Bank Mergers: Best time to ask? Right before you sign the letter of intent.

So, let’s run through a scenario where you have narrowed your offers down to two.

Tensions are mounting on all sides.

To get to this point, there has been seven months of very hard work.

That work has been done with very few people even knowing you have been working on it.

As has been mentioned in prior newsletters, the end goal is to arrive at the point where there is a willing buyer, a willing seller, and a set of terms that all can agree on.

Generally, when all three are present, it’s a good time to sell.

So, if there is one more approach to those making offers, it should be worth the risk of asking.

Is what is being asked for a deal-killer?

Meaning if the party making a particular request doesn’t get the result they were looking for, the whole deal is called off.

Or, if you make a particular request, it just puts the buyer off to the point where they pull their offer.

You often don’t know this in advance—whether this one request will cause them to pull their offer—so there is a fair amount of risk here.

Is what is being asked for, if granted, going to get a deal done?

As a seller, you must make certain that what you’re asking for is the real reason you are asking for it.

Not some reason that you believe the request will not be granted so you can back out and not be seen as the reason the offer didn’t come together.

With the board involved, the chance of this happening goes down, but it should still be examined.

If they grant this request, are we committed to moving forward?

The board needs to consider this.

Is there enough grace with the buyer for the seller to make the request, and if the answer is no, can the deal still be agreed to?

Will there be long-lasting regret in not asking?

Your natural inclination will be to want to just agree with the given offer and get the deal done and with, but you must resist the temptation to take the easy path.

It’s your fiduciary duty.

The strongest leverage you have, as a seller, sits at this point in the process. Your leverage will never be higher than at this point.

Once the letter of intent (LOI) is signed your leverage goes away.

You will likely hear from the buyer’s side, “It’s non-binding, it doesn’t matter, you can change it later.” It is non-binding but once it is put in writing, it is hard to get any changes.

If there is an issue that needs to be addressed, it needs to be addressed here.

Suppose one of the terms is an equation that could lower the price before closing and there is no floor on how low the price can go.

You may need to consider asking for a floor on the price.

With the ability to walk from the deal if the price falls below the floor.

You could still opt to close, conditions may have reached a point in the industry or economy where you still want to close, but you have the option of walking as well.

This would be an example of the “fiduciary out” that was discussed in Chapter 11 – Shareholders.

You are going to be approaching your shareholders with a price, a price that is subject to risk between the announcement and closing, but even if you explain the “subject to,” they will likely only hear the price.

How will it go with your shareholders?

Remember…

These are friends, family, and people you have life-long relationships with and who you will interact with for the rest of your life.

You need the shareholders’ vote to get the deal done.

I am putting these hypotheticals forward to supply a sense of the types of issues that could arise and the underlying related color.

If the other side says all is off, they have “deal fatigue,” or they can’t see working with you on a going forward basis because this has just taken too much of a toll, are you okay with that answer?

If you aren’t okay with the answer, and feel there is a possibility this could happen, you (and the board) really need to examine whether you make the request.

No easy answers here.

You will want to plan this out with your investment bankers and your board ahead of time.

Think through a roleplay of how the conversation may go with each party.

The process of doing so will stimulate thought and conversation.

That conversation will guide your decision-making process in the days to come.

It will prepare your investment bankers for the conversations that might take place by hearing what the priorities are and how the board feels about the level of pushing on the items still waiting to be discussed.

The conversations will likely be different between the parties as the issues with each offer will be different.

One party may need to raise the price and that’s it.

You may be asking the other party to raise the price and change some of the terms.

The board conversation will naturally run through what the possible combinations of answers are and can supply direction for the investment banker to position their conversation.

So, the board will likely supply directions for the scenario where the price doesn’t move, but the terms change in your favor.

Another scenario would be if one party raises the price and separates from the other.

Another scenario is that the terms get better for the seller.

Another scenario is that the terms get better for the seller and the price increases.

Another scenario is neither party move from their current position.

You can see the benefit of going through this process and the dynamics of each scenario aids in pointing out the priorities.

These are tough decisions, but it’s important you understand this.

You have invested a great deal to get to this point.

You cannot take the risk of having communication amongst your board and with your investment bankers be less than clear.

Action plan:

• Spend some time thinking about this. It is important to understand it before you find yourself in the situation.
• Think about a price that you would take for the bank, and the form of consideration for that price. In other words, “If we were to receive $X for the bank tomorrow, in cash (or stock, or cash and stock – and the numbers should be different for each scenario if more than a cash scenario is contemplated), we would sell.”
• Put that answer in writing and put it in an envelope. Seal the envelope. If you find yourself in a sale with offers arriving, it is easy to get caught up in a “We can get more” mindset. Pull that envelope out and look at what you wrote down. You wrote it down when you had an open mind, and a realistic picture of your bank’s value.
• Know that you might get everything you ask for. If so, are you committed to moving forward and closing? That answer needs to be yes. If it isn’t, invest time in looking for the reason why.

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.