With the broking industry getting older and broker books maturing, many are now turning their minds to retirement. Annie Kane takes a look at the ins and outs of succession planning.
Lying on the beach reading a good book with a cold beer in hand...
Retirement is a sweet reward at the end of a long career. But getting to that stage literally takes a lifetime. So, why do so many people only start planning for it when they near retirement?
According to Mortgage Choice’s Australian Financial Savviness Whitepaper, more than half (53.3 per cent) of small business owners did not have a succession plan in place.
Mortgage Choice CEO John Flavell said that the figure was “alarming”, adding that despite small business owners (including brokers) being notoriously time-poor, “the reality is, no one can predict the future and sometimes things happen that will affect the future trajectory of a business”.
Succession planning is crucial, the CEO said, as it’s not just about planning for when to retire, which may be decades away, but it’s also about planning for the unexpected.
“Who will take over the business should you be unable to work? What will happen to your employees? How will your business continue to be profitable in your absence?” Mr Flavell said.
“While it is not a pleasant subject nor an easy process to plan for, succession planning is vital and should not be neglected. Indeed, the sooner small business owners plan for tomorrow, the better position they will be in.”
For brokers, the issue is increasingly coming to a head. In the Mortgage and Finance Association of Australia’s (MFAA) Industry Intelligence Service (IIS) report, it was found that “turnover in the broker population remains quite high and has increased”.
Covering the six months to March 2017, the report found that 1,371 people left the industry over that half-year, with the rates of turnover having increased half-year on half-year to register double-digit rates (10.2 per cent) not only nationally but also in four of the eight states and territories.
The MFAA warned: “The likelihood that turnover will increase seems self-evident: an increasing population of brokers, falling sales productivity, plateauing sales volumes and falling new loan application volumes will likely mean that higher rates of turnover are sustained.”
Supporting this evidence, the founder and head of trail book buyer Trail Homes, Nick Young, revealed that when he started his business 12 years ago, the majority of his deals were for brokers selling trail for short-term cash flow, but now, around 90 per cent of his business is from people selling trail books for retirement.
He explained: “While I’m not doing any less of those smaller deals, we are increasingly now seeing the really big, successful brokers looking to retire. It’s a thriving industry getting older and there are a lot of people in the industry now who have been doing this for one or even two decades. Some of them have very successful businesses and are coming to retirement.”
Reports and anecdotes considered, it seems that, whether planning for retirement or just for the unexpected, having a succession plan cannot, and should not, be postponed.
In fact, succession planning specialist Craig West, CEO of Succession Plus Australia, believes that you should begin planning “as soon as practically possible”.
Speaking to The Adviser, Mr West said: “There is no benefit in delaying at all. I tell people that as soon as they get in business, they should start thinking about the end game. Because the longer the time they have to prepare, the more options are available, the better price they will get and the more enjoyable outcome they will achieve.
“These things take a lot of time to get right.”
So, how and where do you start? According to Mr West, the first step is to establish what you want to happen to the business when you no longer work there.
Explaining, the CEO said: “Do you want to build up the business to sell it on to a competitor or large trade player? Do you want to list the company? Do you want to keep it in the family? Do you want to hand it over to your employees? Do you want to bring in someone new to run it?
“You need to first know what you want to do with the business when you exit, because that will affect what steps you take to get to that point. And you need to have a back-up plan, too, if the first option fails because, invariably, things change.”
Mr West highlighted that some succession plan strategies need time to be enacted, so planning is essential.
“The most common one is things like an employee share plan,” Mr West said.
“A lot of businesses now are thinking about selling the business to their employees, but typically, employees don’t have $1 million in the bank to write out a cheque to buy the business outright. They need to stagger the payments for the purchase over time.
“That’s fine if you are 50 years old and want to retire when you are 60. You have 10 years for them to do that and it can be done quite gradually and all works pretty well. But if you only start doing it at 65 and you haven’t got a lot of time, employee share planning probably is not a great option… So, you see, if you leave it too late, you are going to run out of options.”
The founder of Trail Homes agreed that brokers should be organising a plan for retirement as soon as possible, adding: “All too often, I see brokers drifting into retirement and, as a consequence of that, a lot of wealth is squandered and a lot of the goodwill that the broker has built up is, effectively, wasted.
“As soon as you start thinking about retirement — as soon as those thoughts appear — be proactive, get onto it and put together a plan, as opposed to just drifting ahead.”
Mr Young suggested that brokers also speak to an accountant as soon as possible because there are “some very significant tax breaks that are available to small business people when they sell certain assets”.
