Value your business

For young, new-to-industry brokers, succession planning may be something for the future. For some mature brokers, announcing their retirement and selling their business can’t come soon enough.

Jeff Zulman, managing director of Book Buyers Brokerage, warns a broker’s need for a succession plan may hit earlier than expected, through circumstances outside their control.

“At that stage it’s too late to start preparing a succession plan and often hasty and desperate results follow,” Mr Zulman says.

“If a broker wants to maximise the value of their years of work, or simply ensure that in the event of a tragedy, illness or accident, there are others ready to fill the gap, then a succession plan is a great idea.”

Connective director Glenn Lees says a succession plan can be developed by brokers with any level of experience – and doing so inevitably leads to a higher value for your business.

“It will force you to put things in place along the way, such as good systems and good policies to keep customers on your books,” he told The Adviser.

“If you’re not thinking about succession, then you probably don’t have a plan – the doors to your business will still open every day, but without that purpose in mind your chances of success are less.”

The broker life cycle

Mr Zulman says there isn’t really a typical life cycle for a broker, but notes the common stages they may face in their careers.

The first few years are simply about surviving, building a base and a niche – the early development phase.

The next few years usually involve the development of the broker and their business – moving into new offices, hiring professional staff and starting to market what they have to offer – the growth phase.

Then follows the expansion phase: here the broker works to transition from a personal services brokerage to a fully-fledged business “which is larger and independent of the founder or principal”, Mr Zulman adds.

For those who persevere through the earlier phases, the next step is the corporatisation phase. Mr Zulman says it is at this point when the business “evolves beyond the elementary systems and processes to develop centres of excellence, its own unique intellectual property, a strongly identifiable brand and potentially a host of allied products or services”.

“Finally, there is what I term the harvesting phase,” he says. “Here, the owners enjoy the fruits of their labour – either through a stream of dividends from a recurrent income stream, or possibly from an exit through a trade sale, merger or listing.”

Measuring value

Before a broker executes their succession plan, a valuation of their business should take place. Mr Zulman says the valuation should be carried out by an independent specialist who has methodologies and experience from reviewing similar businesses.

“One of the most common mistakes brokers make when valuing their business is getting an accountant or someone with no industry understanding to perform the task,” he explains.

“I cringe when I am occasionally called by an accountant who has been paid good money to do the job, and I can tell from the questions they are asking that they have no idea about the key drivers in the brokerage industry.”

According to Mr Zulman, the trail book is generally the single largest tangible asset of a brokerage and is quick and easy to value. “We have developed an indicative loan book valuer, a free tool on our website, that allows brokers to determine a value range for their trail book.”

The valuation model used by Book Buyers Brokerage uses algorithms based on key components affecting the value of a business and which are designed to determine the current value of the business’s future cash flow.

“The benefit is that it gives a broker a fairly objective way to stop and measure what they have achieved,” Mr Zulman says. “It also allows them to focus on which areas are really important in building sustainable value and to identify where they are strong and where they are deficient.”

He says the valuation process is no different to an athlete occasionally undertaking a performance test – it won’t make the training any easier, but it will allow them to measure progress and to step back and review what they have achieved.

Mr Zulman suggests brokers value their business once every three years, and avoid placing too much value on intangible assets.

“At the end of the day, you can have the coolest logo, the friendliest staff and the catchiest URL – but they are pretty worthless if you don’t make money.”

Mr Lees says Connective values its brokers’ businesses by looking at things such as their profitability, loan volumes, the amount of investor loans written compared to the amount of owner-occupier loans – “all the things a savvy buyer would be looking for”.

“We can put all this data into our systems and give brokers detailed information about the composition of their book, the age of it and so on,” he says.

“It means that if brokers are aware of these things, they can fix the parts of the business that need improving.”

High demand

As mortgage broking has matured and moved from a “cottage industry” into a profession and as larger broker groups have emerged, Mr Zulman says the number of valuations being carried out in the third-party channel is rising.

“Also, with the increase in M&A activity as planners and accountants and brokers increasingly come together, or people look to retire or to sell out, there is an increased need for valuations.”

Jeremy Fisher, director of 1st Street Home Loans, says the mortgage industry is ageing and there are many brokers looking to leave it.

“There are also brokers who aren’t yet at retirement age, but who have mature businesses that they’d like sell in full or in part,” Mr Fisher says.

Having been in the broking industry for 13 years and watching it grow, Mr Fisher became aware of several mature brokers keen to sell their businesses and found that the way of calculating the market value seemed to undervalue them.

