The mortgage brokerage industry in Australia has seen significant growth and change in recent years.
Many brokers are looking to sell or expand their businesses, and understanding the industry benchmarks, particularly when it comes to average sale multiples, is crucial for anyone involved in buying or selling a mortgage brokerage.
This article will break down the various factors that contribute to the value of a mortgage brokerage, including how industry benchmarks are used to determine average sale multiples.
By understanding these metrics, you can better navigate the process of buying or selling a business in this sector.
Additionally, we’ll look into key terms, including the mortgage trail book multiple, which is an important element in determining a brokerage’s overall worth.
What Are Sale Multiples in Mortgage Brokerages?
When it comes to buying or selling a mortgage brokerage, one of the most critical metrics is the sale multiple.
This refers to the ratio between the sale price of the business and a specific financial measure, such as earnings before interest, tax, depreciation, and amortisation (EBITDA), or revenue.
The sale multiple provides insight into how much buyers are willing to pay for a brokerage relative to its financial performance.
The sale multiple can vary based on numerous factors, including market conditions, the size of the brokerage, its client base, and the strength of its mortgage trail book.
Understanding the average sale multiple for mortgage brokerages can help sellers set realistic expectations and enable buyers to assess whether the business is worth the price.
The Role of the Mortgage Trail Book Multiple
A key part of the valuation for mortgage brokerages is the mortgage trail book multiple. This refers to the recurring revenue generated by a brokerage from ongoing mortgage loans that clients have with lenders.
Trail commissions are paid to brokers as long as the loan remains active, making this stream of revenue relatively stable and predictable.
When a mortgage brokerage is sold, a significant portion of its value comes from its trail book. This is because the buyer will typically continue to receive commission payments for the life of the loan.
The multiple applied to the trail book reflects how much the buyer is willing to pay for this future revenue stream.
Key Factors Influencing Average Sale Multiples
The average sale multiple for mortgage brokerages is influenced by several factors. These can range from the size and profitability of the business to market trends and the performance of the brokerage’s trail book.
Size and Profitability
Larger, more profitable mortgage brokerages tend to attract higher multiples. This is because these businesses are seen as less risky and offer greater growth potential.
In addition to this, a business with more brokers, a larger client base, and a solid revenue history will generally achieve a higher sale multiple than smaller brokerages.
For instance, brokerages with higher revenues and consistent earnings can demand a multiple of 3 to 4 times their EBITDA, while smaller brokerages may see multiples closer to 1 to 2 times EBITDA.
Quality of the Mortgage Trail Book
As mentioned earlier, the mortgage trail book is a critical element in the valuation of a mortgage brokerage. The quality and size of the trail book can greatly influence the sale multiple.
A brokerage with a large and high-quality trail book, meaning a high number of active loans and low client churn, will generally receive a higher multiple.
Investors often value mortgage brokerages based on their trail book because it represents a reliable, ongoing source of income. This is a key difference from businesses in other sectors that may rely more heavily on one-time sales or volatile income sources.
Market Conditions
The broader economic environment can also impact sale multiples. In times of economic uncertainty or market downturns, buyers may be more cautious and less willing to pay premium prices for mortgage brokerages.
Conversely, in a booming property market or a time of low interest rates, buyers may be more aggressive, willing to pay higher multiples to secure a profitable business.
Broker Relationships and Reputation
A brokerage’s relationship with lenders, as well as its overall reputation in the market, can also play a role in the sale multiple. Brokerages with strong, long-standing relationships with key lenders are often able to negotiate better deals and maintain higher levels of client loyalty.
This can lead to a more stable income stream and a higher sale price when the brokerage is sold.
What is the Average Sale Multiple for Mortgage Brokerages?
The average sale multiple for mortgage brokerages in Australia can vary, but generally, it falls within a range of 1 to 4 times EBITDA, depending on the factors discussed earlier.
While it’s difficult to pinpoint a precise number due to the variation in brokerages’ size and financial performance, the mortgage industry has seen a steady increase in sale multiples in recent years, driven by a combination of a strong property market, a low interest rate environment, and increased investor interest in mortgage brokerages.
It is important to note that the sale multiple also differs for different types of mortgage brokerages.
For instance, larger firms with a more diversified client base may attract higher multiples, whereas smaller or more niche players in the market may have to accept lower multiples.
What to Expect in Terms of Sale Multiples?
While no two brokerages are identical, certain industry benchmarks provide a useful reference point. The average sale multiple typically looks at:
- 1 to 2 times EBITDA: Small brokerages with limited market reach or profitability often fall within this range.
- 3 to 4 times EBITDA: Larger, more profitable brokerages with a strong mortgage trail book and established client relationships tend to see higher multiples in this range.
- Up to 5 times EBITDA: In rare cases, well-established brokerages with substantial trail books, extensive broker networks, and strong market positions can demand even higher multiples.
How to Increase Your Brokerage’s Sale Multiple
If you’re looking to sell your mortgage brokerage, there are several ways to improve its sale multiple.
- Grow your mortgage trail book: A large, high-quality trail book is one of the most important factors in determining your brokerage’s value. Focus on maintaining long-term client relationships to increase the predictability and stability of your income stream.
- Improve profitability: Buyers are attracted to profitable businesses. Ensure your brokerage is operating efficiently, with healthy margins and a well-managed cost structure.
- Diversify your client base: A broad client base across different sectors can reduce risk and increase your brokerage’s attractiveness to potential buyers.
- Strengthen lender relationships: Strong ties with lenders can provide more opportunities for clients and offer better loan terms, which can increase the value of your business.
- Enhance brand reputation: A brokerage with a strong reputation in the market and positive client reviews is more likely to attract buyers willing to pay a premium.
Frequently Asked Questions
How long does it take to sell a mortgage brokerage?
The time it takes to sell a mortgage brokerage can vary, but it typically ranges from a few months to a year. The process can be lengthened depending on market conditions, the complexity of the business, and the negotiation process.
What factors affect the mortgage trail book multiple?
Several factors influence the mortgage trail book multiple, including the size and stability of the book, client retention rates, the diversity of lenders, and the overall financial health of the business.
Is it possible to increase the sale multiple after listing the business?
Yes, it is possible to increase the sale multiple by improving key business metrics. This can include growing your mortgage trail book, reducing operational costs, or improving client satisfaction. However, changes made after listing may take time to reflect in the valuation.
Conclusion
Industry benchmarks for mortgage brokerage sale multiples are an essential consideration for both buyers and sellers.
The average sale multiple reflects a range of factors, including the size and profitability of the business, the quality of its mortgage trail book, and broader market conditions.
By understanding these benchmarks and knowing what to expect, you can make more informed decisions when buying or selling a mortgage brokerage.