Top 3 Issues Involved When Buying or Selling a Business

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America is a nation of small business owners.  In fact, there are over 22 million of us.

Why do people want to go into business for themselves?  In surveys done several years ago, the number one response was the potential for higher income.  But now in the most recent survey, the top reason was “control of one’s own destiny.”  The change is most likely a reaction to the recent economic times.

More and more individuals are now viewing small business ownership as a viable alternative to the vagaries of corporate America.  As the founder of Sunbelt Business Brokers said recently, “There is no more job security.  The only job security you’ve got nowadays is the person looking at you in the mirror.”

As a business broker, I’m often asked about the issues involved in buying or selling an existing  business.  In my opinion, these are the top three issues:

1. Confidentiality

Confidentiality is critical to the successful transfer of a business.  If word gets out that a business is for sale, several things start happening and none of them are good for the seller or buyer of the business.  First, key employees start looking for other jobs, fearing that a new owner may not retain them.  In the uncertainty, customers may begin shopping elsewhere.  Suppliers get nervous.  Competitors can take advantage of the situation.

This is why a prospective business buyer will be asked to sign a non-disclosure confidentiality agreement early in the process of looking at a possible business acquisition. In this agreement, the potential buyer confirms that he/she will not disclose the fact that the business is for sale except to professional advisors.

If you show that you take the need for confidentiality seriously, you will be regarded as the professional that you are.

2. Valuation

Nothing causes the buyers and sellers of businesses more anxiety than the problem of valuation. The question of selling price haunts both parties. The seller doesn’t want to price his business too low and “leave money on the table.”  On the other hand, the buyer of the business is afraid he’ll pay too much and not get the best possible price.

Formal, fully documented business appraisals are now readily available.  In addition, there are rule of thumb guidelines that can be used to quickly estimate the value of a business.  As just one example, we know that a full service restaurant with liquor license is worth about 30% of its annual gross revenue as an ongoing business.  This assumes – big assumption – that the business is earning the average bottom line profit for its peer group.

There are rule of thumb guidelines for almost all categories of business from ice cream stands to manufacturing plants.  But again, these guidelines provide only quick estimates.  And written, fully documented business appraisals are now done by several respected national firms at a cost similar to real estate appraisals.

3. Financing

The toughest problem facing business buyers and sellers for the past three years has been financing.  No question about it.

These are five possible sources for business acquisition loans:

BANKS – Although most people seeking a loan to buy a business will think first of a traditional bank loan, I can tell you from years of business brokerage experience that banks generally do not make business acquisition loans.  There are exceptions but this is more true than ever in today’s economy.

SBA – The SBA, through its approved lenders, provides business acquisition loans.  The SBA does not make direct loans, but rather guarantees a portion of the loan that is made by the approved lender.   It’s known as the SBA 7(a) program.  Wells Fargo Bank is currently the top volume SBA lender nationally.

The SBA route for a business acquisition loan is sometimes frustrating because of the time and detail that is involved.  However, keep in mind that the SBA will approve loans that others have turned down and will usually approve them with a smaller down payment.  In most cases, it’s worth the wait.

FAMILY – Many times the older generation in a family will loan the down payment or the entire amount needed to a promising member of the family’s younger generation.  If your family is willing to loan you the money, one word of advice is in order.  Have a very clear understanding as to how the debt is to be handled and put it in writing in the form of a legal note.

THE SELLER – In the majority of the business transfers that I handle as a business broker, the owner of the business finances a portion of the purchase price for the buyer.  Some sellers cannot offer owner financing for a variety of reasons, but when they can, it conveniently solves the problem of financing.

The fact that the business owner is willing to finance the sale of his company provides more than a convenient finance plan.  More importantly, it provides a strong validation of the owner’s belief that the business will support the owner and earn enough cash to pay back the loan.  You can’t get any better recommendation on the business than this.

The normal down payment for owner financing ranges generally from around 30% to 50% of the purchase price of the business.  Interest rates are generally market driven but there is more flexibility here than in other forms of financing.

401(K) FUNDS AND IRA ACCOUNTS – The use of these funds to buy a business, without tax penalty, is a fairly recent development.  Several national CPA and attorney groups have developed a plan, approved by the IRS, which allows you to use your funds for business acquisition.  There are legal and accounting fees involved, but they are a small fraction of the tax penalty that would be assessed for cashing in these accounts early.

