For many business owners, the daily grind of running a company can leave little time to dream about life after work. Yet, shaping a clear exit strategy is as critical as the deadlines you’re facing today. Whether you plan to pass the torch to family or employees or plan to find a buyer, early planning ensures you leave the business on your terms.
To inspire entrepreneurs to approach their future with the same enthusiasm as they do their business, Sheri Griffiths, Senior Vice-President and Head of Ontario at BMO Commercial Bank, hosted a recent event titled “Preparing for the Next Step: Navigating Business Transition.” She was joined by three colleagues from the BMO Private Wealth team: Adam Carter, Vice President, Business Advisory and Transition Planning, Stuart Clark, Senior Estate and Insurance Advisor, and Leigh Vyn, Director, Tax Planning. To round out the conversation, Gary Chung, Managing Director, Middle-Market Mergers and Acquisitions at BMO Financial Group and Taylor Sekhon, Managing Director, Employee Ownership, BMO Commercial Bank, joined to talk what it takes to sell a business in this market and discuss Canada’s newest succession-planning tool.
Time is of the essence
When it comes to planning a business transition, the earlier you start, the better off you’ll be. That’s because there are some restrictions from a tax perspective that require you to have key elements of your business plan settled at least 24 months prior to the official transfer or sale of the business, such as the ownership structure, explained Stuart Clark. Failing to address some of these points early on could make you ineligible to benefit from the lifetime capital gains exemption (LCGE), which allows owners to shelter a portion of the sale proceeds from tax.
Clark and his team make sure their clients fully understand the implications of various transition scenarios as part of a person’s wealth plan. “It’s a matter of providing perspective, not just to clients but to us as a team because, absent good information, we’re all just making the best guess and that’s not where you want to be with something as substantial as a business disposition.”
Looking out for No. 1
If you’re considering selling your business, Leigh Vyn said the first thing you should think about is, “What does this mean for me?” That generally comes down to what ends up in your pocket at the end of the day. While a lot of business owners are familiar with the LCGE, which allows for $1.25 million of tax-free proceeds upon the sale of a business, she said not everyone qualifies for that exemption. “We want clients to start the process early so we can see how they’re structured and really make sure we can maximize those after-tax proceeds,” she said.
To navigate the process, she helps clients craft a plan that outlines their financial priorities and makes it easier to determine if the proceeds from a sale are aligned with their future goals. “It helps to map out those decisions,” she said. “It’s about creating a scenario where you can see what the future could look like for you. From there, you can choose which way you want to go.”
Many of the owners Adam Carter has met are so focused on their business that they don’t have time to think about themselves. For owners, succession planning can be debilitating, he explained, noting that entrepreneurs don’t always know what to prioritize. To help them work through that process, Carter and his teams provide independent, objective advice. “We spend time with our clients, fundamentally trying to understand their situation, because it’s personal,” he said. “Every succession transition is different for every business owner.”
Paying it forward
Philanthropy can be a big part of transition planning, Clark noted, but it comes back to the individual and their goals for their family. Some people are very driven to give, regardless of the tax benefits, but there’s nothing wrong with achieving both at the same time. “You want to transition value and values,” he explained. “If you’re disposing of your company – and you’re going to have a large tax liability as a result of that disposition – it may make sense to make a donation at that time to benefit the entities you would like, but also receive the tax benefit.”
For those who want to gift some of the proceeds from the sale of a business, Vyn said she might explore the potential benefits of a donor-advised fund, as it will help secure the tax credit while giving the owner more time to decide what cause they want to support. “This allows you to calm down, let the closing run its course and then, in the future, you can sit down and think about what charities are important to you and your family. It’s like a parking spot for that intention, but you get the tax credit.”
Communication is key
Few things are as important to a successful transition as communication. According to Clark, the families that put together the best plans include their external advisors or even their mentors when they start making decisions. It’s also important to make sure your family is aware of your intentions as early as possible, even if those conversations can be uncomfortable. An advisor can help with this. “There’s a vested interest in your business, even if your family members aren’t involved in it,” he said. “Those conversations are pivotal to getting things right.”
An open discussion can help avoid situations where a client is confident one of their children will take over the business when the children have other interests. It may also reveal what the kids are hoping the transition will mean for them. “A lot of people shy away from these conversations because they can get emotional, but it makes things a lot cheaper down the road.”
Trust your employees
If you’re focused on the legacy you’ll leave behind, Taylor Sekhon said some owners may want to consider whether an Employee Ownership Trust (EOT) could be part of their succession plan. Think of the EOT as a as a friendly takeover by your own team, allowing employees to collectively own the business while maintaining its independence.
To qualify, an EOT must purchase more than 50% of the shares and hold them for the benefit of all employees. Typically, the purchase is financed by the company through bank loans and vendor notes, ensuring employees don’t need to contribute personal funds. Importantly, daily business decisions often remain with existing management and a traditional board, though employees must have voting rights on certain key matters.
To make EOTs more attractive, Ottawa has introduced two generous tax incentives. One incentive, which applies to owners who set up an EOT since the start of 2024, offers a capital gains exemption of up to $10 million for business owners. The government has also offered a longer capital gains reserve period (up to 10 years, instead of the usual 5 years) to ease tax burdens.
“It’s now easier and more attractive than ever to sell to your company’s employees,” Sekhon said. “This is a great way to ensure the company remains independent and that the culture and values you created persist to the next generation of ownership.”
Putting a business up for sale
When marketing a business to potential buyers, it is very important to consider your goals and concerns so that you to get the best outcome. “Strategic buyers and financial investors will focus on different aspects of your business, which makes planning and organization so important,” explained Gary Chung. “Being prepared ensures that we’re controlling the messaging when engaging in live discussions with buyers or those we’ve chosen to be exclusive with, which minimizes the risk of either party being surprised.”
Preparing a business for sale involves organizing large volumes of data (financial, operational, legal, etc.) and optimizing your operations to ensure the company appeals to various types of buyers. Strategic buyers will typically focus on potential operational enhancements and synergies that could be generated post-closing. At the same time, financial investors are making sure that the management team is complete and aligned with driving future growth, which is why they want to see that you have a diversified business across markets and geographies, he added.
The preparation work isn’t only about appealing to potential suitors; it also allows sellers to quickly narrow down multiple discussions to find the optimal buyer. Once the right buyer is identified, all of your advisors (bankers, accountants and lawyers) should then be co-ordinated to reduce the timelines and close as quickly as possible. We have seen certain timelines extended in recent years and are always vigilant to create an environment where the process is as compact as possible, he said.
As capital to fund transactions has become more expensive, deal structuring has risen to the forefront. To manage the inherent investment risks, buyers are using various tools, including deferred and contingent payments, specialized insurance products and management contracts. These tools allow a seller to receive maximum proceeds if a business achieves its forecasts and offers the buyer a level of downside protection in the event that the forecasts are ultimately not met.
“The sale of a business is both a technical exercise that’s based on facts, numbers and contracts,” said Chung, noting that it’s also a deeply personal exercise based on emotions, goals and concerns. “Our client-centric team is focussed on managing all of these dynamic elements through the sale of a private business.”