Smart succession planning

In this process, it’s important to view the brokerage as a business – not just as a trail book. Think of it as having perhaps two assets, being a “hard asset” (trail) and “soft assets” (goodwill). It’s a common mistake to only focus on the hard assets. Accordingly, goodwill is often overlooked as it’s an intangible asset and not easily quantifiable (i.e. intellectual property, market awareness, reputation, and most importantly client relationships). However, goodwill can significantly contribute to the value of the business. 

The benefits of a carefully planned exit strategy, developed well in advance, cannot be overrated.

Ideally, it should be considered whilst the business is still strong and done in collaboration with an accountant. It should also be integrated with an overall retirement plan that supports long-term lifestyle goals. 

A practical way to assess where a business is at in its life cycle is to categorise whether it’s an expanding business (higher upfront income relative to trail income), mature business (approximately equal upfront and trail income) or business in decline (higher trail-to-upfront income). 

According to Justin Mastores, managing director of accounting and advisory firm, Rees Group, brokers should assess their business strategy and succession planning in conjunction with their accountant annually for an expanding business and every three to six months for a mature business and business that may start to be in a stage of declining revenue. 

So, again, the key question becomes: “What stage is your business at and when should you start planning your exit?”

Let’s start with an expanding business, which is a brokerage in a high-growth phase where everything’s a “garden of Eden”. Everything’s green. Everything’s growing – including income, trail and goodwill (reputation). Whilst it may sound contradictory, this is the time to start to map out your longer-term goals (including your exit strategy) to ensure you achieve the most lucrative exit. Mr Mastores’ tips for businesses at this stage include:

• Create an “A team:” Your “A team” is critical to help grow the business and reduce the reliance on the principal to be a “Jack of all Trades”. Identify, in conjunction with your accountant, the key hires required at specific milestones and progressively build the best team you can afford in a staged approach that aligns with your growth plan (and cash flow position). 
• Set a budget: Effective budget-setting and forecasting are critical. We suggest setting an achievable rolling 12-month income and expenditure budget and assessing monthly to ensure you’re staying on track. 
• Invest in technology: Apart from the efficiencies gained from investing in aligned technology, the ATO has instant asset write-offs for assets purchased.
• Maximise super contributions: Contribute as much money as you can into your super to minimise tax (the ATO allows up to two years of concessional contributions brought forward in one year).
• Amortise dividends: There are potential tax benefits to being paid dividends in instalments over time, rather than in one lump sum. As your marginal tax rate scales up with the more taxable income you earn, it’s best to spread your dividends over a few years so you don’t necessarily hit the top marginal tax rate if you don’t need to.  

Conversely, the “foot is coming off the pedal” in a mature business. The principal broker is not necessarily thinking of retirement, but they’re not as hungry as they once were. At this stage, a business can slip into decline subtly, yet progressively. To optimise the brokerage’s value, it’s wise for brokers to plan their exit strategy while the business is strong and goodwill is still high. Here are some of Mr Mastores’ suggestions for a business at this stage:

• Plan your exit: It’s a common mistake for brokers to plan their exit the year they want to retire. We recommend starting to plan your exit at least five years in advance, including determining your successor. 
• Seek advice: Seek advice from your adviser at least 12 months before you plan to exit or sell to get the most out of the deal (to include proactive tax advice before you transact) – NOT when you’re planning to sell your trail book! 
• Start saving: Seek advice to set a retirement/savings plan to ensure you’re able to afford your lifestyle that is completely independent of your trail book. Again, it’s a common mistake for brokers to expect a trail book tp remain stable for the rest of your life – though the reality is that it’s the opposite. The average trail book depreciates, on average, at a rate of 20 per cent per year.
• Cut costs: Actively remove excessive costs to help bolster savings. 

Finally, when a business is in decline, everything is less: less time is spent on growth, less money is spent on marketing, and less effort is being made overall. This usually corresponds with an over-reliance on referrals to maintain business. It’s important to look at the business critically and objectively, recognising that a business in decline will suffer and is not sustainable. Mr Mastores’ advice for businesses at this stage includes:

• Be proactive: Be proactive about all elements of the business, as well as the exit strategy, to maximise the remaining assets (remembering there are both “hard” and “soft” assets).
• Consider an acquisition: Identify people inside the business who could potentially buy in. This may include a management buyout/ internal profit share – which can be advantageous as your management team will most likely already have the understanding and expertise of how your company works. 
• Appoint a successor: Alternatively, seek an industry successor and integrate him/her/they into your business ASAP (we regularly get involved with this process).
• Assess your tax position: Your accountant will be able to provide advice on how to minimise tax. For instance, transacting a sale over a few financial years may improve your tax position.
• Involve a financial planner: It’s wise to also seek advice from a financial planner to ensure your capital on sale is protected for the future. 

Nick Young is a results-driven specialist who has more than 25 years of experience in the broking industry and heads Trail Homes: Australia’s most established and longest-serving trail book purchaser.