IN DAD WE TRUST

The three brothers who owned Patton Electronics needed a seasoned manager to help their company grow. Their dad seemed the best choice. Or was he?

By Dan Rottenberg

It was a year of living dangerously in the Maryland household of Robert E. Patton. Upstairs, the 57-year-old entrepreneur was recuperating from a heart attack. Downstairs, two of his ten children, 21-year-old Bob Jr. and Burt, 19, were launching Patton Electronics to sell data communications equipment by mail.

The brothers, who had arranged their college schedules that fall of 1983 so that each could be at the business half a day, started out with little more than $5,000 from their father and the tradition of self-reliance he had instilled in them.

Within two years Patton Electronics was flourishing; indeed, it was facing a desperate need for expansion capital and management expertise. When Bob Sr. faced a similar capital shortage a decade earlier with his much larger company, Leasametric Inc., which rented electronic test equipment, he sold it to the Trans Union conglomerate, only to see it gobbled up by Chicago's Pritzker family. His sons were determined not to let their creation suffer the same fate. So in 1986 the young founders of Patton Electronics turned the corporate reins over to the one man capable of offering them the needed capital and expertise without sacrificing the company's independence: their father.

In an era of the generation gap, sons hiring their father is decidedly rare. For years family businesses have grappled with the role of the next generation — what to do with the founders' children. Bringing a parent into the business poses a different challenge, but one that is likely to come up often in the future.

Changing demographic patterns suggest that the Patton role-reversal could be a harbinger of things to come: Nowadays senior citizens are willing and able to remain active well into their seventies or even eighties. And many have the capital, as well as the experience, that their overextended baby-boomer children so desperately need to expand their businesses.

That's what happened at Code Alarin Inc., a Madison Heights, Michigan, maker of auto security devices with $34 million sales, which was founded in 1979 by brothers Marshall and Rand Mueller. Marshall has since left the firm, but the boys' father, Kenneth, joined in 1987 as a key stockholder and director of investor relations.

Such arrangements risk foundering on the shoals of Oedipal conflicts. At Patton Electronics, both father and sons worried as they considered a working relationship. "At Leasametric Dad was accustomed to working with a huge support staff," says Bob Jr. "When he thought about coming on with us, I thought, 'I can see myself becoming his staff, and I don't really want that.'"

Bob Sr. was concerned, too. "On my own I probably wouldn't have done it, because I knew the business risk involved."

When it comes to accepting the notion that father knows best, the Pattons are no ordinary family. Barbara and Bob Patton Sr. have ten children between the ages of 38 and 17. In a highly mobile age when families typically scatter across the country, all ten of the Patton kids reside within a two-hour drive of their parents, and six will soon live within shouting distance, in homes being built on their parents' property.

Watching the Patton boys sit around the company conference table wise-cracking with their father conjures up images of what it would be like if Wally and the Beaver had grown up and gone into business with Ward Cleaver. The Patton kids are good-natured, uncomplicated pragmatists who seem comfortable with each other and whose closely interwoven lives seem uncluttered by the neuroses which have plagued so many of their contemporaries.

In 1983, when Bob Jr. and Burt — then college students majoring in computer science and marketing, respectively — wanted to start a computer software company, it was their father who provided them with a better idea, based on his own experience in electronics. Software takes years to develop, he noted, and thus requires too much initial capital investment. On the other hand, data communications hardware products — which enable computers to speak to each other — had proven themselves in consumer markets, but no one was selling them directly to businesses. A company offering low-priced business-to-business components, Bob Sr. reasoned, could carve out its own niche. What's more, "If you manufactured the stuff, it would be as near-vertically integrated as you could get. You'd be selling direct to the end user without a middleman."

The boys acquired the requisite manufacturing capacity via their older brother Bruce, a production specialist with Westinghouse. He began spending his nights setting up a manufacturing operation in the Patton basement. Bruce bought parts and hired a few helpers to assemble them by hand. "All you needed was a soldering iron and some skill," he insists. When the operation outgrew the basement, Bruce made up assembly kits and farmed them out to subcontractors who worked in their own homes.