He added: “People find it quite surprising, but the effect of tax actually has much greater effect on the bottom line result than the multiple that you have been negotiating for the sale of the business.”
For those looking to sell their trail book on retirement, Mr Young recommended that brokers first check what they are entitled to legally, and understand fully their contractual agreements with both their aggregator and sub-aggregators.
Next, brokers need to ensure that the buyer knows whether they are buying just the trail or the right to service the clients, or both, and should take several steps to make it more appealing to buyers.
According to Mr Young, the average trail book sells for between 1.5 and two times the value of the trail, but it could be as high as three, or even four times, in some cases.
He explained: “The industry rule of thumb is that a book sells for around two times the trail... but it depends on the quality of the book. You can get higher than that, but it’s usually only for books that are in excess of $25,000 a month, or more, in trail. It has to be a very solid book and a very good business [to get a higher multiple].
“If you are selling the trail and the actual right to service the clients, and if it is well planned (and by well planned, I mean the aggregators are involved, the buyer is involved, the seller is involved), I believe you can almost get as much again for the assignment of the goodwill, the right to answer a telephone tomorrow.”
Concluding, Mr Young said: “If it’s done well, if it’s properly planned, I believe that it can potentially make it more than three times or even closing up to four times. But it has to be well planned and it has got to be a very solid business.”
One way of shoring up the trail book value (and the business proposition as a whole) is by ensuring that the clients are sticky. Good brokers, and therefore good trail books, are the ones that have a strong connection to their clients. As such, those that keep in regular contact with their clients (for example, by providing information on rates, refinance opportunities, information or education, etc.) have “extra bite” when it comes to selling their trail.
Both Mr Young and Mr West agreed that another step to make the business more attractive to a buyer is to ensure that all processes and systems are documented and accounted for. According to Mr West, buyers would also be sceptical of buying a business that has no documented processes for operations.
He elaborated: “Often when you get involved in a business, you find that the broker knows how everything is done, but no one else does. If they were sick for a week, there would be no revenue, because all the sales and referrals are generated by them. That means there is a real risk there.
“So, one of the things that we tell people is to go and document processes, document everything you can think of, and make sure you have everything written down and everyone knows how systems work.
“It’s not just about turning over $500,000; it’s about how and where you get your work from and the ability to replicate that that makes the business more valuable.”
It’s also about ensuring that the current clients are happy.
Mr Young commented: “I see poor outcome with brokers driving into retirement — it’s a poor outcome for everybody. Starting with the consumer.
“A client might think the broker was attentive and fantastic, but now they hardly return phone calls. That’s not of benefit to anyone.
“If it were properly planned, it could have been the case that their consumer was thinking that the business was fantastic, even after their broker retired. That is what it should be. It’s all just about planning.”
Top tips for succession planning
Case study: Succession done right
Craig West, CEO and founder of business consultancy Succession Plus Australia, outlines how succession plans can be done right.
“I once worked with a mortgage broker in Western Sydney who came to me three years before he was looking to retire. He had a young guy working with him who had been with the company for a few years, first as an admin person and then as a new broker.
“Over that three-year period, they planned every aspect of what the handover would look like. For example, the younger broker had to do some training, courses and become accredited with various lenders. He also began going to meetings and lunches with referral partners so that people got to know who he was.
“People often think that it is best to keep all this stuff secret, but in my experience, that is not the case. These guys made it very open.
“Let’s say John was going to retire in 2020. He started telling people in 2018. So, they started making people familiar with the situation a long time before John actually retired.
“Gradually, the older broker stopped going to meetings and the young man largely took over. So, they planned all of that over the three years and it was done gradually to make sure it all worked. And that actually worked like clockwork.
“So, it’s just about timing. If you have time, then you can do that stuff really well. If it doesn’t quite work as quickly, or if you didn’t catch on with your accreditations or training as quickly as you should have, you still have time to fix it.
“But if you leave everything until the last six weeks before the handover, you haven’t got time to do anything and you just have to hope that it all works out.”
Annie Kane is the editor of The Adviser magazine, Australia’s leading magazine for mortgage brokers. As well as writing news and features on the Australian mortgage market, financial regulation, fintechs and the wider lending market – Annie is also the host of the Elite Broker podcast and regulator contributor to the Mortgage Business Uncut podcast.
Before joining The Adviser team at Momentum Media in 2016, Annie wrote for a range of business and consumer titles, including The Guardian (Australia), BBC Music Magazine, Elle (Australia), BBC Countryfile, BBC Homes & Antiques, and Resource magazine.
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