Banking institutions have the capability of making a lot of money. When consumers safely store their funds in a bank, the bank then borrows the money for loans. As a result, they then profit significantly off of the interest charges. Because banking institutions have such high profit returns, they are often in demand as a type of business to own. Perhaps, the biggest trouble in purchasing a bank that is for sale, is in establishing a fair sale price. The seller often values the bank much higher than it is. The buyer wants to receive a great deal for their investment. How can something like a bank, be properly valued, especially when there are so many unknown factors involved?
The unknown factors of the banking institution
A bank cannot be successful without a large inventory of funds. These funds must come from consumers. If consumers do not feel secure or appreciated with their current banking institution, they are likely to switch banks. It can be difficult to accurately value a banking institution, because there are often outside factors affecting its ability to make profits. Many buyers also wonder which aspects of the bank are the best business valuation resources. Do you consider how many customers are members? Do you consider how much is currently in banking accounts? Or do you consider how many loans the bank current has?
Different approaches to valuation
There are also different methods available when valuing a banking institution. Your company valuation can be done in one of three approaches, by comparison to recent sales of similar businesses, based on the business? earning power and risk assessment, and based on the company?s assets. In many cases, all three valuations are important. However, specifically when it comes to the sale of banking institutions, you may find it difficult to find recent sale comparison, as banks are not frequently sold. Work with a business valuation firm on the best small business valuation appraisal type to use.
Also factor in sellers reason for sale
You do not see many banking institutions for sale. Sometimes, one banking branch will buy out another that is failing, but this is also not extremely common. For this reason, you will also want to factor in the seller?s reason for selling. It may seem surprising at first that the valuation results are influenced by your need for the business valuation, but business value is not absolute. It is a process of measuring business worth, which depends on two key elements, how you measure business value and under what circumstances. In formal terms, these elements are known as the standard of value and the premise of value.
The seller of the banking institution does not necessarily have to disclose their cause for sale, but most do. Because the sale of banks does not occur frequently, many understand that not disclosing this information can actually hurt the sale. If they are selling because they want to move onto other business opportunities, the price may not be affected. However, if they are selling because members are leaving and they are not being paid back on loans, this may bring down the valuation of the business.
Carefully go over all documents
Documents are an important part of any sale, especially business sales. If you have expressed serious intent on purchasing the bank in question, the bank?s business documents will be released to you. It is important to carefully go over these documents. You may also want to include these documents in the business valuation software for a true value. The two key starting points toward establishing a business worth are determining why you need the business valuation and assembling all of the required information.
You do not often see banking institutions for sale. This can make it more difficult to come to an accurate business valuation for sale purposes. If you are the buyer interested in purchasing a bank, ensure that you have access to all needed information and documents for an accurate business valuation. If you are unsure of how to value a company, such as a bank, be sure to work with a valuation firm.