Starting and growing a successful business might be the obvious priorities for mortgage brokers, but do far too few think about successful succession management? Be it happy retirement, a general need to leave, or an unexpected injury (or even death), sound planning for passing on a valuable business is crucial from the start. We find out how brokers can best prepare for succession
It may seem like putting the proverbial ‘cart before the horse’ but planning your exit from your business is perhaps best done when first setting up your business.
While the broking industry is now reaching maturation (given the first entrants may now be reaching retirement age), succession planning is becoming a very pertinent discussion point and will remain so from this point onward.
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Indeed, broker turnover/churn increased by 0.7 percentage points in the six months to 31 March 2022, with a national average broker turnover — or ‘churn’ — of 8.9 per cent (according to the Mortgage and Finance Association of Australia’s Industry Intelligence Service [14th Edition]).
But succession planning isn’t just for those looking at retiring. Indeed, having a strong exit plan right from the get-go can help brokers build a strong brokerage.
“You can never start too early,” says Trail Homes founder and managing director Nick Young. According to the succession planning specialist, while it may feel premature to plan an exit even before you know whether you will have a successful broking business, it would be even more foolish to omit it.
Trail Homes, which values and purchases trail books, is well versed in the pitfalls and issues associated with buying and selling loans books. According to Mr Young, there are a few steps that brokers can take to ensure they successfully move on and ‘sell’ their trail book for the best price.
Get a good accountant and lawyer
“When you set up your mortgage broking business [from] day one, you should also think about how the endgame is going to look,” Mr Young explains.
“So particularly here, the corporate structures you employ, the agreements that you put in place.
“All of these things have enormous impact when you sell — particularly from a tax point of view.”
As such, he advised that brokers involve their accountant and their lawyers right at the start of their business journey, particularly if they want to start introducing things like family trusts.
“It’s very easy to set up any corporate structures and things hanging off the side,” he explains.
“Often there’s a good reason for doing that, but just again check back with your counsel and make sure that, with [an] exit in mind, it’s not going to cause problems.
“The advice that you’ll get will depend on your circumstances and your business, but you’ve just got to be out there asking the questions.
“So talk to your financial planners, talk to [a trail book buyer], talk to your aggregator, talk to everybody … even other brokers; [so you] continue developing and refining your plan.”
Protect your clients
A key driver of business value is ‘goodwill’. While it may be somewhat intangible, having a sticky client list is one of the main things that anyone buying a book will look at. After all, without clients, what is a business?
As such, the timing of telling your clients about an imminent departure is necessary, but shouldn’t be done until you are ready to hand over the baton.
Telling clients needs to be done in “one clean, professional way” but only when you are able to answer all questions and concerns that they may have, as opposed to ‘muddling along the way’ and coming up with different ideas.
Indeed, if clients are advised of a broker leaving too early, it could lead to an exodus of nervous clients and dramatically impact the end value of the company.
The aggregator agreement
But if a broker hasn’t started their succession management plans from the start, how do they go about resolving it in the middle, or even at the end, of their broker journey?
Indeed, many broking businesses may start off as a one-man band, but as time and experience go on, the structure of the brokerage changes.
“A broker will typically start out just by themselves and then the business grows,” Mr Young explains.
“So you need to adapt to that. There will be changes that you have to make for the day-to-day functioning of the business.”
Touching base with business professionals such as accountants and lawyers is again key here but so too is talking to your aggregator.
In fact, Mr Young flags that, too often, aggregator agreements are not considered until right at the end of a broker’s succession plan; but that can often lead to some nasty surprises.
“Aggregators are starting to push back against sole practitioners’ sign-up and operating things are becoming less fashionable, so brokers will typically be in a corporate structure from day one,” he explains.
“Aggregation agreements that the broker holds with the aggregator [is like] the title deeds to your house; it’s essentially the worth of the business is contained in that agreement.
“And the number of brokers that I talked to, they don’t even know where that gravitates.
“They don’t have a copy. They can’t produce it. They don’t really know what’s in it.
“It’s such an important document because your rights are held in that agreement,” flagging that some agreements may state that the client is the aggregator’s and not the broker’s, which impacts the value of a brokerage.
Brokers therefore need to ensure they understand their aggregation contract and what will happen once they exit [from] it, according to Mr Young.
Specifically, brokers need to understand what happens with their client base and their trail when they exit their business.
The broker experience
Money Links director and finance strategist Brenden Lowbridge recently spoke to The Adviser about his decision to move away from being the primary broker to becoming a business owner and mentor.
When asked for his tips on handing over the business writing, he suggested finding a mentor/coach who has done it before and ‘model them’.
“Proximity is power. Often as brokers we are so caught up serving our clients day-to-day that we don’t get to spend time on growing our business,” Mr Lowbridge explains.
“I have found regular coaching sessions an excellent way to be accountable to putting this time aside and taking massive action towards my business goals.
“When looking for the right coach, I was very particular in making sure they had built a broking business to the size of business I was looking to build.”
Managing workload to avail time for succession planning was also advisable, he said.
You can find out more about Brenden Lowbridge’s plans to evolve his brokerage and role, in the Elite Broker podcast.
Tune in to the episode with Brenden, Addressing the elephant in the room, here:
