By Rich Carty
Contracts and Bank Sales: Key Negotiation Insights for Executives
What should boards of directors and executives consider when negotiating with their major technology vendors if they are considering an acquisition, or planning to sell their bank in the next several years?
Recently, a CEO client approached us to manage her technology contract negotiation. One of the questions we asked her was, “How many years until you plan to retire?” This wasn’t a question she could answer with her Sr. Management team in the room, but in a closed-quarters discussion later, she confessed that her timeline until retirement was likely 3-4 years. Her family controlled the majority stock position in the bank and the plan was for the family to sell the bank when she was ready to retire.
Her initial thought was that she would seek a three-year auto-renewal of her core contract and then try to do the same with her other technology contracts as well. We reviewed her technology contracts and provided a SWOT analysis on each contract keeping in mind her 3-4 year planned divestiture.
There are a lot of things she learned during the renewal process with her vendors during the next negotiation with each of them…more than can be covered in a single article. Here are a few mistakes that she was able to avoid during that process, as well as a few things we’ve learned from other clients over the years who are regularly active in the M&A landscape:
If you plan to sell the bank, here are the questions you should be asking:
- Do your technology contracts (even across multiple vendors) terminate at the same time and have similar auto-renewal language?
- Does the bank know what they will pay in fees to their vendors if the bank is sold in 2 years? 3 years?
- Will taking an auto-renewal raise fees significantly or cause expiration of language in your contract that increases exit fees?
- Does the change-in-ownership clause in the contract put the bank at financial or regulatory risk?
Navigating Tech Contracts in Mergers & Acquisitions
For this client, her various technology contracts had termination dates ranging from 2-7 years, and there was quite a bit of risk in these and other areas. We were able to optimize her contracts, which resulted in lower annual fees over the course of the contract, and significantly lower termination fees over a slightly longer contract period.
In the end, she signed a five-year contract with her primary vendor, but the total cost of ownership was shorter in every period we modeled except for year one.
In the case of another of client, a board member had previously owned an $800M bank. He had no intention of selling, but an offer came out of the blue which was too good to pass up. Always having had a good relationship with his core, he did not have a good sense of the cost to get out of his contract and was ultimately hit with such inflated fees that his personal gain from the sale was significantly reduced.
Had he known at the time what questions to ask, and how to properly evaluate his tech contract for all the ways the vendor would be able to hit him on the way out the door, his deal could have been significantly improved. After retirement, he joined another bank board and brought in Remedy to significantly reduce risk in the contract in the event of a merger, organic growth, or a future acquisition.
Banks considering an acquisition or merger should consider these questions:
- Which of the buyer or seller is responsible for the termination fees of the seller?
- What are the conversion fees associated with acquisition of banks within a targeted size?
- Do fees change if acquiring a bank that is currently with the same provider or on the same technology platform?
- Are you planning to stay with your current vendors after the acquisition period, or migrate to another provider?
Strategic Planning for Tech Contracts in M&A
Regardless of whether you are planning to acquire or be acquired, it is likely that the preferred/required contract term of any of your technology providers may be longer than the timeline you are considering for your acquisition strategy.
Since any of the bullets above could be a decision that may cost/save the bank more than $100,000, it makes sense to do some pre-planning.
Most banks believe that they are solving their issue by requesting a short contract or taking an auto-renewal to their current contract. Unfortunately, vendors are becoming wise to this strategy and building in contract language that expires when the initial contract renews.
Oddly, these days many shorter contracts carry a higher total cost of ownership than slightly longer contracts with the right price and contract terms and conditions.
About the Author
Rich Carty is a sales professional at Remedy Consulting, committed to educating potential clients on the strategic and financial benefits that Remedy Consulting delivers. Remedy Consulting empowers community financial institutions (CFIs) to thrive by offering best-in-class consulting services, including Technology Contract Negotiation, Technology Pricing & System Assessments, Contract Terms & Conditions Improvements, and FI Strategic Planning. To learn more visit remedyconsult.net.