When a sum isn’t greater than its parts

This suggests that brokers are increasingly realising that their trail book can be used to meet short term cash flow needs. Used in a responsible manner this opens up tremendous opportunities. 

The prime motivator to sell is two-fold:

• Clients are separated from the transaction, which means brokers can continue to write new loans, refinance old loans (and receive future upfront and trails from these new loans), with their client base intact and untouched; and
• The sale of a trail book provides an immediate ‘self-funded’ cash injection. This may be a distinctly more appealing alternative than to trying to secure a business loan.

Interestingly, 2016 bucked the trend from the last ten years, as the overwhelming number of transactions involved part sales of their trail books versus the traditional approach of selling a trail book as a whole. 

We believe that the motivation to sell a portion vs the entire book is that it’s the best of both worlds – meaning, they can use some of their trail book as an asset to invest in business growth, while retaining the rest as a secure ongoing annuity stream. 

What may not be commonly known is that with trails, the older the trail, the more valuable it is. The reason being that older loans are more stable and have no clawbacks – which makes them a more valuable asset. The market rate for purchasing a trail book is 1.5–2 x’s of its annual value and is largely dependent on the maturity of the loan. So if a trail book is valued at $100,000 p.a. and it’s say 6 years old, it would be reasonable to expect a purchase rate of 2 x of its annual value: meaning in this example, a 50% trail book sale would equate to $100,000 – upfront. All this while leaving the other half of the book to provide an ongoing secure annuity stream.

In terms of what the sales proceeds are used for, no two sales are the same. There are though some common themes which include hiring more staff, investing in marketing, upgrading technology, moving to a bigger premise, or buying out a business partner. 

Independently of what the proceeds are used for, it’s great to see a progressive shift to brokers using their trail book as an asset to actively help realise their business goals at different stages of their company’s life cycle - versus the previous misconception of aligning trail book sales solely with retirement, and therefore missing its true opportunity.

The upshot: a trail book is a massive asset. We encourage brokers to make it perform in 2017.