Brokers who are thinking of retiring should “get out early” and “start planning soon”, the managing director of a trail book-buying business has advised.
Nick Young, managing director of Trail Homes, says brokers considering retirement should start the process soon, as the federal government is contemplating halving the capital gains tax discount for superannuation funds, which could change the amount of money brokers receive should they wish to put the money from their trail book sale into their fund.
“Depending on how you do or don’t plan this from a tax point of view, you can end up paying about 50 per cent of what you receive from your trail in tax. If you plan it well, you can potentially pay no tax,” Mr Young told The Adviser.
“Essentially, there are particular allowances under the Tax Act for small business people to receive capital gains tax exemptions when they sell…
“But there is talk in Canberra at the moment of closing down a number of the tax concessions that are available around capital gains. It’s these tax concessions that we’re talking about being able to use and take advantage of today. They may not be there next year. So, there is potentially an argument for sooner, as opposed to ‘I’ll do it in two years’ time’.”
Mr Young said brokers need to be across these potential changes before they do anything. He said he has seen people “after the event wishing they could re-write how they done it”.
“It’s such a big, knock-out blow tax,” he said.
Mr Young suggested that any brokers thinking of retiring soon should therefore “get your accountant involved early”.
'Tell clients last or risk trail walking off at 20 per cent per annum'
The Trail Homes managing director said even if brokers aren’t thinking of retiring immediately, planning early is important as the succession planning process can take between one to two years.
“The selling of a trail can be done very quickly, but the whole process involves a lot of people and needs good planning. Who is going to buy the business? What is going to happen to existing staff? When will the succession take place? All these sorts of things need to be considered and it cannot be a spontaneous decision,” Mr Young said.
“Many people want to keep it quiet and suddenly announce they’re retiring. I’m a great fan of doing the complete reverse. Tell the world. But you’ve got to be prepared for the fact you are going to follow through and do it. Involve your staff, involve your accountant, involve your aggregator, involve Trail Homes, involve your family, get everybody involved in the decision. That way, it’s done with everybody being aware and on the same page.”
However, Mr Young warned that clients should only be informed once everything has been finalised.
“Potentially, everybody [you tell] has got something to add. There is almost nobody who has anything to detract. With one exception – the clients,” he said.
“Clients need to be handled very carefully. They are the life blood of the business... If your clients sense that you’re wanting to wind back, that you’re maybe semi-retired and just doing two or three days a week... invariably what happens, is that the clients start steadily leaving the business. They’ll think, ‘We will make it easy for you and go to that new, young pup who’s keen for our business. Enjoy your time down the beach, you deserve it’.
"You can then find that your trail starts walking off at a rate of about 20 per cent per annum. So broadly speaking, every three years, it halves. It surprises the brokers just how quickly it erodes away. Essentially, within the space of a couple of years, you can run a business into the ground.”
Mr Young cautioned against springing the news on your clients, especially if a stranger is coming in to take over the business, as that would break trust.
He suggested that a successful succession plan could involve merging with another broker/firm, becoming an incorporated business and retiring a few years later when the new business is established in its own right.
“There should be no surprises. There needs to be a clear handover and a period where the incoming person is working alongside the outgoing person.”
Mr Young concluded that having a good relationship with whomever is succeeding you is a good option, as they could agree to pay a share of the commissions generated from new loans.
“That way, [you] get two bites of the cherry, one from selling the trail book and one, for a period of time, off all the new business.”
Find out more about succession planning in the April edition of The Adviser magazine.