NADC 2016 Fall Conference

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SUCCESSION PLANNINGFundamentals and Practicalities

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Our panelists

Andrew DanaAttorneyParker Poe Adams & Bernstein

Richard KollaufDirector Wealth ServicesBMO Private Bank

BMO Wealth Management and BMO Private Bank are not affiliated with Parker Poe Adams & Bernstein or Parker Poe.

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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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• 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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• 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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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.

How is it different for dealerships?

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• 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 strategyDetermining the strategy

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• 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


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retire.


• 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


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retire.


• 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


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• What does retirement look like?‒ How do you want to spend your time?

‒ Vacations, second home, living, etc.

Personal VisionPersonal vision

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• What future role in the business do you want to have?


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• 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


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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


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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

*Grantor Retained Annuity Trust

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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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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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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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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 flowsHistorical and Forecast Sales Performance



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 businessPreparing 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?


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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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• 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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• 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.


* Don’t seek perfection in the initial plan – it’s a

living document that can and will be revised later.

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• 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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• 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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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


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

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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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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 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 ComponentsLeveragability 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

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Succession transition

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

Succession transition

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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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Next steps

For more information, contact:Rick Kollauf, BMO Private Bank: 414-287-8859

Andrew Dana, Parker Poe: 704-335-9863

Next steps

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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.

With respect to any statements regarding tax matters made herein, including any attachments, (1) nothing herein was intended or written to be used, and cannot be used by you, 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.

BMO Private Bank is a brand name used in the United States by BMO Harris Bank N.A. Member FDIC. Not all products and services are available in every state and/or location.

BMO Wealth Management is a brand name that refers to BMO Harris Bank N.A. and certain of its affiliates that provide certain investment, investment advisory, trust, banking, securities, insurance and brokerage products and services.

Investment products offered are: NOT A DEPOSIT – NOT INSURED BY THE FDIC OR ANY FEDERAL GOVERNMENT AGENCY – NOT GUARANTEED BY ANY BANK – MAY LOSE VALUE.

BMO Wealth Management and BMO Private Bank are not affiliated with Parker Poe Adams & Bernstein or Parker Poe.

Disclosures

NADC 2016 Fall Conference

Documents

Transcript of NADC 2016 Fall Conference