Instead of starting a bank from scratch, many entrepreneurs choose to buy an existing bank. This can be a great way to become a business owner. But, you should know a few things before buying an existing bank.
This article will discuss buying a bank and how much money you will need to have available. Whether you are just starting or are well into your entrepreneurial journey, read on for some helpful tips.
Guide for Buying a Bank
Here is a step-by-step guide on how to buy an existing bank:
1. Make Sure You Understand the Market and Niche
The first step to buying an existing bank is to do your research. You should start by understanding the banking industry and the niche of the specific business(es) in which you are interested.
2. Find a Business to Purchase
Once you have a good understanding of the market and niche, you can start looking for businesses to purchase. There are two key sources to find banks to purchase:
- Business brokers: Find a local or national business broker. They can easily find companies that are looking for buyers. They can also approach businesses you might be interested in that aren’t currently for sale.
- Online business marketplaces such as BizBuySell.com: Many companies that want to sell are listed (by the business owner or their business broker) online.
3. Evaluate the Business
After you have found a bank to purchase, it is crucial to thoroughly evaluate the business. This includes looking at the financials, the products or services offered, the customer base, and anything else that could impact your decision to buy the business.
Also, be sure to ask why the business is being sold. For example, is it because the owner is retiring (good), or is it because the business is failing (generally bad, but could be an opportunity to acquire at a low cost and turnaround)?
As part of your evaluation, you should perform a valuation of the business. If a business is listed for sale, it will generally already have a published price, or the owner will have a price in mind. You need to ensure the price is fair.
There are a few different ways to value a business. The most common method is to use a multiple of the bank‘s annual earnings or sales. For example, if the current multiple (you can figure this out by looking at the prices of other banks) is 1.5 times revenues and the business is generating $500,000 a year in sales, the valuation should be around $750.000.
If the business is being sold at a higher price than the valuation you determine, you can try to negotiate a lower price with the seller.
4. Get Professional Help
As you buy a bank, it is crucial to get professional help from an experienced business broker, lawyer, and CPA. They can all help you with due diligence, negotiation, and other aspects of the purchase process.
A business broker can help you find businesses for sale and help you negotiate the purchase price. A lawyer can help with the legal aspects of the purchase, such as drafting and reviewing the purchase agreement. Finally, a CPA can help with financial due diligence and tax implications of buying a business.
5. Draft an Offer Letter, also known as a Letter of Intent (LOI)
After you have found a bank in which you are interested, the next step is to make an offer. The offer should be in the form of a letter, and it should include the following:
- Your name and contact information
- The name and contact information of the business you are interested in buying
- The purchase price you are offering
- A brief description of the terms of the deal (such as how the payment will be made)
6. Perform Due Diligence
Due diligence is the process of investigating a potential business purchase. This includes reviewing financial statements, examining legal documents, and speaking with current and former employees. Due diligence aims to identify any potential risks or problems with the bank before you buy it. If you find any red flags, you can use them to negotiate a lower purchase price or get concessions from the seller.
The process of due diligence can be time-consuming, but it is essential to do it thoroughly. You should review the following items during due diligence:
- Financial statements: Review the company’s financial statements to understand its overall financial health.
- Legal documents: Examine any legal documents related to the business, such as contracts and leases.
- Current and former employees: Speak with current and former employees to better understand the bank.
7. Negotiate the Terms of the Deal
Once you have completed due diligence, it is time to negotiate the terms of the deal. This includes the purchase price, the payment schedule, and other terms that need to be ironed out.
You should have a lawyer or business broker help you with the negotiation process. They will be able to advise you on what is fair and what is not. However, if the current owner is unwilling to negotiate, you may need to walk away from the deal.
8. Obtain Financing for the Purchase
To buy a bank, you’ll need to obtain financing. There are a few different ways to finance a bank purchase:
- Use your savings: This is the simplest way to finance a business purchase, but it may not be an option if you don’t have enough.
- Get a loan from a bank: You can get a loan from a bank or other financial institution to finance the purchase. The advantage of this is that you won’t have to give up any equity in the business. The downside is that you will have to make monthly loan payments, which could be challenging if the business doesn’t do well.
- Find an investor: Another option is to find an investor willing to finance the purchase in exchange for a percentage of the business. This can be a good option if you don’t have the cash to buy the business outright, but it does come with some downside. The main downsides are that the investor will take a percentage of the proceeds if/when you eventually sell the business, and the investor’s strategic thoughts may differ from yours, which could cause problems.
9. Close the Deal
After you have negotiated the terms of the deal, it is time to close it. This involves signing the contract, transferring the business ownership, paying the purchase price, and taking over any leases or contracts.
You will need a lawyer or business broker to help you with this process. They will be able to ensure that all the paperwork is in order and that the transfer of ownership is done correctly.
Congratulations! You bought a bank.
10. Write a Business Plan and Get Started Running Your Business
After you’ve closed the deal and taken ownership of the business, it’s time to start running it! This includes everything from hiring employees to marketing the business.
You should also start working on writing a bank business plan detailing how you plan to grow the company you’ve acquired. The plan will help you map out your goals for the business and how you plan on achieving them.
Conclusion
By following these steps, you can ensure you buy a bank that is right for you and that you are prepared for what comes next. Being a business owner can be a great experience, but doing your homework before taking on this responsibility is essential.