Soon, the Patton house was overflowing with inventory, and sales jumped from $100,000 in 1984 to $300,000 in 1985 to $700,000 in 1986. Overhead was about as low as it could be the space was free, Burt and Bob Jr. paid themselves just $4 an hour, and Bruce worked for nothing until he left Westinghouse. But the company was soon starving for expansion capital. "It looked like they were on to something," Bob Sr. says, so to meet the boys' financing needs, he sold a vacant lot next to his house for $90,000 and invested it in the fledgling company. In a matter of months, however, that money was soaked up.

At that point, Bob Sr. faced a crossroads: Recuperating from his second heart attack and open heart surgery in 1986, he could go on plugging away at his unrewarding job at Leasametric, keep his retirement fund intact — and watch his sons' promising venture drown for lack of capital. Or at age 61, he could invest his retirement fund in the boys' company — and risk retiring with no nest egg and a bad heart. Gradually another option occurred to him: Why not invest both his capital and his skills in his boys — assuming they would have him?

The boys weren't overjoyed about the prospect of turning their enterprise over to their father. "Dad had been our silent partner and investor, but we ran the company," Bob Jr. remembers. He worried that the brothers would end up working for their father, not the other way around.

The same point was raised by Bob Jr.'s independent-minded older brother Barry. He had resisted joining his brothers in Patton Electronics and instead had become an independent distributor of data communications hardware (his company is now the largest U.S. distributor of Patton Electronics products). At the time, he recalls, "I thought Dad would naturally take authority and everyone would wind up reporting to him."

The boys ultimately overcame their misgivings — at least partly because they had no choice. "We wanted to build a multimillion-dollar company that would provide a livelihood for all of us," Burt says. "For that, we realized, we needed experienced management — and those types of people were really expensive. Having Dad meant an injection of his 40 years' experience and all his contacts. We could build on his reputation."

Meanwhile, Bob Sr. continued to debate pouring his $150,000 retirement fund into the company. "I wasn't sure the business was mature enough to carry me," he remembers. Like his sons, he would have to start out donating his services to Patton Electronics: With $300,000 in sales in 1985, the company could hardly be expected to approach his $160,000 compensation package at Leasametric.

Ultimately, Bob's wife Barbara helped him decide. Bob Sr. recalls Barbara asking him, "What's the money for? For us to vegetate or go to Florida? Or to live?" That did it, Bob says in retrospect: "The prospect of working with my sons was something I'd wanted to do for 25 years. But I had a hard time convincing myself that it would be responsible to go do something I wanted to do."

So in 1986 after he left Leasametric, Bob Sr. took over Patton Electronics. Actually, although the family always viewed Patton Electronics as the boys' company, for tax purposes it was originally established as a proprietorship owned by Bob Sr. so its losses could be written off against his earnings at Leasametric. On January 1, 1987, Patton Electronics was restructured as a Subchapter S corporation. Bob Sr. retained 70 percent of the equity, while Bob Jr., Burt, and Bruce each got 10 percent. The new corporation was configured by yet another Patton — Bob's accountant son, Ben, who sits with Bob Sr. and Jr., Burt, and Bruce on Patton Electronics' board of directors.

Under Patton pere et fils, Patton Electronics has blossomed into a producer of some 300 different high-tech components sold through the mails to large corporations, hospitals, and universities. By any measure, the company looks like a winner: Sales have jumped from $700,000 when Bob Sr. joined in 1986 to about $3 million this year; profit margins are well above 10 percent; the company, now in Gaithersburg, Maryland, is doubling its floor space.

By all accounts, Bob Sr.'s presence hasn't ruffled any of his sons' feathers. Burt, as vice-president for sales and marketing, now administers a $250,000 annual advertising budget pretty much at his own discretion. Bob Jr., as vice-president for engineering, oversees development of the company's expanding product line. ("In this business, patents are worthless," explains Bob Sr. "The name of the game is invent it and sell it before it obsoletes.") Bruce, vice-president for operations, directs production, purchasing, and internal functions.

Meanwhile, Bob Jr. insists, "We're not doing anything different from before Dad came on. We just benefit from Dad's management." Indeed, Bob Sr.'s function at the company has turned out to be mostly serving as a teacher and door-opener. A few months ago, for example, he took Burt on a three-week tour of Europe, discussing sales and joint ventures with old distributors from his Leasametric days. Each month Bob Sr. reviews the company's financial statements with his sons "so they can see the results of actions we've taken, or not taken."

