The twin pressures of succession planning and increased regulatory burdens have caused many bank owners to consider selling their banks.

What is the best way to sell your bank? Often a buyer is found from long-standing relationships and shared visions for community banking. A desire to keep a bank or at least a branch in a community weighs heavily in the decision, and a wish to protect employees is also a factor. This might lead to one-on-one negotiations with another bank, but an auction or bidding process has become very popular in recent years. In many ways, this is the best means to find the best price for your bank. A classic auction from years gone by illustrates how an auction can generate the best price.

Over 20 years ago, I was involved in a unique auction process that has withstood the test of time. Even so, to my knowledge, this process has been used only once. The sale was conducted at a time when bank prices were not as rosy as they are today. Because of the dearth of banks for sale, the auction attracted a lot of interest. A number of banks were selected to participate, sent bid packages consisting of financial information about the bank and other key data, and invited to attend a bid meeting.

At the bid meeting, approximately a dozen bidders were assembled in a large conference room at a number of small tables. Some bankers came alone, others brought along their outside accountants or lawyers.

The bidding was conducted in rounds. Each bidder was asked to express its bid in terms of a multiple of the stated book value. If a bidder did not want to bid (and this turned out to be the key), it was asked to simply write “pass” on the bid card and turn it in.

For the first round, a minimum bid of just over 1x book value was set. Each bidder completed a bid card and turned it in. All of the bids were reviewed, and no one had made a bid! All had passed. The results were not announced, and for the second round, no minimum bid was set. The second round produced a number of bids and many passes. At the end of the second round, the high bid was announced and the next round commenced.

As round followed round, more bidders passed. Because of the phantom bidders, those still in the bidding had no idea how many competitors there were for the bank. After several rounds, the highest bidder had offered a multiple of book greater than the minimum set at the beginning of the first round.

If this process were to be duplicated today, perhaps a better course would be to announce that the seller has an undisclosed minimum that must be met.