In this instalment of our Growing your Brokerage series, The Adviser finds out how brokers could successfully merge with other brokerages to achieve operational efficiencies and scale, and why sharing a common vision is critical for the newly merged business to thrive.
There has been a whirlwind of activity in the home loan space as brokers write record levels of mortgages and ramp up recruitment for additional staff to help meet skyrocketing client demand. But as brokers spend long hours operating their brokerages and struggle to strike a balance between their personal and professional lives, many brokers have been turning their minds to scaling their business to improve productivity, reduce work hours to achieve that elusive work/life balance, and, of course, increase profitability.
There are various paths to scalability depending on a broker’s goals and circumstances. Some brokers opt to purchase client books (often borrowing against the mortgage trail book) to diversify their business and increase their footprint. While this could be an effective method to acquire clients and grow a business rapidly, brokers must be prepared for the long lead time to expand a client book effectively.
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For other brokers – particularly sole traders – a more attractive route might be to opt to merge with another brokerage and form a partnership. For example, in 2018, Victoria-based broker Nicola Tucker did just that when she joined director Lanie Conquest at her Torquay-based brokerage Surf Coast Finance.
Ms Tucker met Ms Conquest around 18 months into her stint as a Loan Market franchisee, and immediately “hit it off”.
However, it would be another six months before the duo formed a business partnership under the Surf Coast Finance brand, where Ms Tucker would go on to become the second director.
“I’d say we ‘dated’ for the first six months, where we just worked together,” Ms Tucker said on The Adviser’s Elite Broker podcast.
“We shared services, we shared our team but still traded under separate brands so we could get a feel for whether it was going to work or not”, Ms Tucker says.
During those six months, Ms Tucker and Ms Conquest tested the waters to gauge how their relationship would work, and ironed out the details about how to distribute leads.
Because Ms Conquest had already established the brand and the website, she and Ms Tucker did not have to build the business from scratch. Rather, they mapped out a plan and process around how the business would operate under the partnership, and sought advice from a lawyer and an accountant.
Once they formed the partnership, Ms Tucker and Ms Conquest informed their clients about the new brand through emails and social media posts, while underscoring that their service offerings had not changed.
What to consider when scaling up
Before forming partnerships or merging with another brokerage like Ms Tucker did, best practice from the Australian Taxation Office dictates that directors must assess the timing of the decision, which would depend on the characteristics of the businesses, including its growth stage, staff, and unique challenges and opportunities.
A change in the business structure could enhance a brokerage’s internal processes, provide complementary resourcing, allow it to pursue new trail books (and new clients), a competitive advantage in the market, intellectual property, facilitate entry into new markets, and provide new opportunities in the mortgages space.
However, while this sounds ideal on paper, turning these goals into objectives is more complex. In order to merge with another brokerage and form a partnership that is fruitful, brokers would benefit from understanding the entire life cycle of the business through to the exit (including what would happen if one partner decides to exit the business unexpectedly). This would involve detailed analysis of the day-to-day challenges of being a partner.
Brokers could provide several alternative options during negotiations with potential partners so they can adapt to changing circumstances and increase their negotiating strength and speed, for example.
Choosing the right partner
As Ms Tucker and Ms Conquest’s case demonstrates, partnering with the right broker is critical for the merged business to flourish. A common way to do this is by defining goals and objectives and their implications, and ensure that they align with the larger company vision.
It is also a key step for all business owners to consider the tax implications whenever considering merging businesses. Partnerships can be relatively inexpensive to operate and all partners would share control, and income and losses of the business. The partners would have their own business number and tax file number. They must lodge annual tax returns, and pay tax on their share of the partnership’s earnings as individuals.
While a written legal agreement is not essential for a partnership to exist, it might offer better peace of mind to have a lawyer draw up the paperwork. This partnership agreement could outline the business structure, capital contribution to the business, how decisions would be made and disputes resolved, how income and losses would be distributed to the partners and how the business would be controlled.
All partnerships may also require a degree of compromise. If objectives and goals do not align and there is a lack of willingness to change business operations, the partnership could become burdensome instead of beneficial. Partners should therefore ensure that they share common values, and work ethic.
In addition, both partners must work to ensure they embed the required frameworks, policies, and procedures to comply with relevant regulations and legislation, such as the best interests duty (BID), while actively managing risk.
Deciding who does what
The next step when going down the partnerships route is for the partners to distribute roles and responsibilities between them, which could be based on their strengths and weaknesses. Defining responsibilities between partners could be beneficial for both employees and clients because it provides clarity around who handles different aspects of the business.
For example, Ms Tucker said that she and Ms Conquest defined their strengths at the beginning of their partnership.
“I’m better at leading people and training… I look after a lot of the training of the team and all of us as a whole. [This includes] arranging Zoom meetings with [lender] BDMs and things like that to keep on top of policy,” she said.
“Lanie looks after all our marketing, branding, [and] everything else around the business.”
Both Ms Tucker and Ms Conquest enjoy writing a diverse range of loans for their clients. Ms Tucker writes residential and commercial loans as well as asset finance, while Ms Conquest, who has a background in wealth, services self-managed superannuation fund-related loans.
“I would say we both do a bit of everything but there are particular sorts of deals that I may refer to Lanie or Lanie may refer to me,” Ms Tucker said.
“I think as we grow, we probably will be a bit more defined around that. But I actually get a lot of enjoyment out of doing different types of applications. I like to keep things changing, keep it interesting.”
Healthy cash flow for a healthy partnership
As with any small-to-medium enterprise (SME), the impact on and ability to manage the business’ cash flow would also be a significant consideration when merging with another brokerage, especially because brokers are usually paid by lenders when loans are settled (rather than when written).
Merging with another brokerage and creating a partnership could boost the cash-flow position and allow brokers to access more capital and expand operations quickly. More cash flow could enhance a broker’s value proposition or provide a larger budget for marketing campaigns.
To gauge the level of cash flow, brokers could perform a financial health check when merging with another business by examining their liquidity ratios (including working capital ratios) to assess if they have sufficient funds to pay bills.
Other best practice arrangements include ensuring the business is profitable and producing the kinds of returns they expected by calculating common solvency and profitability ratios, gross profit margin ratio, net profit margin ratio, gross profit versus net profit, and return on investment. Other helpful financial indicators could include management ratios and balance sheet ratios, as well as debt-to-equity ratio and loan-to-value ratio.
Top tip for successfully merging businesses
"Having good communication is really important… just nutting through what things look like financially, leads wise, where we want the business to go together, and so on." - Nicola Tucker, director, Surf Coast Finance
