Why New Business Models For US Banks?

Reportedly, second and third quarter was an impressive period of significant improvements for the US banks, but still we get to hear some news about the stocks of large banks that declined by more than 20 percent. This is happening since the beginning of the third quarter and four out of every five people are trading below the book value. Do you know why?

Here's a sneak-peak....

While some commentators blame the fear of double dip recession or may be Europe's sovereign debt crisis, McKinsey Quarterly has tried to draw attention to three additional factors. The undermining issues brought to light by this business journal include the new bank capital requirements initiated under Basel III international-banking regulations, impact of new US banking regulations retorting to financial crisis, Dodd-Frank Act, and continuous deleveraging of customers.

As per the estimates, if these banks continue following the current business model, their average ROE (Return on Equity) is expected to fall from 11% to 7% by the year 2015. Moreover, the investors are also willing to see bank management teams to put forward trustworthy and far-reaching plans to fill this gap. This is the current scenario, but what next? Let's find out.

What does the current status implies?

Out of these three factors, Basel III requirement is the most significant, since without justifying actions, they could reduce ROE of some banks by 5%. And that is why, it is being estimated that US banking system will require almost $500 billion in retained earning or may be an absolutely new equity to meet new standards. The second threat is also stepping forward slowly, as an amendment caps fees on payments and there is also a requirement to move many Over-The-Counter (OTC) businesses to clearing houses. This will probably lead to more expensive and complex day-to-day operations.

Then the next threat is all about unwinding of consumer debt and according to the analysis, when excessive borrowing becomes the principal cause of recession, businesses tend to spend next eight years to restructure their balance sheets. So, there is a very little prospect for the companies to return from those borrowing levels and some may never even return.

Therefore, banks must constrict the most out of all the capital cash especially that they have been neglecting from more than a decade. In fact, linking to risk adjusted capital usage would prove even more helpful in such a scenario.

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Planning Effective Exit Strategies For Business Owners

Today, many business owners are finding it increasingly difficult to retire due to a lack of an effective exit strategy and planning. Contracting cash flow in a tough economy, declines in net income and the credit crunch have all conspired to force many business owners into a fight-or-flight mindset.

Several companies have successfully compensated by trying to expand sales and cutting costs. Many small to mid-sized companies, however, have experienced a drop in value, with no end in sight.

Owners are also entering the chapter in their life when exiting their business in one way or another is becoming more probable. Unfortunately, the business may not be currently worth what they need it to be to successfully exit.

Or what very often happens, is the business owner wakes up one morning, so to speak, and decides that they don't want to run the business anymore and often decides the fate of the business without any careful planning.

The reality is that selling or exiting a business, is probably the single most important decision an owner will make. Instead of blindly hoping to sell their business "one day," an alternative is for the business owners formulate a thoroughly planned exit strategy in order to sell or transfer their business for maximum value or compensation in the most tax-efficient method.

Creating an exit strategy, a process which takes three to five years, is the most significant step a business owner can make. All businesses are different and all business owners are different, therefore the exit strategy must be integrated with the owner's objectives and requirements.

Is it a "lifestyle" business that produces revenue which does not need to be sold? Can the business be transferred over to a family member or key employee, or will it be sold to a third party? If a business owner is entering the stage in life when they need to be planning their exit, here is what they should be attentive to:

Define Objectives

Before you formulate your exit strategy, you must know when you want to leave your business, to whom you want to leave it to and how much money you hope to get from the transaction. Formal retirement planning and the creation of a life goal statement should be the first steps in this process.

Ascertain Value and Cash Flow

Regardless of who you are selling your business to, if your payout will come from future cash flow, then future cash flow is more important than current value. You can use many reliable valuation methods to estimate your business' value. A formal valuation can come later.

Build Value

This step decreases the risk linked to owning your own business and helps improve the outlook for future growth. Setting your business up to operate without you, through improving the dedication of key employees, systematizing your business to run on autopilot, expanding market share, diversifying revenue sources, and growing corporate leadership, can significantly increase your businesses value.

Establish a Successor

The process of transferring your business takes time the sale will continue even after the deal is confirmed because future payouts are usually necessary. The transaction is completed once the agreed price is fully paid. Careful planning is required to successfully manage a sale to insiders who frequently are short of the necessary capital for a total cash buyout.

Conserve Wealth

Selling your business will create income for you, your family and the Internal Revenue Service. Cautious planning must be employed to diminish taxes, and preserve the accumulated wealth.

Exiting a business is probably the most important decision a business owner will make. They usually only get to do it one time, and all of the many years of hard work, risk and dedication is being realize with one event.

Regardless if an owner is transferring it to an insider or selling it to a third party, careful planning and consideration must be taken over an extended period of usually 3 to 5 years. It is a process that is driven by the owner and accompanied by a team of advisors that may include their financial advisor, accountant, business attorney, estate planning attorney, and so on.

It is also important that one of the advisors is thoroughly experienced with the process and can help the owner along through the required steps.

Steve Zeller and Trevor Kern are investment advisor representatives and registered representatives of Commonwealth Financial Network, Member FINRA/SIPC. Advisory Services offered by Zeller Kern Private Wealth Management, one of the leading Sacramento Financial Planning firms and a Registered Investment Adviser separate and unrelated to Commonwealth, located at 11335 Gold Express Dr, Gold River, CA.

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