Successful Community Bank Sale: Do you know your Golden Window of Opportunity?

If you could pick a time that presents the “best” time to begin the process of looking for a buyer, what would you base it on?

I would base it on the moment when your safety & soundness, BSA and IT exams have just successfully completed, and you have 18 months until the next exam cycle (realizing that compliance and CRA exams are on different schedules), AND your core contract is 18-24 months from completion as well.

This is what I refer to as “The Golden Window.”

I call it that for three reasons:

1. You have just completed an exam and don’t have that distraction while the process is taking place.
2. You have just gone through the information request for the exam so there won’t be the need for a suspicious information request associated with the process (maybe a few additions, but not a wholesale request).
3. The most important reason, your core contract will likely have the least negative impact on the price your shareholders would realize in the sale.

Your core contract has two major impacts on the price.

The first is the early termination fee.

The fee you likely must pay to end your contract.

You will want to affirm your contract end date with your core provider, and you’ll want to do this as inconspicuously as possible so as not to alert your team or the core provider to the possibility of a sale.

This could be built in as a part of your annual review of your vendor management program.

Your vendor management program provides a review of all third-party contracts for your board, covering:

• A summary on risk management related to the third-party vendor.
• Who is affected by the risk associated with the vendor—your customers, your operations, etc.
• Issues to be considered relative to the risk—the impact and severity of the risk.
• Reporting requirements associated with the level of risk, external audit reports, etc.

Along with these things, include building a termination and exit strategies section for each third-party contract as part of your annual review.

Review if there are any early termination fees and how those fees will be handled, identified by the vendor, as well as the notification process for each vendor.

This is very important information for you to have available whenever you need it.

The early termination fee is essentially your “make-whole” to the core provider for the remaining term on your contract.

Say you just entered a seven-year core contract so you can get the best monthly pricing.

You then later decide to sell and have 54 months left on your core contract when the closing date is scheduled to take place.

You will be liable for 80% of your contracted payments (a ballpark estimate and your contract may vary) through the remainder of the contract.

If you end the contract early, you may also need to add back credits you received as inducements when you entered into the contract.

 That can be a staggering number and completely change the complexion of whether you (or likely the shareholders) would want to move forward with a sale.

Let’s look at two hypothetical scenarios. This example is for a community bank with $200 million in assets.

You will have to do your own analysis of your contract for the actual impact.

This is for illustration purposes only.

The first scenario is with 54 months remaining when the sale closes, and the second scenario is identical to the first, with the only difference being 12 months remaining when the sale closes.

The closer the closing date can be to the contract expiration the better.

That’s why I refer to the time as “The Golden Window.” It is a short, often fleeting period during which a rare and desired action can be taken and because of the amount of money that could be saved.

It’s easier said than done.

If you can strategically build it into your process, the better off you’ll be.

The core contract expiration needs to be factored in for sure.

Again, I would suggest you consider bringing your core contract and all the ancillary addendums to your board for review once a year as a matter of standard practice as a part of your vendor management program.

By focusing on it during the annual board schedule, it becomes a regular item, taking the unusual one-off review out of the equation.

I know that it is likely included in your vendor management review now, but I emphasize that focus should be heightened to include the early termination fee as a part of the annual review—the actual number.

It will cause the team to put it on a schedule for the board’s review where all the ancillary addendums, like mobile banking, account analysis, treasury services, imaging, etc., will be brought to the forefront and your team will need to review and stay current with any changes that may extend your core contract in a “hidden” way.

The board’s persistent attention to this will likely make your team more aware and accountable.

The review will cause the team to tie everything back together to an agreed upon contract termination date.

The board should get affirmation from the team by specifically asking for confirmation of exactly when the termination date is.

The practice of asking your management team for an affirmation of the termination date will make for better contract negotiation as well, because it will focus your team on the importance of that date. It likely will create the possibility of leveraging the date in future negotiations.

It can easily be explained to your team, from an educational perspective, that contracts carrying termination fees can have a significant impact on the future cash flow of the bank which can therefore impact the value of the bank.

The second impact on the price is the deconversion fee.

The deconversion fee is the charge you will incur for moving your data to the new system. This has an impact on your sales price as well.

Knowing this and focusing on it once a year in front of the board also keeps it front of mind for negotiation as well.

Leveraging the possible removal of the deconversion fees with the core provider when considering new products or extensions should be a high priority.

If the deconversion fees can’t be negotiated away, perhaps a fallback could be for the calculation of the fee to be fully and clearly defined.

Without the definition of the calculation, the leverage shifts dramatically in favor of the core provider who can name their price.

Another example could be your debit card processing contract.

Like the process of taking your core contract annually, consider taking all contracts over a certain value (like $25,000) in front of your board once a year.

This may sound frivolous, but, if you are in a situation where you sell the bank you will likely need to produce these during your due diligence for your definitive agreement (often referred to as the merger agreement interchangeably, we will refer to it throughout this book as the definitive agreement). Again, if they become a standard agenda item for review annually, there is no unusual nature to the production of the results.

There is a higher value placed on these items by your team since there is board scrutiny and the review and production of accompanying documents is never more than twelve months old.

You may have the Golden Window approaching soon, so in the next chapter we’ll consider the shareholders and their desires.

Action plan:

• Audit when your next exam cycle is taking place for your safety & soundness, BSA and IT exams.
• Audit when your core contract is set to expire.
• Determine how those two dates line up:
  • Are they coinciding soon?
  • Or do they more closely align later?
• How can you best use the time presented to better prepare?
  • Is it best to build a plan tied to the intersection of the two in the future?
• Will your planning guide your thoughts on how long to extend your current core contract if it is up for renewal?

There are zero hacks or tricks in this newsletter. Just proven tactics that help you choose the right path for your bank.

Your path will:

• Inform your strategic plan.
• Guide your annual business plan and budget.
• Clarify priorities.
• Define your message so it can be communicated with confidence.

This is how savvy bankers navigate.

They build smart and valuable banks and choose the best time to sell – serving the needs of the shareholders and the board.

I hope you found this short lesson helpful.

What are your thoughts?

I’ll see you next week.