Given, among other things, the current bank regulatory environment and dim prospects for future community bank profitability, many community bank boards are now considering the possibility of partnering with a like-sized institution or an outright sale to a larger institution. If this message resonates with your institution, following are five things for your further consideration.
1. When it comes to pricing, is your board realistic?
Unfortunately, the “good old days” of small community banks selling for 2.0 to 3.0 times book are gone. Today, boards are oftentimes overjoyed with offers of 1.0 to 1.25 times tangible book value. If your board is still wearing the pre-Great Recession rose-colored glasses, one of the first, and perhaps most challenging, things you will need to do is educate your board on current industry pricing trends and what realistically your institution is worth.
2. Should you engage an investment banker?
Many times, community bank deals are born out of face-to-face, direct meetings of interested bankers and/or board members. In other instances, these deals are facilitated by one or more investments bankers engaged by the selling and/or the acquiring institution. A few advantages of engaging an investment banker as the selling institution are:
Generally, investment bankers have access to a much larger pool of would-be buyers. Accordingly, they can “shop” your institution to a larger group of potential purchasers.
Building off of the previous point, if your board elects to shop your institution using an investment banker, doing so will serve to bolster your board’s position that it has met its obligation to maximize shareholder value.
Oftentimes, a substantial portion of the fees payable to investment bankers is contingent on the consummation of the underlying transaction. Accordingly, most investment bankers are very motivated to see transactions through to completion sooner rather than later. As a result, investment bankers can serve a useful role in ensuring that transactions stay on schedule and that important established deadlines are met.
Likely the most common perceived disadvantage of engaging an investment banker is the associated fees and expenses. Without question, good investment banking firms are not cheap. Ultimately, the board of any selling institution should weigh the costs of engaging an investment banking firm against the anticipated benefits and make an informed, reasoned decision.
3. Should you get a fairness opinion?
Yes. As your bank’s governing body, your board has a duty to act in the best interests of your shareholders and generally maximize shareholder value (which, by the way, does not necessarily mean seeking out and accepting the highest offer). Throughout the transaction process, your board should take calculated steps to ensure that these standards are met. One such step should be engaging a qualified and reputable financial advisory firm to provide your board with an independent, third-party opinion that the consideration to be received by your shareholders is fair to your shareholders from a financial point of view. Preferably, this opinion will be commissioned and received by your board before your board votes to approve the subject transaction and submit it for approval by your institution’s shareholders.
4. How time consuming will selling your bank really be?
While each bank purchase and sale transaction varies in its complexity, it is safe to say that each transaction will come with extra responsibilities for your board, management team, and even other lower-level employees. Perhaps one thing that bank management most commonly underestimates is the additional work that comes along with a sale of the institution. When an institution is preparing to be sold, bank employees in many instances find themselves with two jobs (but certainly not double pay): (1) ensuring that the institution continues with business in the ordinary course so as to preserve intact for the prospective buyer the institution’s business, customer and other relationships, goodwill, and prospects, and (2) any myriad of “other jobs” associated only with the anticipated sale of the institution. In light of these certainties, it can be important for bank management (in consultation with and/or with help from legal counsel) to set appropriate expectations early on in the transaction process. This setting of expectations should in most instances start with the board and then trickle down to members of management and other bank employees as appropriate.
5. If you are considering selling your bank, what can you do now to make the process easier?
Unfortunately, there is no one-size-fits-all trick that is guaranteed to simplify the process associated with selling your bank. However, there are certain things you can do now or early on in the transaction process that will hopefully make life a little easier for everyone. A few examples include:
Avoid, if possible, entering into new, or renewing existing, contracts with prolonged terms (e.g., your data processing contract) which would be costly for a buyer to terminate after the sale of your institution closes.
Engage and consult with legal counsel (and other necessary professionals) from the outset. While many bankers prefer to go-it-alone until they know that they have a deal, their doing so oftentimes results in legal and other professional fees and expenses far in excess of those that otherwise would have been incurred if they would have engaged these professional earlier in the process.
Begin now locating, scanning, and organizing any important bank documents (including the bank’s organizational documents, board and committee minutes, material contracts, stock ownership information, tax returns, etc.). Any prospective buyer will want to conduct an exhaustive due diligence review of your institution, and the more prepared you can be to respond to the buyer’s due diligence information requests the better.