The Basics of Trail Book Sales: A Guide for Brokers who have never purchased

The finance industry, particularly in the realm of mortgage brokers and financial advisers often employs a unique form of asset known as a "trail book." We had a meeting with an upcoming WA broker today. During the meeting he happen to say he only just realized the value of his trail book and the fact that it is another form of revenue for his business. That inspired me to write this article for those who are either new to industry (NTI) or unfamiliar with the concept. The purchase of these trail books can be mystifying. This article aims to provide key insights for newcomers.

What is a Trail Book?

Essentially, a trail book is a database. A curated list of clients that a mortgage broker builds up over the years. Each client in this list generates recurring revenue for the broker in the form of trail commissions. These commissions are paid by lenders for the life of a loan, which the client has taken out. The most reliable list to keep track of your trail book is the broker commission statement that your aggregator(s) provides you with along with your RCTI at every pay cycle.

Trail books are extremely valuable because they represent a steady stream of passive income. Instead of always finding new clients a broker can rely on this ongoing revenue from their existing clientele. The best way to ensure this consistent stream of income is to keep in regular contact and always provide service.

Why Do Brokers Sell Trail Books?

Another Top VIC broker we spoke to today could not understand why a broker would ever decide to sell his/her trail book. According to this Top broker his exit strategy was death. He showed us proof on how his trail never dropped while other brokers we all know of constantly complain of claw backs and net of offset. There are myriad reasons a broker might choose to sell their trail book. Common motivations include:

• Retirement or exit from the industry.
• A need for immediate cash.
• A strategic decision to focus on other aspects of the business.
• Personal reasons, like health issues or a change in life circumstances.

When a broker decides to sell, it's vital that they focus on growing their trail book for a good three to five years to ensure they obtain the best possible sale price.

How is a Trail Book Valued?

A thorough valuation of a trail book is a complex process. It involves analyzing both financial and non financial data. Non financial data is not always accurate as it requires for the selling broker to have been extremely diligent in completing all the record keeping fields in their CRMs. Typically, it's a multiple of the annual trail commission income. Professional business valuers request 4 years worth of RCTI data to study trends over time. Several factors can affect this multiple, including:

• Quality of the Client Base: A younger, financially stable client base may be more valuable as they're likely to have ongoing financial needs for a more extended periods.
• Client Retention Rates: A trail book with a high client retention rate is generally more valuable. Needless to say claw backs, drop in the number of clients, net of offset, risk of defaults and discharges all affect retention. It may cost you more in the long run as you will need to spend on marketing campaigns, special offers and other client management strategies. Post sale communication is extremely crucial. Clients not aware may choose to leave rather than carry on with a new broker they know nothing about.
• Age of the Book: Older books may have more established relationships but newer ones might indicate more recent client engagement. Older clients tend to fully repay loans or may be lost due to natural causes such as death and retirement. The older books generally tend to have poor client data records. They miss date of births, current phone numbers, email addresses and addresses. Older books are not well diversified either.
• Diversification: A book with a diverse range of clients and lenders is less risky and often more desirable as it won't be too affected by sudden policy changes, client demographic changes, referrers stop referring and interest rate sensitivity of course.

Tips for Brokers Interested in Buying a Trail Book

For a broker either looking to jumpstart his/her business or to put on brokers to grow, purchasing an existing trail book can be an excellent investment. Here are some insights to keep in mind:

1. Due Diligence is Key: Before purchasing, thoroughly look at the trail book. Review the client list, check the accuracy of the recurring revenue, and understand the terms of the trail commissions. If you don't understand, don't hesitate to reach out to your aggregator's succession (M&A) team and your Business Development Managers.
2. Relationships Matter: Once you purchase a trail book, prioritize building relationships with the existing clients. A successful transition will increase the likelihood of retaining these clients. Market twice to these clients. Once when you take over the trail book and then again in 6 months. Overcommunicate rather than fly under the radar in this instance.
3. Seek Expert Advice: Start with your Accountant to make sure it does not affect any tax planning or budgeting that has been done. Consider consulting with 'mortgage' industry experts who can provide guidance on the purchase process and integrating the new clients into your business. If you don't know of any, your aggregator should be your first point of contact as your trail matters to your aggregator as well.
4. Negotiate Fairly: When discussing terms, ensure you offering both a fair price and fair terms. Reason with the vendor and put yourself in the vendor's shoes. While you want a good deal, undercutting a vendor will result in lost goodwill. It could also result in a potential breakdown in negotiations and the vendor will quietly quit and decide not to be helpful to you post the sale. Don't risk your reputation for a few dollars.

Conclusion

Trail book offer brokers a unique way to monetize their client base. Big businesses can put on a broker to work the book and create an opportunity to grow their business even further . By understanding the basics and learning more about the process a buyers can get one of the best returns on investment available in today's economic times.