Late last year, a highly successful mortgage broker approached me with a common but complex challenge: they wanted to buy out a group of investors who had provided early-stage capital to launch the business.

The brokerage had scaled significantly, was highly profitable, and the investors had no operational involvement. On the surface, the broker’s plan made sense – consolidate ownership by increasing the equity stake held by those actively running the business and exit the “sleeping partners”. However, there was one major obstacle: the valuation of the business had grown substantially, making the buyout a significant financial undertaking.

Evaluating the Options

To fund the investor payout, the broker’s initial instinct was to sell a portion of their trail book. The logic seemed sound – sell a portion of trail revenue while retaining client relationships, generating the necessary capital without fundamentally altering operations.

However, this approach raised a critical question: What impact would this have on the company’s valuation? On the surface, client relationships remained intact, but the reality was far less favourable.  Also, who was going to want to just buy the trail when the relationship still rested with an active broker who could just rewrite the loan?

Mortgage brokerages have as their core asset a trail book.  The bigger the trail the higher the value. Selling off trail meant reducing that revenue base, directly impacting the overall valuation of the whole brokerage. In short, while the ownership percentage of remaining shareholders would increase, the total value of the business would decline, potentially negating any financial advantage of the buyout.

The Hidden Cost of Selling Trail

The maths in this scenario is particularly compelling: The broker was negotiating the investor buyout based on a valuation of 2 x annualised trail revenue. However, on the open market, given the size and efficiency of the business, a full sale would likely command a multiple of 3 x, 4 x, or even 5 x. Selling trail at a 2 x multiple while simultaneously eroding a future exit valuation of 4 x or 5 x is a costly miscalculation.

Could the broker replace lost trail over time by writing new loans for existing clients? Possibly, but the reality of run-off rates presents a serious challenge. Our recent analysis of over 200 trail book valuations conducted over the past 2.5 years shows an average annual run-off rate of 25.4%. In other words, even in a best-case scenario, it would take at least a year to recover just a quarter of the lost revenue and some clients would never return. The risk is substantial.

A Smarter Alternative: Borrowing Against the Trail Book

Rather than selling trail and sacrificing long-term value, the broker secured a business loan against the trail book, arranged through TrailBlazer Finance. This approach allowed them to pay off investors in one transaction while preserving 100% of their trail revenue.

The financing solution was structured as a low-doc business loan, ensuring a fast and seamless approval process. Additionally, because the loan was used for business purposes, the interest and fees were tax-deductible. The repayments were comfortably serviced by the existing trail income, ensuring minimal disruption to cash flow.

Maximising Future Value

By opting to leverage their trail book rather than liquidate it, the broker not only retained full ownership of their revenue-generating asset but also positioned themselves for a more lucrative exit down the track. When the time eventually comes to sell, the multiple will apply to the full value of the business, not a reduced version that was unnecessarily diminished to fund an earlier buyout.

For brokers considering their own growth and succession strategies, this case study serves as a valuable reminder: selling trail may seem like a quick solution, but it often comes at a steep long-term cost and it could have adverse tax consequences. Exploring financing options that allow for business growth while preserving value is usually the smarter move.

Written by Simon Lewis, Sales and Growth Strategist

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