As is often the case for small business owners, principal brokers pour their blood, sweat and tears into their brokerages. As well as being the main broker, many principals are the key driver of the day-to-day running of the business and the face of the company, too.
So, what happens when they retire, or decide it’s time to try something new?
A succession plan ensures a smooth transition between these phases, giving brokers the opportunity to maximise the value of their business, maintain client relationships and ultimately, leave on their terms.
And, as with all good plans, it’s best to start as soon as possible.
Exit strategy
Succession planning is a topic Sam Boer, business development director at financial services group Empower Wealth, deals with frequently. Boer’s job is to lead the mergers and acquisitions function of the brokerage and to work with brokers who are looking to transfer the custodianship of their client base.
Speaking with The Adviser, he says one of the key things he considers when valuing a business is how the brokerage will function when the broker has left.
“If I take [the principal] out of the business, what’s its performance going to look like in the next two, three years? Is it going to continue to maintain the current volume of upfront and trail? We can work things out like runoff and factoring things like potential callbacks or reviews or anything that may impact,” Boer says.
“The big question is: will customers stay? Will there be an acceleration in runoff as a result? Will staff stay? And if I remove the principal, if that person is actively loan writing, can we make that up? Can we offset that? Will we be able to maintain that run rate of flow?
“When you see smaller businesses where that individual owner is still the principal loan writer, it becomes more of a book evaluation because there are too many variables.”
“Generally, that person is a big fish in their pond. There are a lot of key relationships and a lot of word-of-mouth stuff. Customers go to them. If you remove them, in the absence of other supporting structures, there’s a fair chance upfronts are going to drop off pretty quickly. You’re just dealing with a book.”
For this reason, Boer says it’s useful for brokers who are looking to formulate an exit strategy to consider the value of their brokerage as more than just the size of a trail book.
“There are those that will just look at it through a purely financial lens,” Boer says.
“We have our valuation model when looking at the financials. But the devil’s always in the details. It’s really about understanding the people behind the numbers: what do they stand for, what are their beliefs, how do they go about their business? I think [they’re] the other things we’re most interested in when we’re trying to work out who’s a good strategic partner for us.”
Maximising value
The main advantage of having an effective succession plan in place is that it gives the principal an opportunity to maximise the value of the business they’ve built.
This process will look different for every broker according to Nick Young, managing director at trail book purchaser Trail Homes. As he explains on page 22, much depends on the structure of the business and the broker’s short, medium and long-term goals.
“One of the quickest ways to determine your exit strategy is by identifying whether you have an expanding business, a mature business, or a business in decline,” Young writes.
“In broad terms, an expanding business will have higher upfront income relative to trail income. A mature business will have approximately equal upfront and trail income and a business in decline will have a higher trail-to-upfront income ratio.”
For example, an expanding business with greater upfront income than trail may have less time pressure than a mature business with roughly equal upfront and trail income.
“As much as it sounds counterintuitive, we recommend starting your business with your exit in mind: meaning that your business is structured soundly and that you’re considering short, medium, and long-term personal and professional goals on an ongoing basis, preferably in conjunction with your accountant,” Young says.
Mortgage Choice broker Tony Schelling recently shared the challenges of formulating a succession plan in an appearance on the Elite Broker podcast, where he discussed his strategy to wind down after more than 30 years in the industry.
Schelling revealed that his initial plans weren’t smooth sailing, though, as he was approached by a party that wanted to buy the business but hadn’t put the relevant preparations in place.
“When they made me my first offer, they weren’t ready to take over and they didn’t realise they weren’t ready,” Schelling said.
“We basically said: ‘Look, hold off. Happy to hear from you, but you need to go down the pay of getting your accreditations with the MFAA. You need to get your Cert IV done. You need to get yourself ready to take over the business because you’re not starting a business here – you’re buying one that’s already operational. If you’re coming in, you need to be able to operate in that business yourself or have the staff to do it straight away.’”
Eventually, Schelling’s approach was to value the business as a multiple of trail rather than a whole business due to challenges that were specific to his market.
“What I did is I looked at its runoff. I looked at what I could do to arrest that runoff myself and what I couldn’t do,” Schelling told the Elite Broker podcast. “When I was selling it to the people, I made it very clear this is what I’ve done. This is the loan book. This is its multiples. This is what I’ve applied to it because I can’t arrest that. This is your value, the value of what you can do to my book by being able to do the things I can’t do from here on. I think, you know, we’re just honest.”
The next step
With many first-generation brokers approaching retirement age, a large amount of acquisitions and consolidation have already been taking place.
My advice to people is to think like a buyer. Would you buy your business? And if you would, would you pay a premium for it?
- Sam Boer, Empower Wealth
Aggregator Australian Finance Group (AFG) recently announced it would be acquiring non-controlling equity stakes across its network of mortgage broking business, with CEO David Bailey saying the group intends to take equity positions in well-run, growth-minded businesses
“It’s only natural given how established the industry now is, that demographics are changing, and through AFG investing in its brokers’ businesses we are helping to facilitate succession planning for some and expansion for others,” Bailey said in November.
All this points to the importance of succession planning, especially for brokers who have a mind to leave the industry sooner rather than later.
Boer encourages brokers to think about their business from the perspective of a buyer.
“My advice to people is to think like a buyer. Would you buy your business? And if you [would], would you pay a premium for it?”
“I think it’s really important to turn the mirror on where your business is at and also try to identify who is likely to be a buyer of your business and how they run their businesses.”
