system. At the time, however, no one had figured out how to transmit tax information from existing software to the IRS. Excited by what he heard, Charles presented a proposal to his parents.

“We can do this as a family,” Charles told them. “We have all the talent and resources to make a go of this, and we need you to administer the business.”

Recognizing the venture as a golden opportunity, the family pitched in, working nights and weekends on the project. Within a year, eldest son Leroy Jr. had built a system they named Crosslink that linked tax preparers to the IRS electronically.

Crosslink transformed PEI from a professional services firm to a provider of packaged software and information services. The company got an added boost in 1991 when the state of California awarded it a contract to develop an electronic filing system for the California Franchise Tax Board. Later Crosslink was expanded to include preparation of federal and state income tax returns.

“We hit the market at the right time,” says Craig, “and plugged into all the existing software packages. Tax preparers were worried; they didn’t know when the IRS would go to electronic filing, so the market got hot fast.”

By 1994, PEI’s revenues from Crosslink and tax-related financial services surpassed sales of its other product lines. Recognizing that its future lay in the tax applications and electronic filing market, the company sold off its Ag-Comp accounting software business.

“This is a case example of why family firms should require the next generation to work outside the family business,” says Otis Baskin, a professor of management at Pepperdine University in Malibu, Calif., and a senior associate of the Family Business Consulting Group. “Exposing them to new ideas and different thought processes can broaden their thinking and teach them to recognize opportunities,” Baskin notes. “Creating a company that can accept change and initiate change is an important lesson for family businesses to learn.”

PEI carved out another market when it launched its QuickAccess service in 1997. This system allows individuals who don’t have checking or savings accounts to sign up to have their payroll and benefit disbursements issued to them through PEI’s network of QuickAccess service centers in 17 states. The service centers print the checks, and the payees can pick them up without risk of the checks getting lost in the mail or stolen.

In 2002, PEI introduced its latest innovation—and potentially its most profitable—TaxBrain.com, an online tax center. It offers tax preparation, advice, electronic filing and financial services to Internet consumers. For a $60 fee, taxpayers can prepare and file their federal tax returns electronically without having to buy any software. A PEI chat support team is available 24 hours a day during tax season to answer consumer questions. The consumer pays only when the form has been completed and is ready to file.

“Sixty percent of taxpayers pay tax professionals to do their tax returns,” says Craig, “so the market for potential consumers is huge. Last year 13 million people prepared their 2004 tax returns online, 1.5 million using TaxBrain. This year we expect that number to double.”

PEI’s main competitors are industry giants H&R Block and Intuit. “The big guys have minimal advantages over our product and tax development team,” says Craig, who was a project manager at Intuit for three years. “But we have the benefit of being smaller and more nimble.” And, Glenna Sue chimes in, “There’s nothing wrong with being the third largest. We’d be happy with 20% of the market share.”

It seems incongruous in a rural setting, but visitors to PEI’s offices must sign in and out at the entrance and wear a nametag. “It’s an IRS security requirement,” explains Glenna Sue. A genial, gray-haired woman, she greets employees by first name as she leads a tour of the facility. PEI has 50 full-time staff members; the Petzes are interviewing to hire seven more. During tax season, the staff is supplemented by up to 100 temporary software developers, tax professionals and Internet specialists.

With its business expanding year by year, PEI has outgrown its current offices. After renting space for 11 years, the family has purchased property in Tracy, where they are building their own facility; they expect construction to be completed in two years. PEI doesn’t publish its annual revenues, but Craig notes it has grown from a small to a mid-sized company. “We believe the market is big enough for us to grow the business tenfold over the next decade,” Craig says. “We get regular offers to sell the business and calls from venture capitalists who want to invest. The more we say ‘no,’ the more persistent they are. But we’re in business for the long haul, and we prefer to be self-financed.”

PEI is wholly owned by Leroy and Glenna Sue, but they have been gifting shares of stock to the three sons working in the business. On their deaths, the remaining stock will be divided equally among their sons and daughter Sharon.

“Our main goal is to keep the company for the benefit of the family,” says Leroy. “When our kids were young, they wanted to go far away from Tracy and the farm. Now they’re all here. They had to learn what they needed to know before deciding whether they wanted to be in the family business.”

The family jokes that they are joined at the hip from their years of farming. That experience may explain in part their success in avoiding the conflicts that beset so many family businesses. It also helps that family members have distinct abilities and manage their own departments. In fact, the only time they all come together at the office is for their daily lunches. “That’s how we keep everyone informed of what’s happening in each department and what issues have to be resolved,” says Glenna Sue. “Our lunches are like board meetings.”

The organizational structure the family designed for their company—the parents in oversight roles and the sons managing their own departments—has worked well thus far. PEI’s biggest challenge will come when Leroy and Glenna Sue retire, perhaps in the next five years. Retirement has more appeal to Leroy, who enjoys working on cars and driving the new tractor he bought for his grandsons. Glenna Sue is more leery. “What would I do if I retired?” she asks. “I’ve always worked. Besides, no one pinches pennies in this company as hard as I do.”

Because each son has his own separate fiefdom, it will be tough to find an outsider to run the business as a whole, consultant Otis Baskin predicts. “The current organizational structure is a red flag,” says Baskin. “They have to rethink how the business will be organized, and they should start now while the parents are still active in the business. No one can replace Mom and Dad, so the company has to develop a new central organization for doing their jobs.”

Bringing in outside professional management will be a big adjustment for a family whose lives are intertwined at work and at home. The parents and their sons’ families live on the same road of the farm property. A few years ago, Charles built a “party house” with a kitchen and bar so that the extended family of 18 could celebrate family events and holiday dinners around the same table. And Leroy Sr. built a workshop where he and his grandsons can work on a ’92 Chevy Camaro that they own jointly. A picture of the car hangs in Leroy’s office.

The third generation is still young—eight grandchildren ranging in age from 20 to eight years. Leroy Sr. and Glenna Sue are encouraging them to follow their interests, as they did with their children. But they hope that some may join the business or even go back to farming. Their eldest grandson, Christopher, 20, has already won a scholarship for his web design and is studying business in college.

“He’s been eyeing Grandpa’s office and thinking it looks pretty good,” Leroy says with a laugh. “We’d love him to replace me one day.

“Our philosophy is: Give kids a good education, and they’ll come back with good ideas.”

Deanne Stone is a business writer based in Berkeley, Calif.

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