Bumping up your business value

It’s not really a question many brokers ask themselves until they start succession planning (and even then, it’s said that over half of all family businesses have no documented succession plan in place and no retirement plan for the current chief executive) – but it’s a fundamental question that all brokers should be asking themselves.

The new year is therefore the ideal period for brokers to prioritise their own businesses, re-evaluate their future prospects, and embed an airtight succession plan to ensure that their brokerage can prosper with and, crucially, without them. 

Prior planning prevents poor performance

Nick Young, director of trail book lender Trail Homes, advises brokers “start with the end in mind from day one” and design a succession plan when they first establish their business. However, it is never too late for brokers to bolster their business’ value, regardless of whether it is an established or fledgling brokerage.

To avoid key person risk, brokers could embed detailed systems and processes that are followed by all employees and define how the work is conducted. The systems and processes would need to evolve in line with the changing market to avoid becoming outdated.

Brokers could also recruit additional staff (including other brokers), provide training and support, and subsequently withdraw from the brokerage.

“By doing this, they will become less of a key person in the business, maybe even to a point where they’re not a key person at all,” - Nick Young, director, Trail Homes

“That makes it very easy for somebody else to come in and purchase the business.”

Having a thorough understanding of aggregator and staff agreements, and legal structures is also crucial, to ensure you know who owns what to avoid any nasty surprises if and when it comes time to sell or value your company.

This is a particular priority for those brokers deciding to imminently hang up their boots after a long stint of running their brokerage. Indeed, more brokers are expected to retire in the coming years, as the broking industry comes to maturity. Research from Trail Homes shows that the volume of brokers retiring had risen steadily since September 2020 and surged in early 2021, with Mr Young suggesting the increase in retirement-driven trail book sales could be partly attributed to “natural attrition”.

Many brokers could choose to sell their business to build a healthy nest egg and fund their retired lifestyle (particularly for unsalaried brokers not receiving superannuation). That illustrates the need for the business to be a saleable asset, without comprising on its value. The last thing a retiring broker would want is to resort to a fire sale because of diminished value.

This would require brokers to be proactive rather than reactive, have vision for their business, and embed a succession plan that not only safeguards the business but provides a clear picture of its potential saleability should they wish to exit.

However, amid the daily rush of growing their business and servicing their clients, implementing a succession plan may have fallen off brokers’ radar. Some brokers could postpone it because of their emotional attachment towards their business (after all, building a brokerage from scratch is a labour of love), making it difficult for them to consider handing the reins over to someone else. For others, it might be something that has always been on the “to do” list but never quite makes it to the top.

To combat this, brokers could discuss a phased transition arrangement with the buyer where they would scale back but continue to participate in the business through a low-involvement loan writing arrangement.

Furthermore, nurturing client relationships by implementing a marketing strategy and regularly communicating with them could be key to increasing saleability and rendering the brokerage indispensable.

“Having a regular program of contacting your clients, and conditioning your clients to look to you as a service provider would make it much easier for somebody else to come in and just pick up that program and continue to build on it,” Mr Young says.

“If the only thing that kept clients wedded to the brokerage is that they liked the key person for whatever reason, there’s no reason to be dealing in that business anymore once that person is gone.”

Preparing for the unexpected

“What do you do when you’re the only broker and you’ve got a hundred million [dollars] of mortgages in your queue?” -  Louisa Sanghera, director and broker, Zippy Financial 

Aside from retirement, unexpected life events could trigger the sale of a brokerage, underscoring the need to always have a solid succession and business plan in place.

Louisa Sanghera, director and broker of NSW-based brokerage Zippy Financial, recently told The Adviser’s Elite Broker podcast that this was brought into sharp relief for her after she found herself having to work from the intensive care unit in hospital when suffering from heart failure.

“I was in intensive care and everything. I did take a day off the day I had the heart failure but day two, I was sat in intensive care, on my laptop, doing the mortgages, which is absolutely ridiculous…,” she said.

“What do you do when you’re the only broker and you’ve got a hundred million [dollars] of mortgages in your queue?

“I’ve got amazing staff, but I’m the one that has to sign that document,” Ms Sanghera added, highlighting that she is now working on hiring other brokers and working on succession planning this year.

Having a sale-ready business is also important for those wanting to take advantage of any opportune purchase offers from interested parties.

For example, former Time Home Loans director Ruan Burger decided to sell his Brisbane-based residential mortgage brokerage in March 2021 to broker and Cliff & Moss founder Johnathon Reeves.

Although Mr Burger focused on residential mortgage services, he was finding that clients interested in commercial loans were seeking his input, at which point he would refer them to other brokers.

“There were lots of clients who felt they would love for us to do everything. We didn’t have to go and look for that commercial business; it just became part and parcel of our business,” he told The Adviser.

While Mr Burger realised that diversification was necessary for the business, he did not wish to embark on that path himself as it would have taken time away from his family.

