by Jon Denovan

The reduction in non‑bank lending, reduced commissions, and decreased lending volumes have led to an increase in amalgamations and business sales.

Many brokers embark on a proposed sale or purchase without understanding the significant risks associated with such a transaction.

In this report we look at three key risks:
taxation;

+  default liability;
+  trail forfeiture.
+ Taxation

The purchase price paid for a loan book will generally be a capital expense and will not be deductible against the income derived from the book. Accordingly, if a purchaser pays $300K for a book, at a 50% tax rate, trail income of double that amount, $600K will be required just to break even.

In calculating a suitable price to pay for a book, an appropriate allowance must be made for the cost of money (because the purchase price is paid up front), the amortisation of the book, and the risk of accelerated churn after a change of manager/broker.

Accordingly, paying one years trail will normally mean an expectation of at least three years trail to make a modest profit, ignoring the cost of managing the book.

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