Ask the Banker

"If you own a business or are considering starting one, you need to be thinking about your ‘end game.’  The sale of your business should be the biggest payday of your life and, ideally leading you into a comfortable retirement. The best way to maximize this payday through a business succession plan.  A thoroughly developed plan will help increase the value of your business and the number of potential buyers. Once developed, you should frequently revisit and update the document, which will keep you mindful of your exit strategy.

Your timeline, or how many years you have left, will drive a lot of your decisions.  For instance, if you are 15 or more years away from retirement, maybe you should consider buying a building.  It’s possible that when you are ready to sell your business, your building may be paid off and have appreciated in value, thereby increasing your potential payout.  The further away you are from your exit, the more you should be focused on increasing your business’s value.  As your timeline shrinks, you may want to shift your focus towards identifying buyers.  It will be helpful to structure your plan in a linear manner, which would allow you to set benchmarks like these and help you to stay on track as you near the end. 

Business succession can come in two forms: internal and external.  Internal succession can be selling to a co-owner, family member, or one or more employees. External succession would typically be selling to a competitor or some other outside investor or entrepreneur.  Liquidation is another option to get out of your business, but it is often the least profitable and sometimes only makes sense when no other succession has been identified.  A good business succession plan should help you avoid having to rely on liquidation as your out. 

With an understanding of your internal and external succession possibilities, you can better identify individual potential buyers.  If your business is privately owned, there is likely no great marketplace for selling.  You may be able to engage a consultant, broker, or realtor to see buyers on your behalf, but we’d also encourage you to leverage your own network.  For instance, your favorite banker may have other customers who are actively looking to acquire assets.  Because there can be many factors that limit your external options, more businesses are being sold to internally.  In these cases that the early identification is most critical.  If you have a key employee or maybe a young employee with great potential, it will take time to help groom them to eventually take over the business.  It will also take time for them to build up enough savings to help with the acquisition.

The true value of a business is ultimately the agreed upon price between a willing buyer and a willing seller.  But how do you make sure you are not undervaluing your business?  Asset valuation, such as a building appraisal, should hopefully determine a base value. From there, you will want to factor in the value of your annual earnings or profitability. A building with high rents is better than an empty one, right?  Be honest with yourself about value of your business name, too. Your twenty years of excellent reputation may result in some goodwill value as well.  We highly recommend seeking professional help for business valuations, especially if you have any level of complexity in your operation.

Finally, there are some additional factors to consider in succession planning.  Formal operating procedures can act as references or training for future employees and owners.  Are you willing to stay on after the sale as a consultant or to help with the transition? You should also consider the funding of the sale.  More and more frequently, sellers are financing all or part of the sale, which has its own set of pros and cons.  Research this more with your accountant – and this is no time to skimp on your accountant, a good one provides more value back to you than you pay to them. 

In the end, the time and effort that goes into business succession planning will absolutely be worth the reward."

"The first place people start when looking for a bank is products and services.  This is important, but it is not where we believe you should start.  Sure, you want a bank whose offerings match your needs, especially one with the latest technology, but there are so many other important factors.  If you have read the other Question and Answer posts, you will remember important topics like relationship banking and local decision-making.  Those topics, while covered at length, are worth mentioning again because they truly are that important.  With those two criteria met, you will be able to work closely and efficiently with someone you trust, who can get you timely and helpful answers.  

We suggest choosing your bank and banker as if you were choosing a business partner, or even a family friend.  Ideally, you would have shared values.  You want to enter a relationship with someone who is fair and reasonable, community-oriented, easy to communicate with, and who does not have an ego.  It is also important to consider how the bank is organized.  A bank whose operations revolve around the customer is going to be more responsive and flexible. Maybe the easiest way to spot a customer-centric bank is whether your banker ever offers to meet you outside of his or her office.  It may not be reasonable to assume the banker will always come to you since the bank is where the information and funds are stored, but a banker that demands that you come in and stand in line is working with themselves as the priority.  Simply put, customer-centric banking models lead to the highest customer satisfaction.

Finally, you should consider what really makes the bank different from other banks.  The strength and stability of the institution is critical since you’ll be trusting them with your money and credit.  Look for a bank with very strong capital ratios, steady annual profitability markers, and consistent banking practices. We think one overlooked criterion is bank ownership.  Are bank earnings being distributed locally so that they can be reinvested in our own economy, or are they being concentrated in one or two individuals, or worse, are they leaving the area entirely?  We also believe a bank should provide value back to the community. This might be in the form of time or monetary donations or could be something like hosting a seminar on business succession, elder financial abuse, or cybersecurity.