“Therefore, when the offer came to us to sell, it just made sense to us to allow Time Home Loans the opportunity to keep growing,” Mr Burger said.

Mr Burger remarked that he has always reassessed business performance every five to seven years “to take stock of the business and see if it is a saleable asset”.

“If it is not, we ask ourselves what we’re going to do for the next five years to make it one so that if our personal or family circumstances change, we have that option to at least consider a sale,” he explained.

Knowing your worth

As Mr Burger indicates, there are strategies brokers could implement to enhance the value of their business but this would require goal setting and considering how their business could contribute to kicking those goals.

These goals could be based on personal factors such as lifestyle, family, and health and wellbeing. Or, it could be achieving certain financial goals before exiting their brokerage (such as building a $1 billion loan book or writing $100 million in loans a year), or accumulating the wealth required to enjoy a particular lifestyle in retirement.

The next step is to evaluate the business’ worth. Valuers have traditionally determined the worth of a brokerage based on the value of intangible assets (rather than physical assets) such as trail books and trail income, considering factors such as geographical location, the age of the book, and the currency of transactions.

Trail book funder TrailBlazer Finance says that it has been selling a record number of trail books at record high prices in the recent past amid high buyer demand, with six to seven buyers in the market for every seller.

Managing director Jeff Zulman partly attributed this uptick to increased uncertainty during the COVID-19 crisis, which forced some brokers to reconsider whether they wished to remain in the industry, recruit more staff, and purchase other books, or exit the industry altogether.

“We are seeing a seasonal generational change where the early single operators are growing older and exiting because they don’t want to deal with the increased regulation anymore despite being compliant,” he tells The Adviser.

While valuers typically apply a multiple of trailing commissions of between 1.5 to 2.5 times the trail value, Mr Zulman has forecast that this could rise to three times annualised trail.

“What we are seeing is that others who had been toying with the idea of selling their trail book have gone ahead with the sale when they learn that books have been selling at higher multiples,” Mr Zulman says.

In addition, as larger broking groups continue to consolidate, they are evolving into professional businesses with CEOs or managing directors at the helm, who may not write any loans but focus purely on the business operations.

“They move away from transactions and are looking to acquire books and businesses,” Mr Zulman says.

“The mortgage broking industry is going to continue to consolidate and add multiples that I don’t think we’ve seen before.” -  Jeff Zulman, director, TrailBlazer Finance

Because the trail book is fundamental to determining the value of a brokerage and is a reflection of the goodwill that has been generated in the business, many in the broking industry remain concerned about the upcoming 2022 broker remuneration review, which will assess the potential impacts of removing trail, and the viability of continuing upfront commission payments.

Mr Young warns that removing trail commissions could significantly devalue a broker’s business. However, other components that determine the business’ value include the quality of the client database, borrower performance, loan type and sizes, loan seasoning, credit limits, the choice of lenders, technological tools, effective processes and systems (including CRM systems), clawback history, drop-off rates, brand value, and reputation.

Boosting the value of a brokerage

Once a broker has ascertained their business’ value, they could proactively bolster it by enhancing the quality of their client database and referral arrangements, increasing the profitability of the business, upgrading their physical assets (if they have any), and updating their technological tools, processes, and systems (for tasks such as financial management or loan processing, human resources, and IT, whether in-house or external).

Selecting the most appropriate buyer is key when it comes time to hand over the reins, and as such, selling to a larger business could ensure that a broker’s business remains sustainable and flourishes under the new ownership.

For example, if the seller is writing $2 million and the buyer is writing $5 million in loans a month, the seller could reasonably expect the buyer to sustain their level of loan writing and customer service, with the buyer having the resources and skills at their disposal to continue to increase loan volumes in the business.

However, no matter what strategies brokers proactively implement to increase their business’ value, they must accept that it is not a precise science and can vary from business to business. Additionally, maintaining realistic expectations about value is key because businesses could risk remaining on the market indefinitely if the price is exorbitant and disproportionate to its value.

Avoid the succession plan rush

Whatever the driver may be for a broker to sell a business, it is not a decision that should be made lightly or hastily.

Designing a well-considered succession plan and a comprehensive handover process based on advice from a number of professionals including accountants, aggregators, trail book buyers, and even staff could maximise the sale price and ensure a professional, smooth transition.

Top tips for succession planning

1. "If you have the right mindset, you can always build another business after selling yours. The hardest part of selling the business is passing on the staff that you’ve become so close to and care for, who almost become like a chosen family." - Ruan Burger, owner, Success and Broker
2. "SME owners have to pay capital gains tax (CGT) when they sell their business but there are tax breaks that could potentially reduce or even negate the CGT you have to pay. This is why it’s so important to speak with your accountant if you’re thinking of selling your business." Nick Young, director, Trail Homes
3. "Increase your business value by recruiting professional talent and nurturing and mentoring them because they could become a valuable business asset, increase your business value, and fetch you higher multiples. They could even purchase your business themselves." Jeff Zulman, director, TrailBlazer Finance