This document discusses succession planning for businesses. It outlines two main succession strategies: selling the business (Strategy A) or keeping it in the family (Strategy B). For Strategy A, factors like retirement, health issues, growth potential, and management capacity influence the decision to sell. Preparing the business for sale, determining valuation, and managing the sale process are also discussed. Strategy B involves developing family members' leadership skills through a family development plan monitored by an advisory team. Both strategies require advanced planning and consideration of financial and non-financial goals.

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SUCCESSION PLANNING
Fundamentals and Practicalities

2. Our panelists
Andrew Dana
Attorney
Parker Poe Adams & Bernstein
Richard Kollauf
Director Wealth Services
BMO Private Bank
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BMO Wealth Management and BMO Private Bank are not affiliated with Parker Poe Adams
& Bernstein or Parker Poe.

3. What does succession planning entail?
• The efficient and fair distribution of assets to the next generation OR
selling the business to a 3rd party.
What does succession planning entail?
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4. • The efficient and fair distribution of assets to the next generation OR
selling the business to a 3rd party.
• The passing of control of the business in a way that ensures effective
ongoing leadership and continued financial growth … leaving a
legacy.
What does succession planning entail?
What does succession planning entail?
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5. • The efficient and fair distribution of assets to the next generation OR
selling the business to a 3rd party.
• The passing of control of the business in a way that ensures effective
ongoing leadership and continued financial growth … leaving a
legacy.
• The ownership decision tree has only two main branches… but how
do we accomplish our goals within these options?
Two main paths to
choose from
Keep in family
(Strategy B)
Sell it
(Strategy A)
Is there something we can do to
achieve the benefits of both?
What does succession planning entail?
What does succession planning entail?
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6. How is succession planning different for dealerships
than other businesses?
• Manufacturers for the brands represented by the dealer must approve
any change in ownership. The same is true for most lenders,
including vehicle floor plan lenders.
• It is important to identify a successor in advance, notify the
manufacturer, and obtain a written Successorship Addendum to the
Franchise Agreement. That way, the change in control can be pre-
approved.
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How is it different for dealerships?

7. • When should you begin?
– As soon as you start your business. If not, then at least 10 years before you want to
retire.
Determining the strategy
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Determining the strategy

8. • When should you begin?
‒ As soon as you start your business. If not, then at least 10 years before you want to
retire.
• Who’s included in this decision?
‒ Family members
‒ Management
‒ Professional advisors/ business partners/ network
Determining the strategy
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Determining the strategy

9. • When should you begin?
‒ As soon as you start your business. If not, then at least 10 years before you want to
retire.
• Who’s included in this decision?
‒ Family members
‒ Management
‒ Professional advisors/ business partners/ network
• What should be considered?
‒ Personal financial needs – How much DO you need?
‒ Business needs analysis – Human and financial
‒ Continuing ownership desires
‒ Continuing management – Is competent management in place?
‒ Founder’s exit & living with the decision
Determining the strategy
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Determining the strategy

10. • When should you begin?
‒ As soon as you start your business. If not, then at least 10 years before you want to
retire.
• Who’s included in this decision?
‒ Family members
‒ Management
‒ Professional advisors/ business partners/ network
• What should be considered?
‒ Personal financial needs – How much DO you need?
‒ Business needs analysis – Human and financial
‒ Continuing ownership desires
‒ Continuing management – Is competent management in place?
‒ Founder’s exit & living with the decision
• What should you do with the strategy?
‒ Communicate the strategy clearly, early and often with all stakeholders
Determining the strategy
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Determining the strategy

11. • What does retirement look like?
‒ How do you want to spend your time?
‒ Vacations, second home, living, etc.
Personal Vision
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Personal vision

12. • What does retirement look like?
‒ How do you want to spend your time?
‒ Vacations, second home, living, etc.
• What future role in the business do you want to have?
Personal Vision
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Personal vision

