Chapter 1: Train Wreck

In the early evening of November 1, 1918, approximately 650 passengers boarded the Brighton Beach Line subway in Brooklyn as men and women across New York City pulled down shop awnings, tucked their day’s wages into coat pockets, and headed home for dinner. The commuters settled into seats or stood gripping the overhead rail, unaware that one of the deadliest train wrecks in American history awaited them. Edward Luciano, a twenty-five-year-old crew dispatcher who had never operated a passenger train, sat at the helm of the subway. That morning, a significant number of railroad motormen had gone on strike, forcing the Brooklyn Rapid Transit Company (BRT) to press anyone they could find into service to keep the metro system running. Luciano’s experience extended only to parking trains in a yard the previous year. Instead of the standard ninety hours of training required for certification, he had received less than three hours of classroom learning. This inexperienced driver was also mourning the recent death of his infant daughter, a victim of the Spanish Flu epidemic, while still recovering from the flu himself. Despite these challenges, the BRT shoved Luciano into the driver’s seat—emotionally spent, inexperienced, and woefully unprepared. Luciano pulled away from the station and began navigating the tight maze of subway tunnels beneath the city. The journey proceeded smoothly, the rhythmic clatter of wheels on track providing the familiar sound of “going home” to the weary passengers. As the subway neared Prospect Park station, however, it approached a sharp curve notorious among experienced motormen for requiring a significant reduction in speed to navigate safely. Unfortunately, Luciano’s unfamiliarity with the track and limited training betrayed him. The train hurtled toward the curve at dangerously high speed. Other staff on board quickly realized that Luciano was not slowing down sufficiently. Shouts of alarm echoed in the driver’s cabin, but it was too late. Experienced travelers threw themselves to the floor in desperate preparation as the groaning sound of metal against metal filled the subway tunnel and the train began to derail. In one cataclysmic instant, it popped off the track and hurtled into the stone walls, the screeches of twisting metal drowning out the passengers’ screams. News of the Malbone Street wreck, as it came to be known, spread across the country. Ninety-three people lost their lives that day, with over two hundred more injured, making it one of the deadliest accidents in New York City Subway history. When first responders laid eyes on the wreckage, a grim realization must have dawned on them: This was not an unforeseeable accident, but the result of negligence. The rushed deployment of Luciano as a motorman, his lack of training, and the absence of adequate safety measures for such a dangerous curve—all these factors foretold the catastrophe. Yet no one took the warning signs seriously until it was too late. Business Train Wrecks Like those first responders, we at Legacy & Succession have seen our share of train wrecks as well. The wrecks we encounter are not twisted in metal and consumed in flames. Instead, they are fragmented into bitter family disputes, torn apart by banks and private equity groups, and scorched by lawsuits and taxes. Our train wrecks are “business exits” gone wrong—in other words, we help entrepreneurs answer the question, “What do I do with my business when I’m ready to move to the next season of life?” Like a large freight train, a large business with substantial overhead and many employees requires careful planning to navigate sharp corners or transfer leadership. Yet we meet entrepreneurs all the time who are driving businesses that are over a mile long, weigh twenty thousand tons, and are racing down the track at 120 miles per hour with hundreds or even thousands of passengers (aka employees). But despite knowing they have a major turn coming up, they continue to say, “That’s tomorrow’s problem.” Here’s the reality for large trains: If there’s a problem a mile away, you’re almost out of time. The same principle applies to large businesses: If you plan to exit your business within the next ten years, you need to start thinking about it now, not when you’re sitting in your accountant’s office a few months away from your target date. It doesn’t take a railroad engineer to realize what caused the Malbone Street wreck: poor planning. Luciano planned poorly when he approached the turn at such speed. The company planned poorly when it transferred leadership of the train to someone unqualified. And all the striking motormen planned poorly when they didn’t consider the repercussions their sudden disappearance might have. Every business will eventually face either a changing of the tracks or the end of the line. Just as all beginnings differ, no two endings look the same, either. Some businesses will transition from one generation to another, others will change hands through transactions, and still others will end when owners turn the key one last time and walk away. Succession wrecks seldom happen on the straightaways. Instead, they occur during critical moments when a “turn” or transition takes place and someone shoves a new engineer into the driver’s seat. To leaders of substantial businesses, let us be candid: Your planning determines whether your children and family stay connected, whether your employees thrive, and whether your company’s legacy endures. Throughout this book, you’ll find multiple stories about business transfers in action. We’ll see all kinds—the good, the bad, and the ugly. While we’ve altered pieces of each story or mixed them with others to maintain anonymity, all are based on true events we’ve witnessed throughout our company’s history. Wake-Up Call Tom McCoy owned McCoy Construction—a successful company with seventy-five employees and $30 million in annual revenue. He had started the company with only a pickup truck and a backhoe, building it from the ground up to become one of the top residential builders in his area. Early in the company’s history, Tom’s right-hand man, Robert, came to him considering a job with one of McCoy Construction’s competitors. To keep Robert on board, Tom agreed to give him 10 percent of the company if he stayed another ten years. The two shook hands on the deal and made excellent partners, with Tom serving as the well-loved face of the company while Robert handled much of the behind-the-scenes work. The company was his greatest passion, and like many entrepreneurs, Tom continued to pour every spare dollar back into his company year after year. To every financial advisor who approached him about building a diversified investment portfolio or retirement fund, Tom would lean back in his chair and give the same answer: “My company is my investment portfolio, and I don’t plan on retiring.” Tom’s relentless work ethic, dedication, and charismatic energy drove the company’s success. His clients loved him, his