HAVE YOU EVER HEARD THE STORY ABOUT BIG TOM CALLAGHAN?
Big Tom Callaghan is the owner of a company that makes auto parts. One day he would like to see his son, Tommy Callahan III, take over the business. Only problem is Tommy is a dim–witted, albeit affable, slacker who took seven years to get a college degree and has no idea how to run a business.
Enter Big Tom’s young and beautiful wife–to–be, Beverly, who along with her scheming lover, plots to marry Big Tom in the hopes of cashing in on his wealth. When Big Tom suddenly dies at his wedding to Beverly, Tommy finds himself in charge of his dad’s company. Tommy must then hit the road for a long sales trip in a last ditch effort to rescue his father’s legacy, all the while fending off his evil stepmother’s plan to run the company into the ground so she can sell it off and earn a quick payoff.
By now, many of you recognize the story of Big Tom Callaghan as the plotline of one of the great comedies of the 1990s, Tommy Boy. While offering a good 97 minutes of comedy, Tommy Boy also presents an excellent illustration of the problems facing senior business owners today (notwithstanding its more comical and sinister approach). For example, senior business owners may find that the younger generation’s business competence or commitment to the business is not strong enough. They may also find that family discord threatens the continuation of the business.
IT HAS BEEN SAID THAT OF THE ESTIMATED 18 MILLION BUSINESSES IN THE US, CLOSE TO 80% OF THEM ARE FAMILY OWNED AND OPERATED.
Couple this with a generation of baby boomers, the older of which are rapidly approaching retirement, and we find ourselves on the verge of what some have called the greatest generational transfer of wealth in recent history. With this in mind, the importance of business succession planning has taken on a new fervor.
For many years, minimizing taxation was at the forefront of business succession planning and little importance was placed on relationship and management issues. However, recent statistics show that relationship and management issues play a larger role in the success of a succession plan than previously thought.
Because of this, one of the main issues which should be addressed in any business succession plan is who will succeed management and control of the business at a key owner’s death. Many businesses depend largely on the active participation of a key owner. For example, because younger generations might lack the competence to continue the business, businesses should obtain a key man insurance policy which is designed to protect a business upon the loss of a key employee. This type of policy will help ensure cash flow upon the death of a key owner and can be used to engage a professional and/or management company to operate the business pending sale.
In addition, tax–saving strategies continue to play a significant role in the viability of a business at the second generation. The use of various valuation strategies (such as the formation of a limited liability structure to operate the business) can help preserve the value of the business for continuation or sale by reducing taxable values.
A business succession plan should address a wide variety of issues, including but not limited to whether or not to sell the business, maximizing the value of the business, cash flow issues, control issues, tax matters, liquidity needs, and the retention of key employees.
SPOILER ALERT.
While our affable protagonist, Tommy Boy, was able to pull it off at the end, the lesson here is – don’t rely on Hollywood endings. The business succession process involves a number of considerations and strategies which must be specifically tailored to meet the goals and needs of a particular business and owner. By engaging in careful succession planning with your legal and financial advisors, you can help ensure that your business succession goals are met.
