The bank's role in a private company transferWhen a private company is considering a transfer strategy that does not involve an outside sale, there is often a question of the bank's role in such transactions.

The financing for these internal transfers often involves several pieces, which can include deferred compensation, a seller note, and, in some cases, bank financing.

Bank financing in these cases is rare for a simple reason.  A bank generally does not want to finance transactions where the capital is leaving the business.  A bank prefers to make a loan where the proceeds are reinvested in assets that will help the company grow and where their collateral is not diminished, as is the case when the proceeds are used to buy back stock.

The few occasions when the bank will participate are in cases where a company’s balance sheet is rock solid, such that there is sufficient collateral on the balance sheet after the transaction to justify the making the loan.   These cases are rare, and even when the bank does participate, it will seldom finance the entire transfer.

To increase the likelihood of getting bank participation in your transfer, consider the following:

  1. Plan for your transfer by leaving sufficient capital in the business along the way so that the business has the ability to finance the transaction.
  2. Communicate with the bank well in advance to let them know your plans and allow them to be part of the process and participate
  3. Include your next generation leaders in important bank meetings well ahead of a transfer.  It is important for the bank to get to know the future leaders of the company so they know the people who will be in charge after the exiting family members are gone.  This is a critical step to reduce the risk profile that the bank sees in extending credit to the company – to have a relationship with and confidence in the future leaders.

What has been your experience with getting your bank to participate in the transfer of your business?  Share in the comments.


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