The above ­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­five sources of financing are not exclusive to each other.  I recently handled a transaction in which three of the five sources were used to buy the business.

It’s called creativity!

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William Bruce is an Accredited Business Broker and Appraiser assisting buyers and sellers of privately held businesses in the transfer of ownership.  His practice includes consulting services nationwide to business owners and buyers. 

 

His article on how to analyze a business that you may be interested in buying can be read by clicking here.  He may be reached at (251) 990-5910 or by email at WilliamBruce@bellsouth.net.

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Alabama Business Confidence Improves Slightly: Montgomery Is Most Optmistic, Huntsville Least

The Alabama Business Confidence Index™ (ABCI) is a forward-looking quarterly measure of business optimism across the state.  The first quarter 2012 survey was conducted online during the first two weeks in December, with 271 participants.  This is the 41st consecutive quarter that UA’s Center for Business and Economic Research has surveyed Alabama business executives about their expectations.

FINDINGS: 

ABCI:  Business sentiment measured by UA’s Alabama Business Confidence Index™ (ABCI) moved back into positive territory at 50.8 for the first quarter of 2012, up 5.3 points from last quarter’s 45.5.  Panelists are generally feeling mildly optimistic about their prospects this quarter, with all four industry indicators at or above 50.  While economic conditions in the state should be a positive, the broader national economy is still expected to have a negative impact.  After seeing the pace of recovery slow early in 2011, Alabama business executives are decidedly more cautious than a year ago when the ABCI registered 55.0.

National Economic Outlook:  Alabama business executives are not ready to conclude that the U.S. economy is on solid ground.  Sentiment moved up 8.7 points on the first quarter 2012 survey, but at 46.5 indicates continuing weakness.  About 28 percent of panelists expect improvement, while 36.5 percent feel that economic conditions at the national level are likely to worsen this quarter.

Alabama Economic Outlook: The Alabama economy index rose 7.0 points to 52.0 this quarter.  About a third of panelists expect a better performance in first quarter 2012 than in the fourth quarter, while 24.4 percent think it could be worse.  Business executives continue to feel that the state’s economy will outperform the nation’s.  The Alabama index has been above 50 for five of the last six quarters.

Industry Sales:  Sales are expected to increase moderately in the first quarter of 2012.  The component index has indicated growth since first quarter 2010 and at 55.6 sales is the highest of the four industry indicators.  The index is up 5.0 points from the fourth quarter, with 45.8 percent of firms anticipating an increase in sales this quarter versus 22.1 percent a decrease.

Industry Profits:  About 36 percent of executives think profits in their industry will increase during the first quarter, while 33.2 percent expect no change from the fourth quarter.  The index of 50.2 indicates slight improvement overall.  Still, profits have the largest potential downside, as 31 percent of firms forecast a decrease.

Industry Hiring:  Job growth is not expected to pick up this quarter, with an index of 50 indicating no change from fourth quarter 2011 trends.  While there is a positive difference of 3.0 points between firms expecting to increase versus decrease hiring, the 3.7 percent forecasting a strong decrease cancels this out.  Most businesses (55.7 percent) expect to maintain current staffing levels in first quarter 2012, lending stability to the employment picture.

Industry Capital Expenditures:  Alabama is likely to see a very modest rise in capital spending overall this quarter; the component index of 50.6 is up 4.2 points from the fourth quarter.  Most firms (53.9 percent) expect expenditures to be unchanged, while 25.8 percent forecast an increase.

ABCI by Industry:  Alabama panelists in manufacturing and in the finance, insurance, and real estate and transportation, information, and utilities sectors are the most optimistic about the outlook for their industries in first quarter 2012 with ABCI readings in the 53 to 55 range.  Healthcare businesses are the most pessimistic at 42.5.

Metropolitan Areas:  Confidence in the Birmingham-Hoover metro rose 7.6 points to 52.7, while the Montgomery ABCI climbed 7.1 points to 54.3.  Panelists in both areas forecast at least modest improvement in sales, profits, hiring, and capital spending in the first quarter.  Business executives in Mobile expect the local economy to be relatively flat this quarter, with a reading of 49.6.  Sentiment is weakest in the Huntsville metro area, where a more negative outlook for the U.S. economy and expected declines in profits, hiring, and capital spending contributed to an index of 47.0.

