Here’s an opening question for you – how many business owners out there considered their exit strategy from the business when they established it?
And by ‘considered’ I mean gave it serious thought, rather than it being at the back of the mind. For smaller businesses in particular I would warrant that an exit strategy is not currently written into most firms’ business plans.
Of course, there is an argument to suggest that owners should be considering how they will exit the business from the moment it is set up.
Which is not to say the exit strategy has to be set in stone; after all the situation is likely to change, but it should at the very least be a part of the business plan which can be regularly reviewed depending on the changing circumstances of the business.
We might all wish that exiting a business was a simple exercise – one where having reached that stage in your professional life, you’ve chosen your exit option, received the most amount of money before taking your leave.
It is not that simple. Business owners must know what they want out of their exit and rather importantly, the business must be in the right shape for the exit to work.
In essence, the business must have within it the necessary value to make it attractive to others – value, of course, can be defined in many different ways, however without sufficient value the exit strategy will not work.
Taking care of your valuables
So, what is valuable in today’s mortgage intermediary firm? Talk to any business owner of a medium to large business about what is the most valuable asset in their firm and they will probably tell you it is the people.
Of course, this is just one part of the value and is clearly an important one. But, the majority of mortgage intermediary firms today are small one or two-man bands – for them, their individual value is the goodwill the business has built up.
These types of businesses will have established client bases and developed relationships over the years with, for example, local estate agents and solicitors, who may well supply the business with leads and can continue to do so in the future.
These are clearly relationships worth having and have their value.
The main valuable asset for the smaller mortgage intermediary business however will be the renewal commission they have been able to generate.
This is a fundamental difference between IFA firms and mortgage brokerages, who have traditionally conducted their business on a more transactional basis rather than a focus on renewal.
IFA firms have essentially changed their businesses over the last decade to develop them on a renewal basis; this has allowed them to develop client relationships which have a more natural tendency to be life-long rather than the often one-off transactional nature of mortgage sales.
With IFAs having built up a greater focus on renewal commission, business propositions in the sector have also developed and grown to match this focus. This hasn’t been the case for mortgage intermediaries and needs addressing.
Therefore, business owners of mortgage firms looking at their exit strategy need to focus more on building up the value of renewal business within the firm.
This means more time dedicated to long-term relationships over the life cycle of the client rather than one-off transactions. Cross-sales allow the build up of more renewal commission to which a value is attributed and is therefore a positive when it comes to exiting the market.
The massive advances in technology can also help in making the cross-sale transaction slicker, it can be easier to quickly source a quote and place general insurance, life assurance business which come with renewal commission.
In doing this, the business owner may have to consider the extent to which they focus on areas where renewal commission is generated, perhaps detracting from the more transactional-based mortgage sales.
Considering all the methods
The vast majority of intermediary firms will always be defined as ‘small’ and so all ways of accruing ongoing and tangible value in the business should be considered.
The idea of course is to build up the ongoing value of the firm and alongside this focus, the business owner must think about their future goals and, fundamentally, how much money they want to leave the business with.
These considerations will define their exit strategy and will mean that the business plan works towards those final goals.
There are, of course, many options out there for those looking to exit the business – perhaps they will simply sell to another firm in the field – a competitor down the street perhaps.
This is where the business owner can make the most of the goodwill he or she has accumulated in the firm. This exit strategy may involve visiting a local brokerage and integrating the two businesses together with the one business owner staying on at the integrated firm for a period of time.
This way the firm that remains will get the benefit of the exiting owner’s experience, relationships, and client bank and gives the new firm time to develop and build relationships with those new contacts and clients.
This is an exit method that gets the most out of the goodwill – it will however need the business owner to consider their exit long before retirement given that they will be working in some capacity at the remaining firm.
If the owner has successfully become dispensable to the business then the current senior management may well be the right people to take over the full ownership.
Many business owners have partners or look to sell to family members – if this is the case then there may well need to be a degree of flexibility in terms of the money that can be transferred upfront for the sale.
The individual exiting might have to accept a smaller amount initially followed by regular payments over the months and years ahead – again it depends on the needs of the owner and this should be a fundamental part of the overall strategy.
Also a number of mortgage networks guarantee their appointed representative (AR) firms an exit from the business; for example, they agree to buy ongoing income streams from firms with a lump sum, or they facilitate the buying of the firm by another of its ARs.
There will, of course, be stipulations to all these options and again it will always be about the value within the business.
Leaving on the right terms
Business owners should recognise that they are only going to have one chance to make their exit from the firm and even the industry right for them.
Time should be taken to determine what they want out of the exit and what is the best way to achieve their goals. As the old football cliché goes, ‘you’re a long time retired’ and it is paramount that the exit from the business should be on their terms and right for them.
While most of us are nowhere near considering our final moves out of the industry, now is the time to start building the necessary value in the business to achieve the exit you want.
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