13. • What does retirement look like?
‒ How do you want to spend your time?
‒ Vacations, second home, living, etc.
• What future role in the business do you want to have?
• What is the cost of your post-transition lifestyle?
‒ Travel & activities
‒ Inflation
‒ Supporting children
‒ Charitable giving
‒ Volunteer work
Personal Vision
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Personal vision

14. Estate Planning
• Dealership and other asset information
• Up to date will and other directives
• Use of trusts
• Consider a special executor for the business
– No conflict of interest position
– Appointed to deal with your business
– Has the skill set and knowledge of the business and industry
Personal Vision
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Personal vision

15. Intentionally Defective Grantor Trust (IDGT)
Intentionally Defective Grantor Trust (IDGT)
Purpose
• IDGT seeks the tax-free transfer of appreciation in highly appreciating
assets by gift/sale the of asset from the Donor (with a low rate
interest-bearing promissory note)
Advantages
• Similar to a GRAT* with greater leverage and flexibility on making payments, but
requires up-front taxable “seed” gift. The $5.45 million exemption available in 2016
and beyond provides an opportunity to make a substantial seed gift with no gift tax (or
generation skipping tax (GST) if dynasty type).
• Removes property and appreciation from grantor’s estate – freezes value in grantor’s
estate to initial value plus modest interest rate
• Substantial reduction in gift tax
• Transfer of wealth continues through the life of the IDGT as the grantor pays the tax
due on taxable income earned by the trust
• Transferred assets do not revert to grantor upon grantor’s death – only the promissory
note is included in the taxable estate
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*Grantor Retained Annuity Trust

16. Example
• Discounting via transfer to Intentionally Defective Grantor Trust - Gift
or sell portion of the company to trust for discounting (Lack of Voting,
Lack of Marketability, Minority Interest)
– Recapitalize into voting/nonvoting
– Get appraisal of 1 share voting and 1 share nonvoting with all attendant discounts
– Set up the trust
– Gift or sell (without gain recognition) enough shares to use lifetime exclusion
amount of $5.45MM
– Close on the sale of the business
– Distribute the proceeds (if a sale of interests to the trusts was the technique, the
note to the grantor can be paid off now or over the term that was originally
established assuming the investment proceeds inside the trust would earn more
than the roughly 2-3% rate that the grantor would be charging the trusts)
– Be aware of the Section 2704 Proposed Regulations
Intentionally Defective Grantor Trust (IDGT)
Intentionally Defective Grantor Trust (IDGT)
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17. Strategy A: Selling your business
Why sell the business?
• Retirement
• Partnership Dispute
• No interest from the family to continue
• Loss of Interest/Boredom/Frustration
• Illness or Death of a Principal
• Growth beyond the capacity to fund
– Internally generated funds
– Credit availability
• Growth beyond the ability of existing management to effectively
control
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Strategy A: Selling your business

18. Strategy A: Selling your business
Considerations in selling
• Potential buyers
– Strategic
– Buy-Sell Agreements
– Financial/Private Equity
– Financial/ESOP
• Timing
• Valuation
– Buyers vs. Sellers
• Preparation
• Re-Valuation
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Strategy A: Selling your business

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Strategy A: Selling your business
Timing
• Sale process may take 3 months – 2 years
• Seller’s involvement may span an additional 3-5 years
• Ongoing preparedness is essential to “hitting the market” at the right time
• Buyer is not typically buying assets but rather buying a stream of future cash flows
– Nearer term cash flows are “more valuable”
• The optimal economic time to sell occurs when the seller can demonstrate:
– A steady history of stable or increasing cash flows
– An anticipated future of continuing cash flows
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Historical and Forecast Sales Performance
Strategy A: Selling your business