employees respected him, and competitors admired his hands-on approach to business. He insisted on personally visiting every project site, often showing up in his mud-caked boots to check on progress. At sixty-seven years old, however, the years of constant pressure and stress finally caught up with him. One Tuesday morning, while reviewing blueprints in his office, the words on the page began to blur, and Tom felt a strange weakness creep down his left arm—the warning signs of a minor stroke. After recovering, Tom decided to heed his doctor’s advice: retire from the business and enter a new season of life. While he hadn’t planned for retirement before, and wasn’t one to spend the rest of his life on a golf course, the thought of taking life a little easier didn’t seem all that bad. On the contrary, the more he thought about it, the more he liked the idea of moving to his second home in Colorado, where he could watch the sunrise over the mountains from his back deck. Married with three children, Tom had always wished one of his children would take the reins after him, but that wasn’t his reality. His daughter was happily married in another state, and his two sons had set out on their own career paths. Despite this, he had never seriously planned for any other course of action, and was now caught unprepared. With his mind already on his vacation home in Colorado, Tom turned to Robert for some short-notice planning. “I’ve got a proposal for you, Tom,” Robert said after a week of group discussion and brainstorming. He went on to share how he and a few of the other top employees were interested in buying the company from Tom. While they lacked the liquid capital to buy the company outright, Robert suggested a leveraged buyout, where he would use his 10 percent ownership stake as collateral and have Tom carry the note for the remaining amount, paid off over the next ten years with company profits. “What other options are there?” Tom’s wife, Claire, wanted to know, but Tom was ready to move on. If Robert wanted to buy the company from him and save him the hassle of sorting through spreadsheets and valuations himself, that was fine by him. Confident that the company would be in capable hands with his top employees, Tom agreed to the proposal and signed the papers with a relieved exhale. Pulling $1 million out of the company’s retained earnings to sustain himself for the first year, he felt assured that Robert would start making payments the following year. But the first three years under the new leadership were disastrous. Annual profits plummeted by 30 percent due to reckless spending and loss of key personnel who didn’t want to work under Robert. Some former employees even packed up their desks and started competing businesses down the street. The company that Tom had built from scratch was on the brink of collapse. Due to the financial strain, Tom had received hardly any payments toward the note he was carrying—his mailbox filled with overdue notices instead of checks. Faced with the prospect of watching the company go bankrupt and never receiving his full compensation, he made a decision. At seventy years old, Tom was forced to return from retirement to salvage the company. He managed to steer it back to profitability, only to retire again two years later. However, the company faltered once more under Robert’s leadership. At seventy-four, Tom had to step in again, turning things around for a second time. Rather than transferring ownership back to Robert, Tom decided to sell the company to a competitor looking to expand their territory. The new owners bought the company on a loan against Tom, shaking hands and assuring him that they would pay off the remainder quickly. But the cycle wasn’t finished. At seventy-seven, Tom was called back to save his company for the third time. The stress and pressure, compounded by his age, proved too much. Just a month later, he suffered a stroke and passed away. Claire, heartbroken, followed two months later, and his company went belly up. While Tom and Claire’s passing came as a sudden blow to their children, the impact was compounded by the discovery that their will was underdeveloped—little more than a few handwritten notes tucked in a desk drawer. If asked about his will a year earlier, Tom would have likely winked and said, “I love my kids and trust them. They’ll handle it right.” But with the remnants of the multimillion-dollar company on the line and no clear direction on its allocation, sibling relationships turned sour fast. In the aftermath of Tom’s death, his legacy was marred by infighting among his children and bank liquidation groups. The once-thriving business became a legal battleground for whatever inheritance remained after taxes. At the center of this mess was one undeniable mistake: poor planning. Poor planning for company succession and Tom and Claire’s personal exit. Poor planning to understand the available options and implications of each one. Poor planning for the event of Tom and Claire’s sudden death. Poor planning for tax mitigation instead of forfeiting everything to the IRS. And poor planning for transferring inheritance to his children. Like Edward Luciano at the helm of the Brighton Beach Line subway, Tom McCoy ran his company at full throttle right to the brink of a ninety-degree turn and sent it hurtling off the tracks in flames. Had Tom taken the time to properly plan for the future—mapping out the curves ahead and considering all the options available—he could have avoided this catastrophe and set his family and company up for a bright future. We’ve worked with many clients who count on their natural ability to “make things work out in the end.” Their intuition, hard work, and experience have guided them through every situation no matter how problematic, and when they consider the future of their company, they think this natural “edge” will persist. But they forget one critical detail: They won’t be there anymore to grip the wheel. This complacency can be detrimental. Legacies are not built on wishes and crossed fingers. Building a legacy requires careful foresight, and just as a train needs a mile or more to stop, a business needs years to transition properly. Leaving an inheritance happens by default, but leaving a legacy happens by design. Leaving an inheritance happens by default, but leaving a legacy happens by design. Your company’s legacy, the harmony of your family, and the livelihoods of your employees rely on your strategic foresight. It’s not about merely passing the baton; it’s about ensuring the next runner is ready. Your responsibility is not just to lead but to prepare the next leader. Don’t wait until you can see the end of the tracks. The goal of a properly built exit strategy and succession plan is twofold. First: to prevent catastrophic business failures that leave wreckage in their wake. Second: to prepare you for the rest of the track by equipping you to transition your business for greater profits, value, and impact than you ever imagined possible.