Standing at a podium and sharing his family’s most private affairs with a hundred strangers isn’t Duane Presti’s idea of fun. Yet there he was last year, at a meeting of the Delaware Valley Family Business Forum in suburban Philadelphia, explaining how in 1996 he and his seven siblings removed their father against his will from the family business. Stoic by nature, Duane Presti found himself fighting back tears as he unfolded his cautionary tale about a founder’s illness and its difficult aftermath.
If you’re looking for a reason to start your succession planning early, heed the experiences of this close-knit Italian-American family and their $30 million assortment of rubber-products and software enterprises, the Presti Group. After suffering a stroke in 1995, founder Fred Presti, Duane’s father, refused to believe he was incapable of running the company. Instead, he hung on as CEO for more than a year, resulting in the misspending of millions of dollars and much internal conflict and emotional stress in the family.
Succession is rarely easy in a family business, and when succession involves the forced replacement of a partially disabled parent, it can be particularly agonizing. A disabling illness can arguably be harder to plan for and cope with than a death. Heirs may not agree on when the CEO is actually incapacitated, or precisely when the situation warrants his or her removal. When the CEO is loved, respected, and relied upon by his family, the crisis may be all the more difficult.
This was the crucible in which the Prestis found themselves starting in 1995. Fred Presti had never created a formal succession plan. His symptoms were subtle enough so that some of his children refused to believe he was ill at all. Others were too proud at first to reach out for professional help. Had the Prestis known then what they know now, Duane Presti told his fellow members of the Delaware Valley Family Business Forum, the family board of directors would have handled things much differently.
Despite the personal pain and the red ink, the five brothers and three sister rallied to bring the Presti Group back from the brink of default. Making a virtue of their diverse talents and interests, the brothers and a brother-in-law filled different managerial niches. Duane, 45, the eldest, emerged as the leader, acting decisively and forging a partnership among eight equal owners in the new generation under the most harrowing circumstances.
It was a classic example of how to take charge and establish a leadership structure in the midst of a crisis. Since then, moreover, Duane and his siblings have put the business on a professional footing and set up an intricate compensation plan that rewards the various partners according to their roles in the different businesses, their performance, and the risks that some in the group have assumed.
Decade of struggle
When children grow up watching their father build a business from nothing and see him surmount one financial and physical setback after another, they come to believe he’s invulnerable. Even when the father reaches 70 and his health falters, they may still deny the possibility that he’s a threat to the business he created.
In 1975, at age 48 and with seven children, Fred Presti walked out on his management job at a mid-sized rubber products company. Armed with a novel idea for a seamless, reusable rubber “envelope” that could sharply cut the cost of retreading a tire, he found investors, leased a building north of Philadelphia, and went into business for himself.
The next decade was a difficult one. In 1976, after the first of several heart attacks, he returned from the hospital to find that his investors had locked him out of the plant. In 1981, after he formed Presti Rubber Products Inc. with $10,000 from a friend, a factory fire in Ohio put him out of production. He then enjoyed 10 good years in a 50-50 venture with Iowa-based tire giant Bandag Corp. Then, in 1995, he had to borrow heavily to thwart a competitor’s bid for Bandag’s half of the business.
That’s when his health unraveled. While vacationing in Las Vegas he suffered a major stroke. After surgery, he seemed to recover. But over the next year, those who saw him every day realized that his short-term memory and sight were markedly impaired. He bought equipment and forgot why. He gave orders and reversed them the next day. He had blind spots and literally could not see parts of a balance sheet put in front of him. Though he insisted nothing was wrong, he recruited Duane, who at the time was running his own software venture, to help with the books. “I’d be in and away, in and away,” Duane recalled. “In the meantime, my father went through a couple of million in capital”—mainly by buying machinery he didn’t need.
Worried about the company’s 30-to-1 debt-to-equity ratio, the Prestis’ long-time bank, Union National Bank, proposed that Duane replace his father as sole signatory to the outstanding loans. That threw the family into turmoil. Fred Presti wouldn’t hear of stepping down. Duane’s siblings didn’t believe their father was seriously ill. Hadn’t he shrugged off setbacks many times in the past?
Instead, they suspected Duane of losing his grip. Duane, meanwhile, refused to assume all of the risk for the debt and wanted at least some of the co-owners to sign with him. His brothers David, Brian, and Darryl signed, as did brother-in-law Bruce Robinson, who owns 10 percent with his wife, Linay, Duane’s sister.
“The bank was deciding whether or not to call the loans,” Duane recalls. “They told me to put a plan together to fix the company. My father and I had quite a struggle over this. He didn’t know that he had any problems with judgment, and we had to go through a painful process of educating him about that. The responsibility fell largely upon me and, to be honest, I didn’t do it as gracefully as I could have.”
