Your community banker and M&A: More than the money

Market conditions and demographic trends are setting the stage for an increase in merger and acquisitions to be a regular feature of the market in the coming years. The Federal Reserve has indicated that it has reached the crest of interest rates and will likely begin to loosen monetary policy in the coming months; long-term interest rates have already dropped from their high in October 2023. Perhaps even more importantly, the Baby Boomer generation of business owners is reaching retirement age and beginning to exit in earnest. Taken together, we should expect M&A activity to increase going forward.

Everyone knows that a good commercial banker plays a central role in any merger-and-acquisition transaction — but the importance of a good banking relationship extends far beyond the bank’s ability to finance the deal.

In fact, the greatest value that your banker brings to your business acquisition team probably won’t be financial at all. Instead, a good banker will bring insights about the market, a seasoned ability to analyze the details of a transaction, counsel on the right experts to engage in valuation and accounting and the experience to shape a winning deal.

The benefits of your banker’s counsel will be all the greater, of course, if your relationship has been allowed to deepen over time.

Any acquisition or merger deal will require a team — a banker, a lawyer and an accountant, at the very least. A professional business evaluator should also be part of the mix to ensure that your business is valued accurately. All of them need to play their roles well, and the selection of professional advisers is one of the most important elements in the success of a transaction and your banker should be providing counsel as to the right mix of partners.

An experienced banker will have a deep understanding of the market in which the businesses operate. Lenders at a community bank, for instance, bring knowledge that’s been built over years of relationships with local business clients. Just as important, their personal roots in the community create informal networks that often generate powerful insights.

Deep knowledge of the community and the market, in turn, allows the banker to provide thoughtful counsel about the likelihood of success of an acquisition. Acquisitions of existing operations can help a business gain market share quickly, expand product offerings, widen its geographic footprint or provide more opportunities for talented employees. For a newcomer to business, acquisition of an existing company can provide a fast track that avoids the slow-and-steady process of building from scratch.

Bankers know the right questions to ask to help their clients clarify their thinking. What, for instance, is a realistic target for revenue growth? What if the economy softens? What if a major national competitor moves into the market?

Most importantly, bankers will ask their clients for a thoughtful business plan, one that realistically lays out the steps that ensure a profitable, growing future. Generally, the preparation of a business plan is just as valuable to the borrower as it is to the bank. It provides yet another clear-eyed look at the deal.

Even the best-considered transaction, however, can be scuttled by poorly designed financing. What role should owner’s equity play? Is long-term debt best? Can the business generate enough cash to repay a short-term loan, saving on interest costs? What about the financing for real estate or equipment owned by the business? Is it possible that a loan guaranteed by the Small Business Administration would reduce the financing costs? And how does each of these options fit with the cash-flow requirements and tax needs of the business and its owners?

An experienced community banker provides invaluable assistance assembling the right financial package to meet the individual needs of each business borrower and each transaction.

Any team becomes more effective over time as members build relationships and learn about the strengths that each brings to a successful performance. That’s true for orchestras and sports teams, and it’s equally true for teams of merger-and-acquisition professionals.

The best time to begin building a relationship with a banker isn’t during the frantic days after an attractive acquisition opportunity presents itself. Rather, the most valuable counsel will result from a banking relationship that’s been strengthened over years of experience. Business owners looking to exist should plan for a three- to five-year runway to ensure that assets are properly titled and valued and that all aspects of the business are aligned for a successful sale.

The time to find a banker to provide wise counsel on an acquisition, then, is long before the advice is needed. In fact, that relationship might begin on the day that a small business opens its very first business banking account.

Matt Baca is vice president commercial lending for Plumas Bank, based in Reno. With over a decade of banking experience, Baca has a keen understanding of the Northern Nevada and Lake Tahoe region and finds unique ways to help business clients achieve their goals. Meet Matt Baca at plumasbank.com/meetyourbanker. Member FDIC. Equal Housing Lender.