An event we recently hosted in Chicago for an audience of business owners included a roundtable discussion on preparing for the next phase of the ownership journey. Given that many of our clients are family-owned companies, it’s an important topic.

Our panelists included experts from BMO Wealth Management and BMO Commercial Bank, who shared their insights on the professional and personal preparations required for a smooth transition. It also featured a co-founder of a leading design and construction firm, who shared his company’s story on transitioning to an employee-owned business:

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  Amy Bergren, Private Wealth Advisor, BMO Wealth Management, served as the moderator

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  Derek Garland, Head of the Business Transition Advisory Group, BMO Wealth Management

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  Robert Harrod, Director, Corporate Advisory, BMO Commercial Bank

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  Colin MacLean, CFA^®, CIMA^®, Director and Senior Portfolio Manager, BMO Wealth Management

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  Brian Paul, Managing Principal, Co-Founder, PREMIER Design + Build Group (PREMIER), a national construction firm

The following is a summary of their conversation.

When is the optimal time to prepare? That’s one of the key questions for any business considering a succession plan. The answer: as soon as possible, and all the time.

As Garland explained, “It’s a process. It’s not a one-time event where you create this magical plan that will be consistent and work for generations to come. It’s an ongoing part of operating the business.”

Garland noted that it starts with building a framework that includes asking the following questions:

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  What are your most important priorities and goals?

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  Are you planning an immediate or gradual exit?

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  Do you plan to relinquish control of the company or maintain control while building the management team?

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  Is family involvement a consideration?

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  What does your personal financial plan look like? What will you need to fulfill the lifestyle you desire?

On the business side, maximizing the valuation of your business comes down to how potential buyers perceive your operation. Often, one key metric can imply several attributes: EBITDA (earnings before interest, taxes, depreciation, and amortization).

"Most businesses trade off of a multiple of EBITDA,” Harrod said. “Whether you’re 6x EBITDA or 8x when you go to market will depend on the profile of the business. For businesses that trade at 8x, you’ll see solid, deep management teams. You’ll see up-to-date, high-tech systems, whether it’s for ERP or financial reporting.”

Harrod added that having your financial statements audited is ideal. “From the buyer’s perspective, it speaks to the integrity of the financials.”

As for personal considerations, MacLean emphasized the importance of understanding your priorities. “It’s about what’s right for the individual after the transaction,” he said. “Think about what your life will look like post-sale. It’s unique and tied to each individual.”

Harrod noted that, broadly speaking, succession options fall into two categories: external (outright sale) and internal (transition to the next generation or to internal leaders). Both scenarios require a strong team of advisers to help guide you through the process.

"That includes private wealth management, a strong CPA, and a strong attorney who’s familiar with these types of transactions,” Garland said. “When you have all of them working together to understand what you need, you can build a roadmap to maximize your outcome along the way.”

After 19 years in business, PREMIER converted to an employee stock ownership plan (ESOP). As Paul explained, that option wasn’t on the leadership team’s radar initially. "We were in listening mode at the beginning,” he said. “If the right [external] deal came along, we would have pulled the trigger.

Given the partners’ priorities, however, they realized that an ESOP checked every box they were looking for. Paul and his partners created PREMIER in 2004. By 2023, the firm had grown significantly, and the leadership wanted to reward the employees who helped build the business. “Several of our earliest employees are still at our company, so we are very protective of the people who helped to build this,” Paul said.

Paul noted the other benefits that being an ESOP offered, including creating an instant liquidity event and delivering significant tax advantages. Another factor was Paul’s personal circumstances.

“I was 49 at the time and not looking to walk away,” he said. An ESOP allowed Paul and his partners to reward their employees while continuing to lead the business.

While an ESOP can deliver significant benefits to employees, Paul soon learned the importance of setting employee expectations.

"When you transact on an ESOP, at the beginning, the employees don’t see a benefit,” he said. “The company gets sold to a trust, and the trust represents all your employees going forward. In our case, we sold 100% of the stock shares to the trust. For the first year, we were a fully levered company, so the stock value of the company is the worst it’s going to be. So, they get these statements in the mail for the first year that are not that exciting. But as the company grows in value and as the company deleverages, the value of that stock will rise.”

Communicating the philosophy behind this is something that Paul believes is helpful for all parties involved. “If I’m getting free shares, I want it to be as cheap as possible,” he said. “It’s similar to when you’re buying stocks in the market; you don’t want to buy it at a high. If you keep getting free shares and all of a sudden it starts rising, that’s optimal.

“The biggest lesson was being prepared that your employees are not going to have a huge cork-popping party because they’re not seeing the benefits,” Paul continued. “But down the road, the people who have been there and will be there for a long time will make a tremendous amount of money from this.”

To close the discussion, the panelists were offered the opportunity to offer one piece of advice when it comes to succession planning.

Garland: “Get educated. The thing that kills the most deals is unrealistic expectations that surprise people. Getting educated about what the common processes are and what tomorrow looks like for you creates a smoother, better process for everybody.”

Harrod: “Be flexible on outcomes. You don’t know what the market is going to bring. Be open to ideas. And invest in your advisers. They will pay you back immeasurably later.”

Paul: “You need to have the right team in place. If you’re focused and committed, you can move forward and get this done. It doesn’t close in a week, but if you have the right team in front of you, you can get it done.”

MacLean: “Oftentimes, these transactions are going to be tax-intensive. Look at the rest of your portfolio. Are there things you can do to be more efficient? If there are other tools you can use to lessen the tax impact, the earlier you do that, the more valuable it is.”