Being a Mortgage Broker is a tough job! I know because I am one. Often your clients are emotional and anxious, lender employees that you rely on often provide inconsistent or incorrect information, there is ever increasing and changing regulation to keep up with and for me, I felt I “went into battle” for my clients every day which gets exhausting. But we do it because we have a skill set that can make a complicated process more simple for our clients. We enjoy the process of making the impossible possible. To help our clients achieve their dreams. But we also do it because we are able to build an asset whilst being paid a salary. Our trail book.
Considering what we put ourselves through day in and day out for the sake of this trail book, surprisingly few brokers know what is involved in selling it when the time comes. I was one of them. “Begin with the end in mind” is one of the 7 Habits of Highly Effective People by Dr. Stephen R. Covey and one I definitely did not apply to my mortgage business! Below are 10 things you should know now, well before you want to sell your trail book.
- Are you going to sell just the trail book or the business as a going concern?
Most buyers will want to just buy the trail book i.e. they will purchase just the asset of the loan book only. A transfer of the customers and the right to collect the trail payments to the buyer. If you have a company structure, this means you will end up with the proceeds of the sale in your company. You will then need to get the funds out and likely wind up your company if you aren’t going to do anything else with it.
You can however, sell the business as a whole/going concern. In this scenario you sell the shares in the controlling entity, transferring everything the entity owns, including the trail payments, to the buyer. In this scenario, the selling shareholder ends up with the cash and the company lives on with new directors and shareholders. This sale type might suit someone entering the industry who wants a ‘walk in walk out’ type deal. Everything is set up for them ready to go.
- Tax differences depending on how you sell and how your entities have been set up
There are some big differences in the resulting tax position between selling just the trail book asset vs the shares in the business depending on how you have set up your business entities and shareholdings. You should seek advice on this ideally when you set up your business, but if it is too late for that, you need to know the tax difference between selling just the asset or the business as a going concern as this might dictate the way in which you need to sell it.
If you do sell the business as a going concern, the buyer will not have to pay GST which is a saving for the buyer and worth remembering when negotiating.
- Due diligence
There are also some big differences in the due diligence the buyer will do depending on whether you are selling just the trail book, in which case they will want to see likely 12-24 months commission statements, a sample of files to review and any referral agreements in place.
If you are selling the business as a going concern (selling the shares in your company) they will want to see the above as well as a very lengthy list of due diligence on the company so they can satisfy themselves that they are not going to inherit debts, tax liabilities or other issues. Expect it to be more in-depth than an ATO audit. It’s full on!
If you are selling as a going concern, you should expect the due diligence process to cost you a lot of time both in compiling the documentation and then waiting for the buyer’s accountant to review. This could take several weeks/months and you will likely need to involve your accountant which will be at your own expense.
- Trail book key performance indicators matter – you need to know these WAY ahead of time
The way trail books are valued are a multiple of annual trail revenue. This could be anywhere between 1.5x to 3.5x depending on many factors, most of which you have control over if you understand them early, long before you go to sell.
Some of these factors are:
Run Off– The rate at which loans have their balances paid down either through principal repayments or discharges/payouts.
Seasoning– The age of the loans, recognising very young loans have an implicit clawback risk and older loans a higher proportion of principal repayments and thus a faster decline in trail.
Arrears– Assesses both the frequency of arrears on individual loans as well as across the portfolio to provide a view on the overall quality of loan clients.
Clawbacks– To determine the stickiness of client loans and level of churn.
Type of Loan– Refers to whether the loan is Residential / Commercial / Asset Finance and applies a valuation factor to accommodate the differences in trail payments and risk.
Net book growth – how much the book has grown year on year net of run off.
Lender spread – how diverse your lenders are.
Other factors will be where your clients are located, the age of your clients, the income of your clients, the demographic of your clients and available equity in the book to name a few.
If you know what your trail book KPIs are well ahead of time, you give yourself the opportunity to improve them. If you only learn these when you go to sell, there is nothing you can do to change them.
Hound calculates all these for you, and updates them monthly so you can focus on the activities that will result in the highest value possible for your book when you go to sell.
Another critical element of determining that sale multiple is the quality of your client data, it can make a huge difference to the sale price! Most important is customer contact information which is required so the new owner can contact the customers to reduce run off and prospect for refinance and additional lending opportunities. Other data that would contribute includes fixed and IO expiry dates which provide another touch point and opportunity for the new owner to connect with the clients. Notes on the clients, their relationship to other clients and data from past deals are also important to a new buyer.
- Payment terms
Payment terms are negotiable but it’s common that a percentage (often 5% – 10%) is retained by the buyer for 12 – 24 months to cover any potential clawbacks. If this or something similar isn’t in place the multiple may reduce to mitigate this risk.
- It will cost more than you think
Be prepared to put your hand in your pocket! This is not a cheap exercise. Legal fees for a contract of sale will be anywhere from $5K – $15K depending on how many revisions there are. If you are selling the shares in the entity and the due diligence is hefty, expect your accountant bill to be around $10K.
If you do sell the business as a going concern, the new buyer will likely require you to pay out all outstanding leave balances for your staff, pay out any debts or credit cards the company has and pay your tax up to the date of settlement.
It is fairly standard that the main broker in the business and/or the administration staff will be required to stay on for a transition period to aid personal introductions to key referrers and clients. This could be anywhere from 3-12 months. So plan that you will have to stay on after the money is in the bank!
You will likely also have to agree to restraint clauses around working in the industry again for a period of time once you have fulfilled your transition period.
- Where to find a buyer
You could start by letting your aggregator BDM know, they are seeing brokers all day every day and might know of other brokers from the same aggregator looking to buy a book. Selling to someone at the same aggregator is easier as there are no transfer of data issues and the buyer will not have to sign up to your aggregator just to pay to collect your trail.
Your MFAA or FBAA state manager is also worth talking to as they attend many functions with brokers and tend to have their finger on the pulse of the industry.
There are a couple of well known Mortgage Broker “Business Brokers” who will value, market and negotiate the sale for you.. These business brokers will charge a valuation fee of approx. $2,000 to understand all your trail book KPIs listed above and determine a value. There are, as you can imagine, fees involved in them acting as essentially a sales agent.
Something worth checking when you find a buyer, or are choosing between buyers, make sure they are asset-backed or have their finance approved. You don’t want to get all the way through due diligence only to have them pull out because they couldn’t get finance.
- Time it takes – be prepared for it to take longer than you thought.
If you are just selling the trail book as an asset, time to settlement will be much quicker then selling the business as a whole. As a rough guide, you could settle the trail book sale in less than 3 months but a sale of the business could take up to 6 months or more depending on how long due diligence takes or if the buyer has issues gaining finance approval.