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 As many of you know, I am a staunch supporter of independent community banks.

I also realize, as indicated in prior blogs, that sometimes, for whatever reason, community banks will sell or combine with other institutions.

The reasons could be sheer fatigue; no management or board succession plans; "all the fun we can stand"; or seeing a sale as an opportunity to enhance shareholder value.

Let's say one of those points describes your mindset, and you are in active selling mode.  I thought it might be helpful for me to identify some do's and don't's.

Getting your ducks in a row

Consider these steps:

1. Don't enter into long-term contracts shortly prior to the sale.

Particularly do not enter into long-term leases and/or data processing contracts with enormous termination fees.

As a practical matter, those fees will come right out of your shareholders' pockets.

In the last three transactions that our firms have handled, our client (the acquiring bank) has had to go through the process of converting the target bank and paying the termination fee. That is not an inexpensive exercise. So, do not make it any worse by entering into a new long-term contract.

2. Don't let your board get "ahead" of the deal.

Often, when a board makes a conceptual determination to sell, the board members then begin to start spending their money either conceptually or in reality and become biased toward being acquired. That often causes them to lose their objectivity (this can also happen on the buy side).

The result? They may take a deal that is less from a pricing term standpoint than what they might otherwise have been able to obtain.

3. Don't leave dangling lawsuits.

Settle any litigation against the bank. Obviously, the board does not want to "give away the store," but any litigation against the bank represents potential risk to the acquiring institution. That risk will result in a discount of the purchase price due to the uncertainty inherent in connection with the litigation risk.

Don't kid yourself. The bank can obtain all the "attorney's opinions" it wants indicating the likelihood the bank is going to have minimal exposure in that litigation. From a buyer's standpoint, however, "minimal" is probably "too much," depending on the maximum exposure.

Settle the litigation, if you can, on a reasonable basis.

4. Chop expenses before you put the bank of the block.

Minimize expenses and drive earnings in the year leading up to the acquisition.

Why? Earnings drive the value of your bank to an acquirer. Get rid of unnecessary expenses so your core earnings stream is sustainable from the start.

5. Make sure asset quality is as pristine as possible.

This may involve getting OREO (other real estate owned) off the books, and compromising or accelerating the workout of troubled credits. Anything that can be done to reduce the risks in the loan portfolio will make the bank more attractive.

6. Stop stock buybacks once you go into sales mode.

Don't redeem any shares back into your holding company once the board has made the decision to sell.

Even if someone wants to try to sell their shares back, once the board has decided to sell and the deal may occur in the next six or eight months, discourage whoever is wanting to sell their shares back to the company.

Mind you, it is not a total disaster if the bank holding company has to buy them back. But it may create political or reputational issues or reimbursement/unwinding the transaction issues once the deal is announced.

7. Don't think you can do this without professional help.

If you go ahead and try to sell your bank without professional help, you may literally need professional help post-closing.

About the Author

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  Gerrish can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it , and the firm’s website, www.gerrish.com.

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