The number of transactions involving community banks and financial institutions should increase significantly in the next three to five years, according to Jim Alerding, who spoke on this niche topic at the most recent AICPA National BV Conference in San Francisco. “It may not happen right away, because of the current economy,” he said, “but it will happen.” Banking shareholders are getting older (along with most of the business-owning population), and many are waiting for built-in capital gains deadlines to expire. “Once that rolls off,” Alerding said, “most banks will be ready to sell.”
Of course, more sellers on the market drives down the prices of community banks, he cautioned. Because of the higher regulatory burdens and costs of doing business in the current economy—and greater concerns about asset quality—most buyers will bargain hard for lower prices, to protect their shareholders.
How can valuation analysts—and their bank clients—prepare to get the best price in the coming sale days? Alerding offered this advice:
- Find niche markets and excel at serving them;
- Secure key officers with non-compete, non-solicitation agreements
- Elect Subchapter S status to take advantage of tax benefits;
- Focus on locations in growth-oriented markets, but
- Don’t try to grow into unfamiliar markets without hiring the right (experienced) talent.
Market approach is most reliable. When valuation time comes, the market approach may prove the most reliable. Transaction data are plentiful: “There’s a lot more data on banks in the transaction databases such as Pratt’s Stats,” Alerding said. He also recommended Austin Associates for “all kinds of industry-specific resources on deal value,” including bank and thrift M&A transaction data since 2004.