As a significant number of brokerage operators near retirement, many are quietly selling their books, MortgageBrokerNews.ca has learned.
Succession plans are also in the works—and while they usually involve bequeathing businesses to progeniture or hiring and training young blood, a great many operators are simply opting to sell their books.
“There are a lot of brokers in Canada who do in the neighbourhood of 100 to 200 deals a year that have a personal and professional relationship with their clients and have built businesses where there’s value,” said mortgage broker and Principal of Champion Mortgage Doug Adlam.
Adlam notes that a book’s value is predicated on four pillars: Trust, reputation, systems, and service.
“These four parts are why the client continues to come back to them,” he said. “When these brokers or brokerages that they trust retire or leave the industry, they’re not going to know where to go. They want to find someone who delivers on those same metrics of trust, reputation, systems and service. There is opportunity and value in those books, but a lot of mortgage brokers are similar to real estate agents in that they don’t think there’s a lot of value in their books because they don’t think there’s anyone out there who can deliver their clients an equal experience to what they delivered. The truth is, yes, there is.”
The mortgage industry is getting younger, but it’s occurring at a snail’s pace. With many brokers and brokerage owners slated to retire over the coming decade, change is afoot.
“The sale of books is becoming more and more common; it happens a lot but usually quietly,” said Adlam. “I think in the next five to 10 years, we are going to see a big shift for those willing to believe that there is value in their database and their book of clients.
“We’ve already seen a number of mergers and acquisitions at both the small and larger scales in the Canadian mortgage industry, and I think we’ll continue to see more. There will be more consolidation and more partnering.”
Adlam cautions that selling books isn’t easy. The biggest challenge is figuring out a book’s value. He says that anybody who buys a book with a one-time cash offer is making a mistake.
“It comes down to how active the owner is in owning the brokerage,” he said. “The question is does the brokerage function and run without that owner? If it does, the business is worth something. If it doesn’t, then it’s not worth pursuing.”
A new brokerage owner might be a terrible fit for existing brokers, who will flee the first chance they get.
“My recommendation would be to look at the actual agreements with their agents and make sure they are in longer term contracts, otherwise there has to be some repercussion in the original deal, or a holdback perhaps,” said Adlam.
However, the risks associated with purchasing a brokerage cannot be understated. An incongruent fit between new owner and existing agents is why Ron Butler, founder of Butler Mortgage, isn’t sure there’s value to be had. To elucidate his point, Butler juxtaposes mortgage and insurance brokerages.
“When you buy a book in the insurance business, it’s not a transactional one like it is in the mortgage industry,” said Butler. “If you buy a property casualty book, which is cars and homes, it renews every year. There’s tiny changeover every year in that business—it’s just over 15%—so you can use math to realize you’ll still have over 50% of that business in three years.”
A good operator in the insurance business can even grow business, he added, because client retention is high to begin with.
“Can you do that in the mortgage business? No,” said Butler. “What if your agents flee? Or what if your agents are all over 55? The math doesn’t work in the mortgage business, so the brokerages have no value. The big networks have value, but individual brokerages don’t.”