In August 1996, at the family dinner table, Duane Presti committed the single most difficult act of his life. He led his four brothers and three sisters through a reluctant vote to remove their father—their superhero, who had put food on that same table for the family for so many years—from the company. When it was over, Duane was CEO of the Presti Group. This included subsidiary Presti Rubber Products Inc., North Carolina-based rubber maker Hoke Rubber, and a half-interest in Educom, an Australia-based company that provides Microsoft computer training worldwide. Educom owns PARIS Technologies Inc., which sells financial management software. To create a sense of closure for Fred Presti’s career, the family later honored him with a retirement dinner. Still, he did not speak to Duane again until more than a year later, on January 1, 1998, when he phoned his son to apologize and say it was time for a truce.
Assigning roles
Fortunately for the company, all of Fred Presti’s sons, as well as a son-in-law, were already involved in the business. Darryl, now 35, went into Presti Rubber Products after high school. Brian, 37, came in 1985 after a short stint as a systems operator at a small communications company. David, 41, joined in 1982, left to study at Elizabethtown College and Columbia University, then returned full-time in 1991. Barry, 39, joined in 1983 after graduating from the Maryland Institute of Art. Bruce Robinson, 44, arrived in 1983 after working in production inventory control at Bendix Corp.
Duane, 45, spent the most time outside the company. He worked for 10 years in finance and MIS at Bristol-Myers Squibb and then, in the 1990s, was CEO of his own software startup, United Information Technologies Inc. The three daughters worked outside the business: Barbara as a nurse supervisor, Janelle as the owner of a dance academy, and Linay as a school librarian. Fred’s wife, Maysie, currently serves as chairman of the board.
Fred Presti had split the ownership of the company 10 equal ways while he was recovering from a heart attack. He distributed 10 percent to himself, 10 percent to Maysie, and 10 percent to each child. The stakes had little market value then. Rather, they symbolized Presti’s dream of an all-inclusive, loving, and successful family business. “My father envisioned a day when we’d all run the company,” Duane says. “But he didn’t have a particular succession plan. He thought that one day he’d just flip a switch and it would happen.”
On paper, each family member was a voting member of the board. In practice, Fred ran the company as a “benevolent dictator,” as Duane put it. Like many entrepreneurs, he kept every detail of the business, from the formulas for mixing rubber to the specs of his machinery, between his own ears. Board meetings were few, and the family simply ratified Presti’s decisions.
Drawing on his corporate experience, Duane delegated authority and assigned his brothers wherever they were needed most. Darryl stayed at Presti Rubber, while Barry started revamping the production process at Hoke Rubber. David took over sales for PARIS Technologies and the rubber businesses. At the corporate level, Brian handled MIS. Bruce took over finance and administration. Duane watched expenses, planned ahead, and cracked the whip.
But “the company couldn’t go from entrepreneurial management to consensus in one meeting,” Duane says. “I was going to be the one who was responsible—the bank at first had wanted me to sign alone—and I couldn’t take that risk unless I had control. So the things that I wanted to have happen, happened. My feeling was, ‘Do it this way or find somebody else to take the responsibility.’”
Says David Presti, “We eventually had a vote, but Duane was the natural choice as CEO. He had the experience, and he’s a financial genius. When we put together plans to grow the businesses, I’d put the ideas on paper, but it was always Duane who worked the numbers.”
One of Duane’s first official acts was to demote his brother Darryl. Duane felt that Fred had prematurely made Darryl president of Presti Rubber. The demotion shocked the siblings. “They couldn’t conceive how we could demote someone in the family,” Duane says. “Since then, Darryl has had to perform. There was a lot of discussion about it. But at the time, I felt I had to do it.” Darryl has since been reinstated in his position.
To deal with conflict, the family turned, reluctantly at first, to consultant Henry Landes. He showed them basic ground rules for communicating at meetings. These included taking “time-outs” when they started to lose their tempers, and distinguishing among family issues, business issues, and ownership issues. At board meetings, the siblings began giving each person an opportunity to speak without interruption. Still, there’s a communication gap between the men who work in the business and the sisters who do not. The three sisters complain that at board meetings there’s seldom enough time to discuss every complex issue that comes up for a vote.
Nonetheless, the enterprise is thriving. The business plan has been to use the unspectacular but reliable cash flow from the rubber business to reduce overall debt and to finance PARIS Technologies’ risky software venture without parting with any of its equity. So far, it’s working. Since August 1996, the Presti Group’s debt-to-equity ratio has fallen tenfold, to about 3:1. The value of each 10 percent share, once near zero, is now estimated at between $2 million and $3 million.
