The art of exiting gracefully

Succession planning is a difficult process, and one often put on the backburner by busy brokers. Sean Richardson of Freshwater Financial Services weighs up the options.

Having read the MPA edition recently on Business Strategy – your complete guide to business success in 2013, I noted that almost 80% of mortgage brokerage operations are either a sole practitioner or 2-3 person operation. Further, only 37% of these business actually have considered or implemented a structured succession plan. If we assume from various sources that there are approximately 12,000 operating mortgage brokerage business’ you would suggest that over 7,000 of these businesses have yet to commence any structured succession plan.

Looking across the life cycle of mortgage brokerage businesses, the stages are;

1. Business establishment, focussing on new business opportunities.
2. Business development & accumulation of referrals phase.
3. Stabilisation of the business as referrals and the trail book matures.
4. The wind down phase where the recurring income stream satisfies the life style costs, less focus on new business, and
5. Full retirement – possible value from the business to supplement retirement lifestyle.

Consider recent data released by the MFAA: The average age of a mortgage broker is 49 while also advising that the 39% (est 4,800 brokers) are in excess of 55 years. In financial planning terms these members can commence a transition to retirement strategy. In real terms, the ability of early retirement probably disappeared at the onset of the global financial crisis. These macro events also raise the need to plan transitioning out of the business or to part or full time retirement.

Options to exit

When moving through Stage 3-5 above we’re all considering how our business value is calculated and what strategies are available to us to extract this value. The three main options available in the current environment are:

1. The outright sale of your trail book (not your business) providing you with an upfront component and a deferred amount subject to clawbacks and out of line trail book run off.
2. The vesting of shares to an existing employee or business partner by way of deferred bonuses. This would generally happen over a 5-10 year period before the shareholding is completely absorbed, and
3. Allow the existing trail book income stream to naturally run off or outsource this post-settlement function to companies specialising in the area of extending loan life.

One of the hurdles in the current lending environment is that banks are unlikely to lend solely against the trail book so including property becomes imperative unless you sell to active corporate trail book buyers. This may limit the number of purchasers available to consider buying your trail book.

The vesting of shareholding is a long term vision that requires buy-in from your new business partner. The concept of management by consensus needs to be considered as your shareholding is diluted and your new partner wishes to exercise their rights in the vision and direction of the business.

The idea of allowing your trail book to run off seems like a waste of your time invested over the prior years although the transition works well if you can refer all inquiries to a “friendly” contact. Alternatively, you register with organisations who specialise in trail book management and see the run off extended.

Whatever option is acceptable to the transitioning brokers, they all need to come to terms with the concept that their current lifestyle is aligned to their current income stream. The replacement of cash flow with a capital lump sum, even if completely reinvested, is unlikely to replace the cash flow lost.

Inherently, small business is time poor with energies directed to the most immediate of tasks. What we need to get across to all is that succession and retirement planning is a process…not an event.