Bob Sr.'s tenure has not stifled his sons in part because he's a long-time believer in consensus management. "I've never been an autocratic leader," he says. "I don't have a corner on all the good ideas. If you can create a team spirit, whether family or not, it's a lot more effective and a lot more fun. The biggest limiting factor to the growth of any department or company is the ego of the guy running it. If there's a way to do something that's easier for someone, let him do it his way. I've been free to make lots of mistakes. I want my sons to have the same freedom."

Since January, Bob Sr. has been taking Fridays off, and "I figure in a few years I'll cut back to three days a week." While he is lightening his load, the family has deliberately avoided the question of succession, and the three sons in the company hold equal rank and equal ownership.

The company's rapid growth — its current roster of 40 employees is expected to increase by at least 20 percent this year — has had a strangely liberating effect on the Patton siblings outside the business. "The knowledge that the company is there if I want it gave me the freedom to try starting my own," says Barry, the independent distributor.

Whether that safety net will always be there, of course, isn't a sure thing. Young companies are highly vulnerable during periods of rapid growth — if only because their success attracts larger, better-capitalized competitors.

Bob Sr. clearly has the biggest financial stake in the venture. He has invested some $400,000 — his entire liquid holdings — in the company. Accountant son Ben structured most of the investment in the form of an interest-bearing loan. That way, Bob says, "If I'm gone, the interest will support Mom as long as the boys keep the company healthy." And if they don't? "Ben will find a way to sell it or liquidate it."

Meanwhile, "I have no retirement fund — zero," he says. "All my life savings are in my house and the company." But the grin on his face suggests that nothing could please him more. "If I can communicate what I've learned to the boys," he says, "it'll be a good education for them without their learning the hard way. That's a lifetime contribution I can give them that's worth much more than an inheritance."

— D.R.


Kids, let me introduce you to Adam Smith

If entrepreneurship comes naturally to the ten children of Bob and Barbara Patton, there's good reason: They've been ingesting it since they learned to walk and talk. Bob Patton ran his sizable family with a system of incentives and rewards worthy of a Fortune 500 company.

Unlike most kids, the Patton children never received an allowance because, Bob says, "I didn't think it was good for them." Instead, he offered to pay for half of things his children wanted to buy. To raise the other half, the kids had to scrimp and save.

"Barry and 1 sold stickers in elementary school," remembers Ben Patton, 33. Bob's pay-half offer extended even to big-ticket items like summer camp. "Camp was expensive," 25-year-old Burt remembers with a mock grimace. "You had to plan ahead."

The kids were expected to pay half their college tuition. "I knew by eighth grade that if I wanted to go to college, I'd better start saving," Ben says.

After graduation, Patton children who chose to live at home were charged room and board equal to 25 percent of their take-home pay. "I wanted them to get accustomed to paying rent," Bob explains. This "rent" was salted away and returned when that offspring finally moved out. Ben's "rent fund" accumulated enough cash to provide the down payment on his house. ("But I only got the money if I was still on good terms with Dad," Ben says, only half-jokingly.)

Even as adults, the Patton kids still find their father holding out an assortment of carrots and sticks. Bob and Barbara recently moved into a new "grandparenting" house in Damascus, Maryland — complete with pool, rec room, and wooded grounds on which to enjoy their 18 grandchildren. They subdivided adjoining lots for possible use by their children and their families, and Bob offered the 3-to-10-acre lots — worth up to $150,000 each — free to his children on three conditions: First, if they accept a lot, they must build on it and live there. Second, if Bob dies, the gift of the lot will represent a predistribution piece of that child's share of Bob's estate. Third, if they want to sell the house or lot, they must first offer it to their siblings at a fair market price. So far, Bob Jr. and Bruce have accepted the terms and have homes under construction.

Bob Sr. insists that his child-rearing principles were "born of necessity. If we'd had only two kids, we wouldn't have done this — to the detriment of the kids." For all their good-natured grousing, the kids seem to agree. "Dad's ground rules," says Ben today, "were great."

—D.R.