With the financial services industry plagued by heightened regulatory pressure, it is not surprising there has been a lot of contraction within the market. The costs associated with compliance alone are squeezing many of the smaller industry players out of business altogether. My company was acquired by LRES in January, so I have first-hand experience that the process is not something that can happen by chance or without a detailed and well-thought-out strategic plan.
But what's most important when preparing for an acquisition is being ready to let go of control of the company. Many smaller players do not want to go out without a fight and are frantically looking to merge with a bigger, more financially stable company. While M&A activity is good in theory for those looking at it as a possible option, it can only be successful with a highly calculated and deliberate approach, including preparation to relinquish the reins of something you very likely built from the ground up.
While the following principles can apply to any lending institution or technology provider looking to get acquired, lenders are particularly struggling with the pressures of the TILA-RESPA Integrated Disclosures rule and may find that a merger is the best solution to remain competitive if they are concerned they might not be able to survive alone.
Have all audited financials in order. Lenders must be able to easily produce and defend figures detailing income and production over time to any prospective acquirer. Make it as easy as possible for the acquirer to make a clear and accurate assessment of the business. Lenders should also steer away from signing any long-term contracts to avoid bringing more liabilities to any prospective acquirer.
Have a unique specialty within the industry. Another way that lenders can set themselves apart and become more attractive targets for acquisition is to specialize in a very niche segment — whether it is reverse mortgages, default, commercial real estate, etc. While it is risky to specialize in one niche, since the lender's livelihood hinges on the performance of that one market in such a dynamic and volatile industry, it can be a true value-add to any organization looking to enhance its diversified business with a specialized area of expertise. Lenders should focus on one market; own that one market, and suddenly become highly desirable candidate for acquisition.
Always have an open mind. Lenders might think they have a good idea of what their lending institution is worth and how the transition should work, but they must be receptive to the acquirer's vision because it could be more advantageous for the future of their business and more lucrative than they had planned in the first place. Acquirers typically have a strong structure in place and set goals in mind, and they know how the plan should manifest itself in the most profitable way possible for both parties.
One key thing for any lender to keep in mind: relinquishing control is necessary. The acquirer is in the driver's seat for a reason, so prepare to let go of some expectations and be open to adapt to its model.
A successful merger or acquisition is not one-sided. Lenders also must fully vet the potential acquirer's business and ensure it is a credible organization with the financial wherewithal to undergo such a time- and energy-consuming process. The buyer must prove its reputation in the industry. Does it have adequate IT resources in place? Does it employ a full-time compliance staff dedicated to the day-to-day monitoring and interpreting of the latest legislation on a local, state and national level? Is it equally invested in the lender's business and does it treat its staff with the respect it deserves? At the end of the day, the two companies must have enough chemistry to smoothly and effectively merge as one.
A merger or acquisition is not the answer for everyone, but it can be a viable solution for lenders if handled correctly. There are a number of ways lenders can actively position themselves as attractive targets, but they should not waste their time on just any company that approaches them. To ensure the smoothest transition, lenders should ensure the company has a good reputation in the industry, a strong financial backing and a company culture that matches that of their own.
Joe Hendren is vice president of business development at LRES.
