Essentially, a retiring broker has three options: to sell the business, to employ someone to run the business on their behalf while they are in retirement (this could even be a partner), or to close the business.
It is not easy to sell mortgage businesses but I am sure a market exists. In this case, the broker is probably best off trying to sell it to another local mortgage business.
The price they would get for selling would depend on many factors such as: the size of business, its profitability and key ratios, what it was that made the business successful, the number of clients, the availability of comprehensive client details (preferably in a database), its location and reputation, its liability (whether the broker has sold many endowments or other regulated products), what the firm’s status is (tied, non-regulated, IFA etc), and whether there is any renewal income from general insurance sales.
However, many other factors may also be applicable.
If the business would support it the broker could retire and either get a business partner to run it or employ a manager. It would also depend what their retirement plans are ‘ for example, do they plan to move abroad?
In terms of their responsibility towards their clients, the basic answer is that they are liable until the last one dies (there is no limit), so it is also a good idea to have some form of run-off professional indemnity (PI) insurance.
Addressing retirement options with just two years to go is certainly not unusual, but I would caution other brokers about how insufficient 24 months can be to achieve the optimum solution.
The choices are simple. Either run the business down and close it upon retirement (this will ensure there is no ‘failure’ but the broker will not realise any further return on their lifetime of investment, apart from any renewal or recurring commissions) or find someone else to continue it. That person might be a buyer but could also be a partner brought in before retirement. Whether the broker finds a buyer or a partner, they should hope to see a combination of capital to buy them out and provide goodwill or profit-linked income.
Nevertheless, ensuring the business does not fail under its new ownership is nigh on impossible. The broker needs to find someone they can trust, who inspires confidence and has the financial clout to continue the business successfully.
It is rare in the UK to have such a mechanism in place in advance. But in Australia and Canada, it is commonplace to design an ‘exit mechanism’ early on. One of the safest schemes is franchising, as this usually gives the broker a defined way of selling the business at any point. In Britain, mortgageforce and Simply Mortgages are examples of franchisers who give brokers a clear way to exit and capitalise on the value of their business in the future. Some franchisers offer to buy back broker franchises on an agreed financial formula.
The broker’s liability to their clients is quite different from the success or failure of the business after retirement. As a sole trader the broker is still responsible for any negligent advice (and received commissions may be subject to ‘clawback’ long after retirement). As a final point, check PI insurance cover and enquire about run-off cover for post-retirement. As a general rule, no claim can be brought by clients after six years from when the broker gave them advice, although this can be extended to six years from the date they become aware of any negligence.’
Having been a mortgage adviser for 25 years, the broker will have built up a considerable client bank. Their liability to those clients in the case of mis-selling should be limited to those clients they advised since the introduction of the Mortgage Code, where as an intermediary the broker will have signed up and taken on professional indemnity (PI) insurance. However, it would be advisable to talk to the insurer and explain the plans. The broker should be able to buy insurance which will cover them for the remainder of time when they would be liable for the advice they gave prior to retirement, probably up to five years. I would add that it does not mean the broker cannot be pursued by a disgruntled client through the civil court.
In light of upcoming regulation, they need to consider whether their business would be better being directly regulated by the FSA or joining a network. With two years to retirement, it might be better to examine what is on offer from the burgeoning number of companies offering everything from a full compliance umbrella to marketing and lead generation support.
The broker has an asset in their client bank, which should enable them to negotiate a figure with some networks that they could expect to receive from either the network or its members. That might also include a clause where the network would take on the PI cost liability, which they would most certainly have to meet if they remained independent and retired having stayed directly regulated. The value of the client bank will depend on how actively it has been managed. To maximise its value to a future buyer, a list of old clients who have had little or no contact with the broker will have very little intrinsic value to a buyer.
Whereas a well-managed client bank, where there is potential for new business opportunities in all types of insurance and investment as well as mortgages, will attract a considerable premium.