20. Strategy A: Selling your business
Valuation
• Traditional methodologies
– Asset Based
 Appraised Value of Net Assets (book value)
– Multiples Based
 Comparable Companies
 Comparable Transactions
– Cash Flow Based
 Discounted Cash Flow
 Terminal Perpetuity
 Terminal Multiple
– Leveraged Buy-Out Analysis
• “Market Testing” is NOT a viable valuation methodology
• Using a professionally prepared appraisal may save anxiety
• Does the value conclusion meet your lifestyle needs?
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Strategy A: Selling your business

21. Strategy A: Selling your business
Preparing for the sale
• Create your business “Story”
– Appropriate to the buyer
• Can you comfortably sell the story today?
• Does your story have too many:
– “Yes, buts”
– Unsubstantiated upsides
– Necessary clean-up items
• Does this present a reality check regarding the “goodness” of the
business in its current state?
• Should you reconsider the timing of your exit?
Strategy A: Selling your business
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22. Strategy B: Keeping the business in the family
Special family-based considerations
• Family involvement – rules and expectations
• Skills and leadership preparation
• Ability to generate ownership liquidity
• Sustaining the business’ financial well being
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Strategy B: Keeping the business in the family

23. Strategy B: Keeping the business in the family
• Create a Family Development Plan* that will help plan for future
leadership either within your family or for an outside professional.
Establish an organized Planning Team to closely monitor progress.
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Strategy B: Keeping the business in the family

24. Strategy B: Keeping the business in the family
• Create a Family Development Plan* that will help plan for future
leadership either within your family or for an outside professional.
Establish an organized Planning Team to closely monitor progress.
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Strategy B: Keeping the business in the family
* Don’t seek perfection in
the initial plan – it’s a
living document that can
and will be revised later.

25. Strategy B: Keeping the business in the family
• Create a Family Development Plan that will help plan for future leadership
either within your family or for an outside professional. Establish an
organized Planning Team to closely monitor progress.
• Successor specifications should outline:
– Specific knowledge and skills needed
– Educational requirements
– The required on-the-job industry experience
– Points of career progression and when they will occur
– Compensation
– Performance and measurement
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Strategy B: Keeping the business in the family

26. Strategy B: Keeping the business in the family
• Create a Family Development Plan that will help plan for future leadership
either within your family or for an outside professional. Establish an
organized Planning Team to closely monitor progress.
• Successor specifications should outline:
– Specific knowledge and skills needed
– Educational requirements
– The required on-the-job industry experience
– Points of career progression and when they will occur
– Compensation
– Performance and measurement
• Conditions:
– The founder’s retirement income must be secured and guaranteed (to the extent
that it’s practical) before any real planning for transition can occur.
– The planning must result in the complete transfer of all (or effectively all) of the
ownership and control to the successors to properly empower them.
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Strategy B: Keeping the business in the family

27. Strategy B: Keeping the business in the family
 Develop successors’ values for stewardship
 Establish a family council
 Finalize the family’s mission statement
 Guidelines for conflict resolution
 Prepare a business strategic plan
 Retain non-family managers
 Install outside directors
 Finalize the owner’s estate plan
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Strategy B: Keeping the business in the family
 Prepare for retirement
 Select a successor
 Prepare a crisis contingency plan for
succession
 Plan a successor’s personal
development
 Map career paths for family members
 Write a participation policy for family
members
 Transfer ownership and control
 Living with the decision
Suggested family succession checklist