 Firm Size:  Alabama firms with 100 or more employees are the most optimistic this quarter, with positive expectations for all indicators and an ABCI of 53.3.  Firms employing 20 to 99 are the most likely to increase hiring, although their ABCI is the lowest at 48.7.  The ABCI for businesses employing fewer than 20 was 49.2.

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After Carnival’s Shipwreck in Italy, We Take a Closer Look at the Company

The captain of the cruise ship, Costa Concordia, is accused of running the ship aground off the coast of Italy and then abandoning the ship as she sank.  He is in police custody in Italy legally charged with manslaughter and abandoning ship.

Witnesses say the captain was among the first to take a lifeboat to safety, effectively leaving the passengers and crew of 4,000 to fend for themselves.

The Costa Concordia is ultimately owned by Carnival Corporation, also the parent company of  Carnival Cruise Lines.  The shipwreck disaster has prompted us to take a closer look at the company.

Carnival Corporation and  PLC (its sister corporation) comprise eleven individual cruise line brands, operating a combined fleet of 96 ships.  Brands include Carnival, Cunard, Holland America, Princess, Seabourn and four others.

Carnival Corporation was initially formed in 1972.  After achieving its position as one of the world’s most popular cruise lines, the company made an initial public offering of 20% of its common stock in 1987. This provided an influx of capital that allowed the company to begin its expansion through acquisitions. In 1989 its first acquisition was the premium operator Holland America Line.  Others quickly followed.

The CEO and owner of controlling interest in Carnival is Micky Arison, son of the founder.  Arison was born in Israel of Romanian ancestry and now lives in Miami as an American citizen.  Forbes lists him as one of the world’s wealthiest individuals.  His compensation from Carnival in 2009 was over $7 million.

In 1988, Carnival Cruise Lines expanded into airlines with the purchase of Pacific Interstate Airlines, which was subsequently renamed Carnival Air Lines.  This venture ended ten years later in bankruptcy court with creditors holding the bag.

Carnival owner, Micky Arison, also owns the professional basketball team, Miami Heat.  Miami area governments built Arison a $250 million dollar waterfront stadium 10 years ago in exchange for a rental agreement.  Now 10 years into the rental contract, thanks to creative accounting by Arison, Miami has received no rent from the Heat or Arison, according to a columnist for the Miami New Times.

Then there is the fact that Carnival Cruise Lines shafted the City of Mobile, Alabama for $20 million.  After enticing the city to spend over $20 million for a cruise ship terminal facility, Carnival left town without even the good manners of a courtesy notice to local leaders.  It was a “Wham bam, thank you m’am” without the “thank you.”

At the website RipoffReport.com, over a hundred individuals have filed reports of being ripped off by Carnival.  I can believe that.

I suspect that the lawsuits following the disastrous shipwreck of the Costa Concordia might lighten the owner’s deep pockets.  However, if it gets too financially painful for him, he’ll probably throw the company into bankruptcy court and just walk away.

It’s his modus operandi.

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Sales of Small Businesses Up in 2011

BizBuySell.com, the Internet’s largest marketplace for buying or selling a small business, recently released its 2011 year-end report. The report, which aggregates data provided by participating business brokers, shows that small business sales were up slightly in 2011.

For 2011, the number of small businesses reported as sold to BizBuySell.com across the U.S. was 6,703, an increase of 3.3 percent over the 2010 total.  This follows a similar 3.0 percent jump in closed transactions from 2009 to 2010.

The slight rise in closed transactions was accompanied by an equivalent 3.3 percent increase in the median selling price, from $150,000 in 2010 to $155,000 in 2011.  Median revenue for sold companies was up by 6.7 percent.

“While 2011 continued to be a tough year for the nation’s small business owners, we were pleased to see that business performance is improving and more people are buying small businesses,” Mike Handelsman, group general manager of BizBuySell.com and BizQuest.com said.