He felt there was room for a new group to move into this space and offer a fairer value for brokerages and, together with nMB founder Sal Cinque, formed The Broker Group late last year.

With an aggressive growth strategy built on mergers and acquisitions, Mr Cinque says the objective is to build a national and profitable broker business by filling market gaps.

“Succession planning options for brokers are limited today,” he told The Adviser, “whether brokers are looking to unlock expansion capital for further growth or they are looking for a viable exit strategy.

“Industry-accepted valuation models do not factor goodwill or intellectual property that has been developed within these businesses over the years.”

Mr Cinque says The Broker Group uses two models to fill gaps in the market for succession planning.

One targets mature brokers growing successful businesses who want to realise some equity by selling down 10 to 20 per cent of their business.

“They will receive a multiple that far exceeds what is readily available today,” Mr Cinque says. “That will be based on the strength of the business.”

While using the capital to further grow their business, these brokers will also be offered equity participation in the overall group as part of the arrangement.

“An SME broker does a great job in building their business, but doesn’t usually hold a position in something greater – this will provide a vehicle for that.”

The Broker Group also targets brokers looking to exit the market.

Whether it’s today or in two or three years, Mr Cinque says the group can assist brokers with a viable option to sell their business as a going concern and for a value that far exceeds industry standard loan book multiples.

“It also provides the opportunity to introduce new talent to the broker industry,” he says. “The Broker Group targets individuals with experience and technical ability, but who are perhaps not in a position to leave a PAYG situation for a commission only model.”

Mr Fisher says he valued 1st Street Home Loans using The Broker Group method.

“The valuation took into account the value of the loan book, the longevity of the client list and the goodwill in the business, including referral sources.

“It used a higher [selling] multiple than the current industry standard in order to represent what the business is worth as a going concern.”

Value-adding

Having multiple revenue streams is a great way for brokers to add value to their businesses, according to Mr Fisher.

“Businesses need enough focus to create specific and successful revenue streams, and enough diversity to be in the position that if one revenue stream reduces, then there are other streams to support the continuity of the business,” he says.

“A business is more valuable if it has proven to be robust and resilient over its lifetime with multiple cross-sell opportunities within the business.”

Choice CEO Stephen Moore says the group works with each of its broker’s businesses across key value drivers – the client value proposition, strategies for attracting and retaining clients and the quality of systems and processes – and tailors support that meets their needs.

“When it comes to new clients, we help them generate leads and referral sources, as well as local area marketing,” Mr Moore says. “When it comes to retaining clients, we look at their use of Podium and CRM, which is the most valuable tool for client retention and communication.”

Choice also helps brokers improve their revenue per client – another key value driver. Mr Moore says this is where diversification has a big role to play.

“We help each business find where they’re at across those key value drivers. From my point of view, the value kicker is taking a broker’s business from being reliant on them alone to helping it move towards a business that can extend beyond the principal.

“Any buyer is going to look at how they can continue the business without the principal, so things like branding and processes come into focus.”

Connective’s Glenn Lees says the fundamental way the aggregator helps its brokers add value to their business is through its agreement structure.

“We recognise that the broker owns the book and they can transfer it to whoever they want – if they want to transfer to a different aggregator, they can,” he says.

Because a broker’s trail book is transferable, Mr Lees believes it holds a lot more value than one that isn’t.

“The other way we help brokers add value to their business is by offering industry leading systems and platforms to operate their business.

“Someone who’s looking to buy a business looks for good compliance, end-to-end record keeping – one that operates in a simple, effective manner. If you can help brokers achieve this for their businesses, we believe they are worth more.”

Selling, exiting and joint ventures

Mr Lees says that because Connective is a large and well-established business, its depth of industry connections means it’s easy to put purchasers in touch with sellers and vice versa.

“We’re very happy to facilitate these transactions,” he says. “We’re not concerned about our brokers who want to sell – the day they join us, it’s about us underpinning their success and if that means exiting, we have to be committed to helping them all the way through.”

Mr Moore says that when it comes to providing brokers with advice and support on how to exit, Choice looks at all the available options.

Joint ventures are one of the options that Choice has been quite active in establishing between broker businesses.

“It’s really a matchmaking service – we help tee up like-minded business owners, then help them complete the transition,” he explains.

“The reason why that’s increasingly important for many brokers is because of the personal nature of the relationships they have with their clients – they want to make sure it’s a smooth transition and that their business goes to someone that they trust.”

Based on broker feedback, Choice has also implemented a buy-and-sell program, but only sells to other members in the group. Mr Moore says the program gives brokers proof of their business’ key value drivers, as well as confidence in knowing they are selling it to someone they know and trust.