The sense of pride in building a business and keeping it in the family can be a huge motivator for business owners. But transferring a business to children for its own sake can have consequential risks for your future, your business, and your legacy.
If one of your goals is to transfer your business to your children, it’s important that you don’t let nepotism guide your decision making. Consider this fictional but representative story about the consequences of nepo baby business planning.
When legacy Blinds Leadership
Bruce and Bobbi Bohrman built a bustling business producing precision parts for military aircraft. As defense contractors, they had to adhere to high standards and secrecy in their work.
Over 25 years, the Bohrman children—Yancey and their adopted daughter Lucy—had taken different paths in the business. Lucy was an operational and production expert who loathed the limelight. Yancey was the face of the sales operation who constantly attracted attention.
After a run of poor health, Bruce and Bobbi decided that it was time to consider putting the business in the hands of their children. Bruce was adamant that Yancey take the helm, because he was their biological son.
However, Lucy was the brains behind the operation. Though she did not like to be front and center, she often fixed the messes that Yancey had created via his big mouth and boisterous personality. Many of the company’s employees knew and understood that when things needed to get done, it was Lucy, not Yancey, who they should talk to.
Bruce and Bobbi worked closely with their Advisor Team to work on a transition plan. But despite the Advisor Team and Bobbi urging Bruce to put Lucy in charge, Bruce refused to consider any option other than giving Yancey majority ownership.
Egomaniacs Never Earn It
When the Bohrmans shared their transition plans with their kids, Lucy took the news in stride even though she was disappointed. She always had a cold relationship with her father, so she wasn’t surprised that this was the decision he had made.
But Yancey’s confidence quickly turned into arrogance when he learned he would be the majority owner.
He was overly aggressive with the production and operations teams, demanding more output without any increase in pay. In internal meetings, he would flaunt top secret information among his employees, then threaten them if they told anyone else about it. But despite his poor leadership, he continued to make sales, so Bruce felt vindicated.
When Yancey took the reins, his ego began to negatively affect business performance.
Contracts began to dry up because of Yancey’s irrational personality. Key employees on the operations and production side grew weary of his constantly changing demands. They also noticed how disrespectful he was to Lucy.
Then, Yancey crossed the line. As he was negotiating the company’s largest contract with a longtime friend of Lucy’s, Lucy’s friend asked if she could consult with Lucy before finalizing the deal.
“If you want to work with the Bohrmans, you will only negotiate with a real Bohrman.”
Naturally, Lucy’s friend took her business elsewhere. When Lucy’s subordinates learned what had happened, they revolted and refused to work for Yancey any longer.
As Bruce and Bobbi’s income dwindled because of Yancey’s poor performance, Bruce realized what a horrible mistake he had made. Until Bruce’s death, he unsuccessfully worked to dig out of the hole that Yancey had dug.
It was only after Bruce’s death, Yancey’s arrest on unrelated charges, and Lucy’s installation as sole owner that the business began to get back on its feet.
Put the ‘No’ in Nepotism
What could Bruce have done differently? The simple answer is that he could have put the no in nepotism.
One of the most challenging parts of transferring a business to children is the fact that the children likely won’t have enough money to pay for the entire value of the business up front. So, selling business owners may need to rely on continued good performance to ensure financial security after the sale.
This could mean that picking the wrong child to run the business can have devastating consequences on a business owner’s future.
Bruce’s Advisor Team and wife specifically urged him not to sell the business to Yancey, but he didn’t listen. Had he taken the temperature of company culture, he likely could have seen that it was Lucy, not Yancey, who knew how to motivate employees.
Nonetheless, when a business owner sells a business to children, it’s dangerously easy for them to put the blinders on. Emotion, family politics, and even favoritism can lead business owners to make irrational decisions when transferring their business to children.
If you are considering a transfer of your business to a child or children, it’s important to consider taking three steps:
- Ensure your successor can run the business in ways that allow you to achieve financial independence.
- Make sure your successor is the right cultural fit.
- Be prepared to pivot if your intended successor does not fulfill Steps 1 and 2.
We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.