In averaging the sales prices of the business that were sold, BizBuySell.com said the average revenue multiple for small businesses sold in 2011 was .60 and the average cash flow multiple was 2.36.  (For our article on how to estimate the value of a small business, click here.)

Service companies accounted for 38 percent of the businesses that were sold in 2011.  Retail businesses were 29 percent of the total, restaurants or bars were 23 and 4 percent were classified as manufacturing firms.

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Boeing Shows Its True Colors – Again

The former criminal enterprise currently known as Boeing has again confirmed its history of bad behavior.

In competing for the Air Force refueling tanker manufacturing contract, Boeing used just about every trick known to man, some of them illegal, to win the contest.

Boeing promised the people of Kansas that if they won the contract, the tankers would be built in Wichita.  This so fired up the politicians of Kansas that operating at full RPM in wild-eyed zealotry they accused anyone who supported Boeing’s opponent in the contest of being “un-American.”

It didn’t matter that the other manufacturer in the contest would have assembled the tankers in Mobile, Alabama, a city that most cartographers would locate within the United States of America.

Now surprise, surprise!  Boeing just announced that they are taking the tanker manufacturing out of Kansas along with over 2,000 jobs.  Never mind the promises.  “Adios Wichita.”

If this comes as any shock to the people of Wichita, perhaps a review of Boeing’s behavior in the tanker contest would be of benefit to our friends in Kansas.

It’s a sordid history including corruption, suicide and bungling.  It dates back to 2001 when the Air Force announced its intention to lease 100 new tankers from Boeing for $20 billion.

In May 2003, the Pentagon chief arms buyer approved the lease four days before he retired.  Sen. John McCain promptly criticized the arrangement and called it a “sweet deal” for Boeing that would cost taxpayers more than the alternatives.

In November 2003, Boeing fired Chief Financial Officer Mike Sears and Vice President Darleen Druyun.  Boeing said Sears had improperly offered Druyun a job while she was an Air Force acquisitions officer in charge of the tanker project.  One week later, Boeing CEO Phil Condit “resigned.”  Sears and Druyun were criminally prosecuted for their role in the tanker deal, convicted and sentenced to prison.

Early in 2004, Secretary of Defense Donald Rumsfield canceled the Boeing tanker leasing deal.

In September 2005, American-based Northrop Grumman teamed up with EADS (European Air Defense Systems) to participate in the competition to replace the Eisenhower-era tankers.

In January 2007, the Air Force issued a “final” request for tanker bids.  A few months later, Boeing and Northrop submitted bids.  In October, The Air Force’s number two acquisition official, Charles Riechers, was found dead in his home of an apparent suicide.  Riechers was working on the tanker program and was under scrutiny while awaiting Senate confirmation for another job.

In January 2008, Northrop confirmed that the tankers would be built in Mobile, Alabama should the Los Angeles-based company win the bidding.  The next month, the Air Force awarded the $35 billion contract for 179 tankers to Northrop/EADS.

Boeing promptly filed a loser’s whining protest.  The aerospace giant brought its considerable political clout to bear, attempting to convince the government that whining constitutes substance.  Three months later on March 10, 2008, the General Accounting Office upheld the Boeing protest, citing “significant errors” in the process.

Later in 2008, Secretary of Defense Robert Gates canceled the Northrop award and said the Pentagon would rebid the contract.  But he removed control over the process from the Air Force, saying his office would make the decision.  The Pentagon then released a draft request for another round of bidding.

Within days, Boeing filed a bullying complaint saying that it might bail out of the bidding unless it got additional time from the Pentagon to consider its offer.  The Defense Department yielded to Boeing and delayed the competition, effectively punting the decision to the Obama Administration which took office four months later.  President Obama asked Robert Gates to stay on as Defense Secretary and Gates agreed.  Gates returned control over the tanker process to the Air Force.

Long story short, Boeing won the contest with a low-ball bid and with the help of its superior lobbying efforts in Kansas and Washington.  And it didn’t hurt that Boeing’s corporate headquarters was in President Obama’s hometown.

Within months of winning the contest with their lower bid, Boeing announced that there would be significant cost overruns as allowed under the contract.

Now on top of that, Boeing is moving the manufacturing from Wichita.  They have said, in effect, “Screw you, Wichita.”

Note to wherever this outfit locates next: You are hereby forewarned that your new corporate citizen bears close scrutiny.