28. Multiple
Constituencies
Benefit
Tax-Advantaged
Alternative to
Ownership
Liquidity
Supportive of
Whole, Staged &
Partial Sales
Continuity of
Management and
Culture
The ESOP…the best of both worlds?
The ESOP is a tax-advantaged ownership liquidity alternative to leveraged
recaps, special dividends, share repurchases and/or the outright sale of a
business.
While the 100% S-ESOP is often the ultimate goal, the ESOP is unique in
its applicability to the partial/minority sale of equity in the privately held
business. Both 100% and staged transactions are common.
Through the sale, the ESOP “buyer” is an independent third party trustee -
hired by the BOD - acting on behalf of the employee group. The depth
and continuity of existing management and culture are critical to the
ESOP.
Each of three constituencies – the Company, the Sellers, and the
Employees – enjoy meaningful cash flow and tax-related benefits through
the ESOP structure as well as multiple “softer” incentives.
The ESOP … the best of both worlds?
ESOP a multi-dimensional solution to your succession plans?
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29. The ESOP…benefits multiple constituencies
Benefits to the Company
• Opportunity to remain private and independent
• Opportunity to leverage favorable debt market conditions to secure attractive pricing, terms
and conditions
• Tax benefits will enhance cash flow, debt capacity and the company’s ability to meet both
senior and junior debt service
• ESOP provides management continuity and ownership stability; solves generational
ownership issues
• ESOP shares provide a recruiting and retention tool for current and future leaders
• No public disclosure or employee sharing of confidential information is required – only the
trustee comes “inside the tent”
Benefits to Employees
• Offers employees a competitive retirement benefit and incentive program
• The ESOP aligns the interest of the company and the employees going forward, allowing for
employees of all generations to participate and benefit from the continued growth of the
company
Benefits to Selling Shareholders
• Secures attractive valuation in a market environment with strong public markets and low
interest rates
• Retains as much as 45% of equity upside through warrants
• Capital gains rate for future warrant appreciation – an estate planning opportunity
• Maintain control and underlying governance of the company
The ESOP … benefits multiple constituencies
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 The ESOP Trust is
treated as one
shareholder –
supportive of S-Corp
status
 The S-Corporation is a
pass-through entity.
Taxes are the
responsibility of its
shareholder(s) in
proportion to their
ownership.
 The ESOP Trust (owner
of the shares) is a not-
for-profit entity … not
subject to taxation
 Neither the company
nor the ESOP has any
federal income tax
liability with respect to
the ESOP’s portion of
the company’s income
 If 100% ESOP-owned
and is an S Corporation,
neither the company nor
the owner pays any
federal income taxes

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Potential issues for early consideration
Critical Components
Leveragability Ability to support leverage
• Predictability and stability of revenues and earnings
Valuation Accept valuation expectations
• Strategic multiples available
Employees & Culture Employee Base/Culture
• Aggregate number of employees
• Participating payroll
• Average age / turnover
• Union representation
• Benefits targets
Ongoing Management Depth of successor management
• Desired level of continuing involvement of current shareholders
• Management
• Financial

31. Succession transition
Not just an asset – a lifestyle!
• An emotional decision
• Personal ambitions vs. economic consequences
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Succession transition

32. Living with the decision
Key takeaways
• Succession planning is an ongoing process
– Exit planning should begin with the formation of the business
– Revisit plans
– Work “on” the business, not simply “in” the business
• Advance preparation assists in the maximization of after-tax asset
values
– Business plans / accounting / documentation
– Successor management
– Tax and estate structure
– Maintain a key advisory team from the inception of the process
 Start now
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Living with the decision

33. Next steps
For more information, contact:
Rick Kollauf, BMO Private Bank: 414-287-8859
Andrew Dana, Parker Poe: 704-335-9863
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Next steps

34. The information provided is intended for informational purposes only and is believed to be reliable, but is not warranted to be accurate, timely or complete.
Estate Planning requires legal assistance, which BMO Harris Bank N.A. does not provide. Consult your personal counsel.
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to avoid tax penalties; and (2) nothing contained herein was intended or written to be used, and cannot be used, or referred to in any marketing or promotional materials. Further,
to the extent any tax statement or tax advice is made herein, BMO Harris Bank N.A. does not and will not impose any limitation on disclosure of the tax treatment or tax structure
of any transactions to which such tax statement or tax advice relates. BMO Harris Bank N.A. does not provide legal advice to clients. You should review your particular
circumstances with your independent legal and tax advisors.
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Disclosures