Successful Bank Sale: Are your people attracting buyers? (Part 2)

In Part 1 of this newsletter, we discussed the importance of making yourself replaceable as CEO.

That requires hiring the right people, developing them, and protecting your investment of time and resources.

You have perhaps kissed more than your fair share of toads along the way looking for the right people.

I know we did.

It takes a great deal of energy to get the right people on board the bus and that often means making sure the wrong people are off the bus.

It’s very hard work.

But it too is the consistency that comes with shared values, attitudes, and beliefs of the right people on the bus.

People can say they have shared values, attitudes, and beliefs to get on the bus, but if they truly don’t, the lack of those shared values, attitudes, and beliefs will show up in their lack of consistency with the details.

The team you found, recruited, hired, and developed, and have put your blood, sweat and tears into

is very dear to you. You have built this team to one day run the bank without you.

You want them to be able to take part in the value they have helped to create.

You offered them the opportunity to buy stock when it became available.

Those who could take advantage of it did.

Others might have been unable to do so because of their financial circumstances at the time the stock was available.

Or perhaps there wasn’t any stock available to offer as shareholders held onto their stock.

The people who are responsible, and most importantly accountable, for the various functions of the bank are people you will want to protect.

You have trained and developed them.

The last thing you want is to be the training department for a competitor who throws money at their problems instead of doing the hard work necessary to build their own team.

The way to protect your key team members is through Change-In-Control (CIC) agreements, and you will want to strongly consider Stay-Put features as well.

This includes you, the CEO.

A CIC provides a lump sum payment to you to diminish the inevitable distraction and personal uncertainties and risks that are created by a potential change in control.

It allows key employees to know they will have a financial incentive if it were to happen so they can forget about it and focus on their role.

A Stay-Put agreement also assures the key employees they have continued employment with the new owner or if the new owner decides they are not needed, will pay the key employee another lump sum payment at the time the Stay-Put feature expires (typically 12 months) or whenever the new owner feels they are no longer needed, whichever comes first.

This should be something the board wants to strongly get behind because it is in the best interests of the shareholders.

Reasons you may hear for not having CIC’s and Stay-Puts could be that it is a lot of money.

You may hear, “Who’s going to pay for this?”

Or “Won’t the buyers balk at that? Won’t they want to decide who stays and who goes?”

Who pays for it can be a matter of opinion.

It likely will be factored into the value of the bank and subtracted from the value to ultimately end in the share price the shareholders will receive.

But I would argue that it will create more value in the gross number before it is netted out.

So, you tell me; Who pays for it?

What would happen to your value after you have found, recruited, hired, and developed key talent who left right before you were going to begin looking for a buyer, or if you were already early in the process?

You are protecting your shareholders’ value by putting these agreements in place.

You are also rewarding key employees for the value they are helping to create.

The buyer will want to ensure that people critical to producing ongoing future profits of the business stay with the bank.

The Stay-Put feature does not guarantee future employment beyond the terms of the agreement.

What it does do is eliminate the need to put these in place as a contingency to closing the deal at a time when the leverage would dramatically shift to the key employees and could impact the whole deal getting done.

The employees ultimately are on-boarded to the buyer when the deal closes with a renewed enthusiasm for what the future holds rather than immediately entertaining offers from the competition.

It does need to be said that CICs should be considered for people you know you want for the long haul and who understand and contribute to the culture.

This should not be a tool handed out as a recruiting “sweetener.”

It is something that should be used very sparingly for those critical to carrying out the day-to-day function of the bank.

The people who should be covered by CICs are those people who can carry on all the functions of the bank, and do it daily, so that you’re not needed.

That ultimately makes a more valuable bank.

That is what most buyers are looking for.

But again, you will have a CIC as well, with Stay-Put provisions as well.

So, if you are needed, you are available, and if you aren’t needed, you have been compensated for your willingness to have stuck around.

Fully understand you are likely working yourself out of a job (and I am assuming you are on the board when I say this).

But it is your fiduciary duty to maximize shareholder value ahead of your personal interest of employment.

So, again, what are CICs and what do they look like?

Keep in mind, I am not a lawyer, so it is strongly recommended that you seek legal counsel on your CICs.

A CIC is an offering to an employee, in addition to the salary they are making.

It’s generally a lump sum payment of a multiple of their salary should a sale of the controlling interest in the bank’s stock be sold.

A lump sum payment equaling that multiple would be paid to them, within 30 days of the change in control.

In addition, the employee would be paid another multiple of their salary if they stay for a prescribed period of time following the change in control (typically one year).

Again, with a lump sum due to them within 30 days of passing that date.

In exchange, the employee agrees to certain things such as confidentiality, and non-solicitation of employees and customers for a period of typically 12 months following their termination of employment.

There are IRS 280-G requirements that do need to be taken into consideration—essentially how much the combined payments (CIC and Stay-Put) total in comparison to the employee’s base salary—and the attorney and your accountant can aid in guiding you there.

In general, the two payments can total up to 2 – 3 times total compensation. This is a standard rule of thumb.

This is something that would require board approval, and the buyer’s regulators will want to review during their exams.

This shortens the conversation with the buyer about the risk of people, which are critical to the function of the bank, leaving when the deal is announced or in the middle of the stream.

It also aids in protecting your other employees and customers to a degree through the non-solicitation features.

I can say with certainty the competition will be doing everything they can to get in front of your employees as soon as the deal is announced.

Your employees can move on without the distraction of those calls because they have a fair amount of money on the line, and they will likely want to see what the opportunity looks like with the buyer.

Action plan:

• Audit your current talent – who on your team would be detrimental to lose?
  • Are they protected?
• Develop a plan for who should be protected (yourself included). Remember this isn’t a sweetener – who should truly be protected?
• Build your case for educating the board on providing protection for preserving and enhancing shareholder value.
• When is your next “Golden Window”?
  • Build a plan to gain approval from the board prior to then.
  • Build a plan to get the CIC/Stay-Puts in place.

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.