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90-Year Old Coppersmith Still Turning Out Lanterns

At 90 years of age, Bill Paulk still turns out handcrafted copper lanterns.

When Bill Paulk opened his coppersmith company in 1985 at age 64 he says it was as “a retirement business.” Now 26 years later at age 90, Paulk gives no hint of real retirement.

“But my wife doesn’t want me to advertise because it might bring in too much business,” says Paulk. The shop is a one man operation and Paulk turns out a hand crafted copper lantern about every four days.

His shop in Mobile, Alabama, has supplied ornamental street lighting for subdivision all over the country.

“I even have some of my lanterns in a residential development in Kuwait,” says Paulk, who explained that one afternoon a guy drove up to his shop in a big black Mercedes. “He got out and walked around for a while looking at the different styles of lanterns. For a while he didn’t seem real interested, but then he ordered a bunch of lanterns and peeled off a wad one-hundred dollar bills to pay for them. He shipped them to Kuwait where he was developing a subdivision.”

Paulk’s lanterns sell for a minimum of $350 with the top models bringing well over $1,000.

Before “retirement,” Paulk spent his career in sheet metal work. He worked with several local companies and did the sheet metal work for the first air conditioning system in the original Battle House Hotel and the Waterman Building, both regional landmarks.

“It’s been a good life,” says Paulk who seems as nimble today as men 30 years his junior.

Indeed it has.

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Real Estate Update: Home Prices Still Declining

CoreLogic®, a leading provider of information, analytics and business services, released last week its October Home Price Index which shows that home prices in the U.S. decreased 1.3 percent on a month-over-month basis, the third consecutive monthly decline.

According to the CoreLogic, national home prices also declined by 3.9 percent on a year-over-year basis in October 2011 compared to October 2010.

Mark Fleming, chief economist for CoreLogic said, “Home prices continue to decline in response to the weak demand for housing. While many housing statistics are basically moving sideways, prices continue to correct for a supply and demand imbalance.  Looking forward, our forecasts indicate flat growth through 2013.”

Highlights as of October 2011

• Including distressed sales, the five states with the highest appreciation were: West Virginia (+4.8%), South Dakota (+3.1%), New York (+3.0%), District of Columbia (+2.4%) and Alaska (+2.1%).
• Including distressed sales, the five states with the greatest depreciation were: Nevada (-12.1%), Illinois (-9.4%), Arizona (-8.1%), Minnesota (-7.9%) and Georgia (-7.3%).
• Of the top 100 markets measured by population, 78 are showing year-over-year declines in October, two fewer than in September.

Full-month October 2011 national and state data can be found at http://www.corelogic.com/HPIOctober2011.

Small Business Survival Index Ranks States for Entrepreneurship

The Small Business and Entrepreneurship Council has released its 2011 ranking of the states according to their public policy climates for small business and entrepreneurship in the “Small Business Survival Index.”

The Index stands out as a comprehensive measure of how friendly or unfriendly states are for small business in terms of public policy decisions. The factors included in the Index – taxes, various regulatory costs, government spending and debt, property rights, health care policies, energy costs, and much more – matter to the competitiveness of each state and to the well being of small business.

The 2011 Index has been expanded to cover 44 major government-imposed or government related costs affecting small businesses and entrepreneurs. The measures are  added together for an overall rating.

The top 15 states are: 1) South Dakota, 2) Nevada, 3) Texas, 4) Wyoming, 5) South Carolina, 6) Alabama, 7) Ohio, 8 Florida, 9) Colorado, 10) Virginia, 11) Washington, 12) Mississippi, 13) North Dakota, 14) Utah, and 15) Arizona.

Meanwhile, the bottom fifteen are: 37) North Carolina, 38) Maryland, 39) Hawaii, 40) Illinois, 41) Iowa, 42) Massachusetts, 43) Minnesota, 44) Connecticut, 45) Maine, 46) California, 47) Rhode Island, 48) Vermont, 49) New Jersey, 50) New York and 51) District of Columbia.

Any surprises for you?  I was surprised to see North Carolina ranked low.  I thought they were pretty business friendly.  All comments are welcome.

