A word from Trail Homes
Trail Homes is Australia’s most established trail book purchaser. For over 20 years, we’ve supported brokers in reaching optimal value from their trail book over the life of their mortgage business. Here are some top tips to maximise the value of your trail book:
- There’s the potential for very favourable tax benefits when a trail book is sold strategically, when working in conjunction with counsel from an accountant and potentially in collaboration with Trail Homes.
- Consider selling part, or all of your trail book over the entire life of their business, not just at retirement. This strategy uses the trail as a ‘self-funded’ facility to support growth.
- Don’t underestimate the importance of long-term succession planning and not just considering succession at retirement.
Reach out to us to discuss how to optimise your succession strategy or fund your business growth. Discuss a trail book sale, in part or in whole:
Nick Young
Managing director, Trail Homes
[email protected]
www.trailhomes.com.au
Amid the day-to-day churn of admin, client meetings, marketing, and chasing new business, it’s easy to see how easily succession planning could fall on a broker’s do-later list.
Yet it’s a topic worth some thought – and not just for brokers approaching retirement.
A broker’s trail book sits at the heart of their exit strategy. But as many have discovered, it’s not as simple as kicking back in retirement and letting the passive income roll in.
Nick Young, managing director of leading trail book buyer Trail Homes, says careful planning and management are required to truly maximise the value of this asset.
“Years ago, the ingrained thought was that the mortgage broker would live on their trail book in retirement. This was very, very common through the industry,” he says. “For example, there was this overwhelming idea that if a trail book had been paying $10,000, $15,000, $5,000 or whatever each month for the last 10 years then somehow this is going to continue to do this all the way through retirement. This is fundamentally incorrect. This is not how it works. The average trail book declines around 20 per cent per year. And if not actively topped up, halves every three or so years.”
Exit strategy
Part of what makes succession planning so challenging is knowing when – a decision that hinges on having a clear picture of where your business stands.
Young encourages brokers to first identify whether their business is expanding, mature, or in decline. Broadly speaking, he says an expanding business will generate more upfront income than trail, a mature business will see both roughly balanced, and a business in decline will show higher trail income relative to upfront commissions.
Depending on what stage a broker’s business is at will then dictate the optimal strategy brokers can take different actions on trail at each stage.
For example, those with an expanding business may choose to sell part of their book to free up capital for new opportunities, while brokers with a mature business may benefit from selling part of their trail book when it’s at its peak value.
Timing is everything, and Young says too many brokers wait too long to put plans in place – as noted previously, the average trail book depreciates by more than 20 per cent annually.
“I’ve been involved in too many phone calls where retirement plans have gone financially wrong for the retiring broker. It’s become a bit of a crusade of mine to try and get brokers to properly prepare for retirement,” he says.
“Trail Homes can provide some of the oil to make a well thought through succession plan happen. At the end of the day, it’s buying or selling a trail book, but it’s part of what is increasingly becoming a much more structured transaction, which is the retirement solution. And that solution will vary from business to business.”
Viewing the brokerage through a business-owner lens – rather than purely as a source of trail income – is key to long-term value.
“It’s part of the overall maturing of the industry. The average mortgage broker today is a much more sophisticated business person than they were 20 years ago,” Young says.
“They are better trained. They are running more substantial businesses. They have a lot more things that they are considering, even when it comes to just putting together a normal mortgage. There’s a lot more, if you like, intellectual grunt within the industry today.”
Growth strategy
However, selling part of a trail book isn’t just an exit strategy. It can also be a way to unlock valuable capital that can be reinvested into the business.
Brokers can use the proceeds to hire additional staff, invest in marketing and technology, or expand into new markets, while retaining an income from the remaining trail.
Luke Gardiner, CEO and founder of Sydney-based brokerage Loans4Homes, completed a structured transaction with Trail Homes to create a new funding solution.
“We were talking with one of our business coaches or mentors about different ways to raise capital. In the past, I had raised capital in other ways. Early on, I brought on a business partner who bought into the business in two tranches – 20 per cent and then another 30 per cent a few years later. We’re now 50/50. Both of those raised a bit of capital,” he says.
“Then, we took out a small business loan. There were pretty good rates available during COVID-19 for small businesses. We took advantage of that, and raised some capital there.
“This time around, we had paid off a bit of debt and wanted the company to be debt free. And we didn’t want to bring on another business partner or give away more equity in the business. Working with Trail Homes just seemed a natural sort of way forward. The terms were quite fair and reasonable and allowed us to cash in and de-risk a bit.
“At the moment, a lot of trail books are getting three or four times cover if you sell the business. But for us, we didn’t want to sell the business. We wanted to maintain control of our business but also de-risk in case something was to happen that would devalue our book in the future.”
Gardiner says he saw the transaction has allowed him to invest strategically.
“There are a lot of brokers who, when told about this option, are like, ‘Oh, why wouldn’t you just keep your trail and grow your book naturally?’ Because when you sell your trail book you’re giving away revenue – in our case it was about $20,000 a month,” he says.
“But that sale allowed us to get a huge cash injection within the business. That has allowed us to hire staff and grow the business and build out some efficiencies, and also invest a bit more in marketing and other software that has enabled us to bring in a lot more new business.
“We’re starting to reap the reward of that now, already. It’s still early days, but it should see us grow our upfront commission by a lot more than $20,000 a month.”
The big decision: ‘When should I start planning my exit?’
As more brokers approach retirement age, many are turning their attention to succession planning. Developing a strategy that maximises the value of key business assets – particularly the trail book – has never been more important.
“The average age of a mortgage broker is older than the typical average person working in Australia. It’s a slightly older profession. So, the issue is becoming more acute,” Young adds.
“The broking industry started 20, 25 years ago, and it has been a very successful industry since then. The person who started out as say an ex-banker in their 30s is now well into their 50s or 60s, maybe even in their 70s.
“Smart succession is an the issue of today. Not on the doorstep of retirement.”
