Now That You’ve Found Your Best Banker, Now what? Better Communication = Better Relationship! The secret to any strong relationship is good communication. In this article, you’ll learn what information you share with with your banker and when to share it, especially when things don’t go as expected.
We continue our interview with Andy Pletz, Vice President and Commercial Relationship Manager at Umpqua Bank in Bellevue, Washington.
Lauren: So, let’s say we’ve got a client and they’ve found just the right bank and banker, a great person who can advocate for them. They’ve got some loans going, maybe one or two, and/or credit lines. How often should they be communicating with their banker? What should they communicate and how should they communicate?
Andy Pletz: Communication, in general, is a style preference. Some clients want to tell you everything, some clients don’t want to tell you anything. At a very minimum, there should be an annual deep conversation with your banker about what happened last year and about what the upcoming year is about to bring about.
Lauren: Sort of “the state of the company”…
Andy Pletz: Right. That’s the bare minimum because your banker needs to understand what happened – good or bad – last year and if there are going to be different needs in the upcoming year. They need to understand that so they can help you out. Higher revenue may drive the need for a larger line of credit or more equipment to produce more product. Conversely, if there is an issue, bankers want to understand what’s going on.
We don’t want to wait a couple of months down the road when financial statements are received to discover there’s a problem. In general, bankers don’t like surprises. There are multiple forms of communication that are needed. One important one is providing basic, financial information. Numbers are important, and generally, banks have loan requirements, or covenants, that require you to provide financial information in a certain format: annual tax returns, quarterly statements, monthly statements; whatever the requirements are.
So that is one form of communication and I would say being proactive about providing that or any information is really helpful for the banker. I love my clients that say, “I need to get this information to you, and I’m proactively giving it to you.” I love these kinds of clients. They’re just great.
Lauren: It helps you understand their business and helps you become a better advocate for the business to your colleagues.
Andy Pletz: It also says something about the management of the company. The customer’s actions are telling me: “This is my obligation, I agreed to do this and I’m doing this.” There’s some credibility built within the organization already as a result of that.
Lauren: If they are in a cycle of sending financial statements regularly, I’m guessing they’re also the kind of clients who have accurate financial statements.
Andy Pletz: Yes, accurate information is critical. How else can the client make good decisions? And while sharing financial numbers is important, it’s also important to share the why behind the numbers. I don’t necessarily know those answers unless I have some direct communication from my client. Why did your revenue go up? Why did your gross profit go down? What else happened that impacted the numbers?
I can see the percentage is going up or going down or changing, but I don’t know the rationale or the reasons. And that’s where the personal communication with my clients is important: help me understand what happened. I can calculate cash flow and debt service and other specific covenants, but my client is going to help me understand the whys behind all that. And that’s really where I think communication is important, because you want your banker to understand what’s going on in your business. You want your banker to understand you know what’s going on in your business.
Lauren: There’s a certain confidence level that you have when you see an owner, even though the news may not be great, or the trends may not be going in the right direction, with a coherent story behind what’s happening, with a plan. And that makes all the difference.
Andy Pletz: The plan – that’s a great point. Bad news happens, that’s life. The next part in the communication process is that we want to understand that the customer understands the impact of that bad news. What is the plan, what are you doing, what steps are you taking to change this dynamic? For example, let’s say you’ve lost a big client. Your revenue is going to go down because of this. Here’s what I want to hear from my client: “Well, one of the steps I’m taking is I’m going to have to take a close look at my infrastructure and possibly make some cost reductions. Maybe I don’t know where those cost reductions are coming from as of yet, but I’ll get back to you when we have a plan.”
That makes me feel good that my client is on top of their business. They’re not any happier than I am that’s there’s been a negative impact to their business, but they are proactively doing something about it. Because part of my job is communicating within my organization about risks, having my clients keep me informed helps me monitor that risk.
Getting financial information is one way that helps us monitor risk. We made a loan based on a certain level of risk. If that level of risk changes, we need to be aware of that from within our organization because if there is more risk, we would need to reserve more capital for that particular loan.
We’re constantly evaluating if there is more risk than we had initially thought. Is there so much risk that there might be a loss? Can our client still afford to pay us back? That’s why it’s important that I understand things from my client’s perspective because we’ll be monitoring the risk and making sure we’re comfortable with what is happening.
Things Change: Succession Planning and Guarantees
Lauren: Let’s say there is a situation where there’s going to be a succession in the business. Mom or Dad has been the majority owner, assumed the risks, and, potentially, signed some personal guarantees. Someone else is buying it, whether it is a child or a key employee. At what point is Dad or Mom or the majority owner going to be released from the personal guarantees if they are holding at least part of the note? How do they get out of that and when does the next generation or the key employee have to take over the guarantee? Do they have to start from scratch?
