Warning Signs: Is Your Commercial Client Selling the Business?

BY RALPH MONTGOMERY , MANAGING DIRECTOR
 

Originally published in The Bank Board Letter, a BankNews publication.
 

Your longest-lasting and most loyal banking clients may leave you, and it has nothing to do with your performance. You guessed it – they’re selling their businesses.
 
The bad news: You may increasingly face this scenario in the coming years as baby boomers reach retirement age. The majority of baby boomer wealth is in their 12 million privately owned businesses, and every day for the next 17 years, 10,000 boomers will turn 65.
 
The good news: If you know the warning signs, you can turn this challenge into an opportunity. A sale doesn’t have to translate into a lost client. Getting in front of a looming transaction enables you to act as an adviser to your client – and perhaps even help the buyer of your client’s business secure financing. Depending on the circumstances, you may have the option of referring your client to your bank’s wealth management department.
 
How do you know if a sale is on the horizon? Typically, you’ll give yourself an edge if you stay in tune with three areas of your client’s life: his or her personal life, the industry’s trends and the company’s status.
 
Personal – If you’re not already keeping in touch with your client, pick up the phone and check in. Or better yet, invite him or her to lunch. Pay attention to these five categories to determine if a sale is in your client’s future:
 

  1. Age. If your business owner is approaching retirement age, chances are he or she now is or will soon be thinking about selling. Baby boomers started aging into retirement in 2011, so this will be one of the most common sale scenarios you face over the next 10 to 20 years.
  2. Health. If your client’s health is becoming more of a concern, he or she may be interested in selling so as to focus on getting better – or maybe just slow down and smell the roses. The health of your client’s family also comes into play here. If a spouse or child has health concerns, a sale may be necessary to cover medical expenses, allow for caregiving or simply increase quality time.
  3. Attitude. If your client’s passion for business seems to be waning, he or she may be considering a transaction – and if one doesn’t transpire, the business may go under, as a business rarely thrives when the leader loses interest. Timing a sale of one’s business at or near its peak is always one of the most challenging situations for an entrepreneur and requires thoughtful introspection.
  4. Family. Does your client have kids who can take over the family business? If not, you can expect the owner to begin considering an eventual sale or transition to existing employees as a means to achieve liquidity.
  5. Liquidity. If your client needs money for another venture or investment, he or she may think selling the business is the best source for capital, and correctly so. But keep in mind: there could be viable recap options to help gain liquidity without selling, which may be in his or her best interest.

 
Read your client’s industry publications and join the leading industry LinkedIn groups to stay current with industry trends and projections. If you notice any of these three flags, the environment might be right for your client to sell:
 

  1. Competitor sales. It could be a prime time to complete a transaction within the industry if your client’s competitors are selling at decent multiples.
  2. Industry consolidation. Are larger companies buying or merging with your client’s competitors? Your client may want to get in on the buying frenzy while his or her company is in high demand.
  3. Increase in competition. If your client is faced with increasing competition, he or she has two choices: grow or get out. Does he or she have enough energy and capital to support growth? If not, the latter option may be the better choice.

 
You may have constant contact with your client, but do you know what’s going on inside the company? Here are four company-specific areas to learn about:
 

  1. Management. If most of the company’s senior management is nearing retirement age, your client may foresee rapid defections on the horizon. He or she may conclude that selling is a better choice than replacing the majority of his company’s leadership team.
  2. Company growth. Certain employee growth numbers change the rules of business. For instance, if your client’s company is approaching 50 employees, new health care requirements may come into play. He or she may not want to navigate the new territory. Company growth milestones may indicate that your client’s company is thriving and he or she will be your client for many years to come, or conversely, growth may indicate a new level of commitment that your client is not interested in managing. Pinpointing what category fits your client will help you offer sound advice.
  3. Goal fulfillment. Many times, entrepreneurs start a company with an end goal in mind. If your client is approaching a sales or revenue goal, he or she may be going to market soon. Sometimes the best way to learn this information is at the onset of your relationship. When clients come to you for a loan, discuss their goals and document them. This information is extremely valuable in assessing your client’s company in the future.
  4. Corporate behavior. Did your client order an audit? Is inventory noticeably thin? If a client is making changes to the company’s corporate structure, it may be a sign he or she is preparing to sell.

 
Having these selling signs in mind will help you understand and therefore serve your client better – not only as his or her banker, but as a trusted adviser.