Your Banker: The Forgotten and Maybe Most Important Advisor Team MemberSep 26, 2018
Fellow business owners, let's be honest. We fear our bankers.
On a daily basis, we may give them little thought. When time comes to tell them we're planning to exit our businesses, or when we need money, however, we may experience feelings ranging from mild anxiety to outright panic.
Why? We've been conditioned to believe that bankers say "no" far more often than they say yes. That may or may not be true but bankers make money by saying yes. When they turn down a loan, they just don't lose money.
While bankers may be cautious by nature, they do need to make money. In fact, like all other business people, bankers are eager to continue profitable relationships. If the sale or transfer of your business is unlikely to disturb that profitable relationship, your banker is vested in helping you execute that transfer. It should come as no surprise that banks value the profitable relationship even if you are not part of it.
Let's look at two sale scenarios. The first is a cash sale to a third party. In this scenario, your banker is an excellent source of financing for your buyer. If loans are hard to come by, you may wish to help out the buyer by introducing him/her to your banker. Be sure the buyer has at least these attributes:
- A "normal" amount of assets (either personal to the buyer or to be acquired in the transaction) that the bank can use as collateral
- Good credit
- Management experience in creating cash flow
- A down payment — usually of at least 25 percent
- Of course, your business should have a solid cash flow history.
As always, banks will likely apply certain restrictions and additional qualifications to your buyer. The point is that banks want to make money. They do so by maintaining existing, profitable relationships through business transitions, including providing the funding necessary to make those transitions possible.
In the second scenario, you are transferring your company to insiders (children or employees) or to an outsider with little cash. These parties may not have much money so there's a real need to recruit your banker for your team.
In all scenarios, banks strive to minimize their risk. One way to do so is for the seller and buyer to have a well thought out and comprehensive plan in place that includes:
- Your Goals and Objectives
- Your Financial Resources, Including an Objective Value of your business and Strong Sustainable Cash Flow
- Improving and Preserving the Value of Your Business
- A well planned out Sale to a Capable, and Bankable Third Party
- A Strong and Viable Inside Transfer Strategy
- A Continuity Plan or Succession Plan
Develop and use your banking relationship. It can be a valuable tool as you begin to plan and to implement your exit. Consider taking your bankers to lunch to explore how they can help you reach your exit objectives. If they accept your invitation, their input will be well worth the cost of the meal.
To Learn More Go To The CORE Strategic Business Solutions website