Andy Pletz: It’s a hard question because every deal is different. Ultimately, what I would have to say is in 99.99% of closely held businesses, the owners personally guaranty the bank loans. It doesn’t mean they’re pledging personal assets; they’re not necessarily putting their home up or their first born. It’s saying, “As the owner of the company, I stand behind this company and I’m willing to guarantee that we are going to pay you back.”
That’s a kind of a principle-thing, saying, “I stand behind the company.” It’s also because they have the total control of the company. They can take all the money out of the company, personally, and leave the company high and dry. If the bank only has the loan to the company and nothing else, we have limited controls there. Generally, in closely held businesses, the individuals guarantee. That’s a norm. When there’s a transition, it kind of depends on how that transition works. If somebody from outside is coming in to buy out the company, they will be asked to give a guarantee. And if the original owners are getting paid off, they’ll want to be released from their guarantee. That clearly makes sense.
When it’s a closer type of a transition, for example the son’s going to be taking over, the bank is going to look at the company, how financially strong it is, what happens when the original owner leaves, what roles do they play, what do they provide, and is the new person going to be able to do all that? If the company is financially strong enough to support the loan on its own, then we’d probably add some financial covenants to ensure it stays that way. If it’s not strong enough to stand on its own, we may look to have additional support in the form of a guarantee.
For example, if the new owner is a young guy who hasn’t been able to build up his own personal portfolio, we’d probably come back and say, you know, we still need some additional support here: “Do you know anybody else who might be able to help?” Maybe Mom and Dad would be willing to continue to offer that guarantee for a period of time until we can see the son is doing what he says he’s going to do: the profits are there, the cash flow is there, the collateral is there, etc.. If we get that comfort level and then perhaps we no longer need the additional support of Mom or Dad.. But keep in mind, banks will not, generally, proactively say, “Yeah, let me release that guarantee for you.”
So I would suggest that clients continue to have that dialogue with their banker. “Do you think we qualify for financing without Mom and Dad’s additional support? You know, we’ve been able to do this and this, they would like to get off the guarantee, can you do that now, or if not, what do you need to see so that we could get there?” It’s a little bit difficult for banks to look ahead, to formulate what we want to see in order to release, because so many different factors can change.
But I think it’s important if the client is looking a release from the guarantee, to make it known to the bank. The bank would make it known that they need the guarantee, and at some point down the road, would take a look at the options. Banks won’t generally say, sure, two years from now we’ll release it. Because they don’t know what two years from now is going to look like. But banks should be open to say, “We will evaluate it and see if we can do it.” Because if that bank won’t do it, maybe another bank would.
The Partnership Pre-Nup, AKA Buy Sell Agreement
Lauren: Are you usually wanting to see a Buy-Sell agreement as part of the lending process? For example, does one exist and has anyone looked at them in the last 20 years. Do they do what they need to do? Because from my experience, usually, nobody’s looked at them, they don’t do what they say they’re supposed to do. Or they don’t even exist.
Andy Pletz: I would say that most of the clients I deal with are 100% closely owned, so there’s not a partner involved. If there’s a partner involved, I highly recommend them setting a Buy-Sell agreement and going through the what-ifs, but I think you’re right in reality, when you’re just staring out, you’re all excited about this new business you’re getting into and this is so wonderful let’s just go forward. We’re busy, we don’t stop and think about what happens if things change. And so, it is just like a pre-nup between a couple, a partnership pre-nup is to be able to say we sure hope everything goes according to plan. But if doesn’t, this is what we’re going to do down the road. Most of my clients are closely-held with one entity, not a partnership, so I don’t encounter them all that often, but if there is, I would highly recommend that they have a buy-sell agreement.
Lauren: And one would hope, if it’s an individual it’s even more important to have a contingency plan in place, a Buy-Sell agreement for just a majority owner, whether they’re addressing that addresses if they become disabled, or die, or get hit by a red big truck.
Andy Pletz: Yes. And we look at succession plans. We look at the management team that the company has built. Is that management team capable of running an organization should some disaster approach the owner? Is there key person’s life insurance that helps offset those kinds of things, that mitigates the risk? So those are things we definitely take a look at, and we try to have conversations with the clients. Because you do have to have a plan, whether it’s for the unexpected or to put things in motion as an exit strategy. Hopefully, you spruce up your company so that it looks the best that it could possibly be if you want to go down that path.