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William Bruce is a business broker and appraiser.  He currently serves as president of the American Business Brokers Association.

He is available nationally to assist with issues of business valuation and the transfer of ownership interests in privately held businesses.

What is Business Goodwill?

As a business broker and president of the American Business Brokers Association, I’m often asked about business goodwill.

There appears to be a bit of confusion about the term.

It’s fairly simple.  Goodwill is an intangible asset of an ongoing business.  It is intangible as opposed to the tangible assets of a business which may include furniture, fixtures, equipment, inventory and real estate.

What creates goodwill?  Many factors may contribute to the goodwill value of a business.  Such considerations as the company’s reputation, size and loyalty of the customer base, number of years in business, market penetration and brand awareness can all create goodwill.

In addition, such things as proprietary products and also agreements giving the business exclusive rights to sell products or deliver services in an exclusive territory can definitely enhance the value of goodwill.

Outstanding employees who are highly trained and motivated also lend goodwill value to a business operation.

In fact, any intangible situation in a business, whether subtle or not so subtle, which gives the business some competitive advantage will add to the goodwill value of the company.

Although goodwill is an intangible asset, it can be calculated as a definite dollar figure.  This is the way it’s done:

• Let’s say ABC Corporation has a business appraisal done on the business to determine the total market value of the company.  The appraiser of the company will use several methods of valuation to compute a total value of the business.  (For our article on using rule of thumb guidelines to estimate the value of a business, please click here.)
• Once the total market value of the company has been determined, we can easily calculate the value of the goodwill asset.  You simply subtract the value of the tangible assets of the company as outlined in the written appraisal (which may include furniture, fixtures, equipment, inventory and real estate) from the total market value of the company.  The difference is goodwill.
• For example, if ABC Corporation has a total market valuation of $300,000 with tangible assets of $200,000, then the value of goodwill of the company would be worth $100,000.

Is goodwill the same as “blue sky?”

Absolutely not.  (At least not to this business broker with graying hair who has “seen it all” – or almost all.)

Goodwill is an accepted business and accounting reality that is validated by CPA and law firms worldwide.  Goodwill lends definite and quantifiable value to a business entity.

Blue sky connotes – at least to me – something that is essentially worthless.

Any questions?  Or comments?  All are welcome and encouraged.

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William Bruce is an Accredited Business Intermediary and currently serves as president of the American Business Brokers Association.

His practice includes consulting nationally on issues involving the valuation and transfer of business interests.  He may be reached at (251) 990-5910 or by email at WilliamBruce@bellsouth.net.

The Business of Beer

“Without question, the greatest invention in the history of mankind is beer.  Oh, I grant you that the wheel was also a fine invention, but the wheel does not go nearly as well with pizza.”                       -Dave Barry

Beer is a huge worldwide business.  With Oktoberfest just celebrated, an event
involving copious quantities of beer, I thought it might be an appropriate time to take a look at the business side of the brew.

Beer is the world’s most widely consumed and probably oldest alcoholic beverage; it is the third most popular drink overall, after water and tea.

Interestingly, the Czech Republic is the world’s largest per capita consumer of beer.  Folks there each consume 42 gallons per year of the brew.   In second place – no surprise – is Ireland where those jolly folks annually drink 32 gallons per person. Rounding out the top five counties in consumption are Austria, Germany and Romania.

The United States actually ranks 15th in the world in per capita consumption.  We quaff an average of 21 gallons of beer per year which is slightly more than the average American person drinks in milk.

Within the U.S. it’s surprising that the top three states in per person consumption of beer are New Hampshire, Montana and North Dakota. What gives with that?  It’s cold as the
dickens in those states.  You would think that the hottest states would be the top consumers.  My personal consumption skyrockets in August to help me survive the dreaded month in Alabama.

As you might imagine, the citizens of the Mormon dominated state of Utah consume the least amount of beer.

The largest beer company in the U.S. by far is Anheuser-Bush, brewers of Budweiser,  which has captured 48 percent of the market.  MillerCoors is in second place with 29 percent of the American market.  The remainder of the market is scattered among smaller brewers with Pabst at three percent of the market and my favorite, Yuengling, garnering one percent market share.