With 10 equal owners and six family members working in different parts of the business, the Prestis have had to create a compensation plan that rewards ownership, risk, responsibility, and performance. That’s not easy, given their diverse roles. Some work in the low-margin rubber side of the business, others in the high-stakes software side. Some have line responsibilities, others have general management roles. Some could command much higher base salaries outside the company.
Each of the 10 equal owners recently began receiving a stipend, disbursed through payroll. The stipend is a fixed amount rather than a percentage of earnings, and the amount can be changed only by a vote of the board. The stipends are modest, says Duane—most of the net goes to debt service and expansion.
Besides the stipends, the six men who work in the business receive salaries. Duane determines each’s salary by studying compensation surveys in the trade press and consulting other CEOs. In addition to salaries and stipends, there are bonuses for increasing profits or exceeding expectations. Finally, those who are personally liable for repaying the company’s debt—Duane, Bruce, David, Brian, and Darryl—receive a fourth type of compensation for the risk, an undisclosed percentage of the Presti Group’s annual operating income.
Nobody receives an automatic annual raise, because Duane Presti feels that in the long run this practice turns good family members into overpaid deadwood who will eventually have to be fired. Raises are not necessarily infrequent, however. “If we see cause-and-effect between something that someone has done and an improvement in the business, that person might get an increase in pay that day,” says Duane. As for performance reviews, that’s an issue the brothers haven’t yet tackled, perhaps because having siblings and equal owners evaluating one another is a dicey proposition.
Sharing the news
The Prestis don’t have a specific succession plan in mind going forward. Duane has raised the possibility that the title of CEO or president might rotate among his brothers and brother-in-law. “I’ll always have responsibility for finance, but other people could take turns as president and maybe CEO,” Duane says. “It’s a long-term goal of mine and something that Henry Landes and I are working on.”
Had he and his siblings confronted the succession issue at the time of their father’s stroke, Duane says, millions of dollars might not have been misspent. He also regrets waiting a year before allowing a consultant into their inner circle. The consultant, he says, might have helped the family overcome their denial and manage the transition with less conflict and pain.
“Their big struggle was, ‘How do we recognize Dad’s illness but treat him with dignity, appreciation, and respect?’” Landes notes. “‘And how do we take the company—which was like one of his children—away from him without ripping out his heart?’” Landes adds: “They all felt like traitors. My job was to hold up a mirror and force them to ask themselves whether they could be partners and create a viable, dynamic ownership group.”
Fred Presti, now 73, is not involved in the business, and board meetings are held without him. He enjoys traveling with his wife to places as far as Italy or as near as the Atlantic City casinos. If there is a silver lining to his illness, it is that he and his sons have been able to relax together, play pinochle, and talk about topics other than the business.
In fact, the sons must avoid talking about business with their father. If the subject drifts toward the company, he gets excited. “If you start to have a business discussion, he wants to get back in and start making decisions. He can’t step back and just be an owner and a board member and relinquish the operating responsibilities,” says Duane.
For Duane and his brothers, withholding good news from their father is hardest of all. Last fall, after Darryl successfully negotiated a partnership with Bandag Corp. that will provide the Presti Group with a stable income for years to come, the brothers had to relay the good news to their father with care. “It should have been a celebration, but it was a difficult thing to tell him. He felt he should have been involved in the pricing decisions,” Duane says. “It just frustrates him that he can’t contribute the way he used to.”
Kerry Pechter, a former Wall Street Journal reporter living in Allentown, PA, is a frequent contributor to Family Business.
The Presti Group
Location: Doylestown and New Britain, PA.
Founded: 1982 by Frederick J. Presti.
Companies: Full ownership of Presti Rubber Products Inc. and Hoke Rubber Co. Fifty-percent interest in Educom Group International, an Australia-based Microsoft training company. Educom includes PARIS Technologies Inc., which sells financial management software.
Annual revenues: $30 million.
Family employees: Mrs. Fred (Maysie) Presti, chairman; sons Duane, president and CEO, the Presti Group; Darryl, president, Presti Rubber Products; David, sales director, PARIS Technologies; Brian, director of information services, PARIS Technologies; Barry, consultant to Hoke Rubber Co.; son-in-law, Bruce Robinson, vice president of operations, the Presti Group.
Ownership: Divided into 10 equal shares among Frederick J. Presti, Maysie Presti, their five sons and three daughters.
Claim to fame: In 1996, after the founder had been partially incapacitated by a stroke for a year, the five brothers and three sisters retired him and created a sibling partnership under crisis conditions. They shrank the debt-to-equity ratio from 30:1 to 3:1, and returned the company to profitability.
— K.P.