Ultimately, we want you to trust your instincts and trust your referrals.  Maybe your friend tells you about how their banker took extra time so that they could fully understand the home buying process.  Maybe you overhear your coworker talking about how his or her banker fought hard to get the deal done.  Maybe you have had a great -or miserable- first impression somewhere.  Trust these.  Remember, you’re looking for a partner, not a bank."

"When a bank refers to local decision-making, they are really referring to how their approval structure fits within their geographical footprint – it’s more impactful than you might think. Banks are typically centralized or decentralized when it comes to decisions, meaning they either make most decisions at a central hub or they push that power down to a local or regional level.  Because true community banks are smaller in size, even centralized decision-making can be done locally.  Since this would most likely apply to you regarding loan requests, we will focus on that the rest of the way.  

Local decisioning has quite a positive impact on the customer experience. The major benefits are that your bank will likely be more responsive to your inquiries, more flexible with requirements, and their operations may seem more consistent. At a smaller institution, your banker should either be able to make important decisions or have a direct line to those who do. A very large bank with truly decentralized decision making is rare. Because of that, at a large institution, you will often notice slow response times or unrealistic approval requirements.  If you do get approved, there is a good chance it comes with an overwhelming number of contingencies.  This is because they are focused on risk management across such a vast footprint, they can become out of touch with local realities.

Simply put, local decision making will result in someone working with you, rather than someone trying to make that request fit within an already existing box. So yes, local loan decision-making is critical if you’re looking for a responsive bank.  We’d argue that the power of local decisions goes far beyond agility, though.  By empowering bankers at a local level, your loan approvals will typically be less rigid, with fewer contingencies, and the underwriting standards tend to be more appropriate for your community. This is important because circumstances are vastly different from area to area, and current events in a large metropolitan area should have no impact on decisions in one of our communities. An example in business lending might be that a large bank is seeing negative trends in a certain industry in Detroit or Chicago, so they restrict their lending to that industry bank-wide. This means you could have a harder time getting a good deal done locally, or you’ll incur more interest to cover risks that aren’t really specific to our area.    

Now that we’ve covered the importance of local decision making, next week we’ll discuss other important and often overlooked factors when choosing a bank."

 

"Relationship Banking is not an ‘official’ banking term, but it’s important to understand.  The right relationship in banking, as in life, can have a significant impact. Some people see banks in a narrower view, such as a place where money is stored safely or simply a spot where direct deposits can go.  Maybe to you, ‘banking’ is just an app with good mobile deposit or bill pay features.  While those things are true, we would argue that at several points in your life, your bank is going to mean much more to you than that.  You’re eventually going to buy your first home, look for a new vehicle, start a business, plan for retirement, or even struggle through a global pandemic.  In those moments, it really helps to have a solid relationship established with your bank – one you can depend on!

 

So, how do you find a relationship to bank on?  I suggest starting with a true community bank.  It seems like these days, all banks claim to be a community bank. That is because bankers know that it’s so much easier to develop relationships at smaller institutions.  The larger the institution, the harder it may be to get an answer on important financing decisions. You may even feel like you are a number and not a person.  Once you have found that true community bank, your next step is to find one or two people at the bank who can give you answers and ideas with confidence and in a timely manner. From there, trust becomes the key.  If that trust runs both ways, then congratulations, you are experiencing relationship banking. 

 

Yes, bankers frequently have to work within regulatory boundaries - and the supporting data is important.  But in the end, relationship banking is as simple as people working together – and Relationship Banking is what we strive for at Upper Peninsula State Bank.  Next week, you will read about how relationship banking can tie into local lending decisions."

“Individuals or businesses most commonly utilize business loans to acquire an asset such as real estate or equipment, finance improvements, or fund various other needs. The best way to approach a possible business loan request is to first understand your own needs. Sometimes these needs are obvious, sometimes not. If not, a good banker should be able to help you discuss your current situation and how to get to your ideal situation.

Next, you’ll want to understand your cash flow, which is the movement of money in and out of a business. This will go a long way in determining your repayment ability and finding the correct payment structure for you. Depending on circumstances, banks may require collateral, and that can often be the deciding factor in your borrowing capacity. If acquiring an asset, it will likely serve as your loan collateral.  If you lack collateral, there still may be products or programs available to help. 
 

Displaying an understanding of your own circumstances and goals is very helpful to bankers.  This can be done through conversations, business plans, financial statements, and/or projections. Finally, you and your banker will want to understand the path forward. Never be afraid to ask questions! A good banker is a resource for you – use that resource throughout the process.  That is how relationships are built. You’ll read next week how helpful a good banking relationship can be!”