Anheuser-Busch Companies, Inc. was an American brewing company which operated 12 breweries in the United States and 18 in other countries.  In 2008, Anheuser-Busch was acquired by InBev, a large Belgian and Brazilian brewer for $52 billion. The acquisition created the world’s largest brewer, uniting the maker of Budweiser and Michelob
with the producer of Beck’s, Stella Artois, Hoegaarden, Leffe, Bass, Labatt and Brahma.
The combined companies have yearly sales of more than $36.4 billion.

Not everyone was pleased with the sale of Anheuser-Bush to InBev.  Shortly after the sale, one industry watcher said, “Within six months, InBev turned a family-led company that spared little expense into one that is focused intently on cost-cutting and profit
margins, while rethinking the way it sells beer.”

Anyway, if I run into you in the neighborhood beer joint, maybe you could buy me a beer during my next elbow aerobics class!

Banks Listed Strongest to Weakest for Mobile and Baldwin Counties, Alabama

Banks are often placed on a pedestal, but they are like any other kind of business; some are stronger and better managed than others.  And also like other types of businesses, many have been hurt by the Great Recession.

It’s been a while since we visited the local banking situation, so we offer this update.

One publically available bank rating service is Bankrate.com.  This system employs more than 20 tests to measure the capital adequacy, asset quality, profitability and liquidity of each rated financial institution. Individual performance levels are determined from publicly available regulatory filings and are compared to asset-size peer norms, industry standards and key benchmarks. Combined results form the basis for the star ratings.

Bankrate.com evaluates the financial condition of institutions and assigns a 1-to-5 star rating with five stars representing the highest rating. Institutions with satisfactory performance will generally receive a rating of three or better stars with the majority of banks falling into the three- to four-star range.  Ratings are believed to be reliable but the information is not guaranteed. In addition, events since the information was collected may have altered an institution’s financial condition.

Interestingly, there are no top rated 5 star banks operating in Mobile or Baldwin County.  However, the following ratings are from the latest reports of Bankrate.com as of June 30, 2011:

4 Stars (sound, indicative of a sound financial condition):

• Century Bank
• Iberia Bank
• Merchants Bank
• PNC Bank (acquiring RBC locally)
• State Bank & Trust
• Wells Fargo Bank
• Whitney Bank (being acquired by Hancock Bank)
• Woodforest National Bank

3 Stars (performing, indicative of a generally satisfactory financial condition):

• BB&T
• BBVA Compass
• Bryant Bank
• Commonwealth Bank
• Community Bank
• First Community Bank
• Hancock Bank (acquiring Whitney Bank)
• National Bank of Commerce
• Regions Bank

2 Stars (below peer group, indicative of a below average financial condition):

• Bancorp South
• BankTrust
• Citizens Bank
• RBC Bank (being acquired by 4 star rated PNC Bank)
• Synovus Bank (doing business locally as Coastal Bank & Trust)
• United Bank

1 Star (lowest rated, indicative of a significantly below average financial condition):

• Bay Bank
• First National Bank of Baldwin County
• Heritage First Bank
• Vision Bank

Again, keep in mind that these ratings are based on information furnished by the banks as of June 30 of this year.  Things could have changed since then.  And there are other bank rating services whose rankings could differ.

Also, it is important to realize that some of the lower rated banks may be subsidiaries or affiliates of higher rated institutions.  For example, Vision Bank is affiliated with the 3 star rated Park National Bank in Ohio.

Does size matter?

 Apparently not much, at least in the banking world.  There are strong and weak banks among both the largest and smallest of banks.

In Mobile County, the 10 largest banks based on deposits as of June 30 are listed below. Each bank’s percentage (rounded) of the total money on deposit in the county is also shown:

• Regions Bank  38%
• RBC Bank  12%
• BBVA Compass  12%
• Wells Fargo  9%
• BankTrust  9%
• Whitney Bank  5%
• BB&T  3%
• First Community Bank  2%
• Hancock Bank  2%
• Iberia Bank  2%

The leftover balance of total money on deposit in the county, the remaining 6 percent of all deposits, is split unevenly among the other 17 smaller banks.

The smallest bank in Mobile County by a long shot is Woodforest National Bank, which is found only in a few Walmart locations.  In size based on deposits it is miniscule, but it is rated as one of the soundest banks in the area.