A single multiple cannot tell a buyer whether a trail-book asking price is justified. It compresses the quality, duration and cost of future receipts into one number, often without explaining which income measure it multiplies or which risks are already reflected.

Start with reconciled net receipts and a loan-level forecast, then test run-off, refinancing, concentration, seasoning, arrears, deductions, servicing cost and transfer conditions. Use any market multiple only as a reasonableness check. The seller’s asking price, the book’s supported value and the buyer’s affordable price are three different figures.

Separate asking price, value and affordability

An asking price is the seller’s proposal. Value is an evidence-based estimate under a defined basis, date and set of assumptions. Affordability is buyer-specific: it reflects funding terms, tax position, required return, operating capacity and downside tolerance. A book may have defensible market value yet still be unaffordable for a buyer whose debt service or servicing resources leave too little margin.

Australian Government guidance says there is no single set business-valuation method and that a combination may be used. It identifies market value, return on investment, asset value, establishment cost and future profit as possible approaches (business.gov.au). A trail book is unusual because its economic benefit depends heavily on future commission receipts from a changing pool of loans. That makes the definition and durability of cash flow more important than a label attached to a multiple.

The ATO’s market-valuation guide is written for tax purposes, not as a trail-book pricing rule. Its broader discipline is nevertheless useful: use relevant and reliable information available at the valuation date, state inputs and assumptions, choose an appropriate method, and where possible apply a secondary method or cross-check (ATO). Buyers should obtain specialist valuation and tax advice for their transaction.

Establish the cash flow being priced

Do not begin with the seller’s annualised headline. Rebuild at least 24–36 months of monthly receipts where available and connect four records:

  1. the loan-level data file, including balance, lender, product, settlement date and borrower grouping;
  2. aggregator or payer statements showing gross commission, adjustments and net payable;
  3. deposits into the seller’s bank account; and
  4. the general ledger and tax records showing how receipts and deductions were recorded.

Define whether the quoted figure is lender-calculated trail, statement gross, statement net, cash received or a seller-adjusted forecast. ASIC’s remuneration review found that trail was generally calculated by reference to loan value and that most surveyed lenders used the ongoing or prevailing balance; it also documented differing aggregator charging models (ASIC). The report is historical and does not prove the current economics of any book. Current lender schedules, aggregator agreements and statements control the investigation.

Remove unexplained amounts from the base case rather than treating them as recurring. Keep GST presentation consistent. Separate continuing aggregator fees, broker or referrer splits, platform charges, adjustments and any seller-specific offsets. Then deduct the post-completion cost of servicing the acquired clients. Net receipts are not the same as free cash flow.

Build the loan-level risk bridge

A useful price model shows how the reconciled starting receipts change under explicit assumptions. Test at least these drivers:

Driver Evidence Pricing question
Run-off and refinancing Monthly balances, discharged loans, payout reasons and commission history Is attrition stable by lender, vintage and client cohort, or hidden by new originations?
Loan seasoning Settlement dates, remaining terms, fixed-rate expiry dates and repayment profiles Does the book contain mature loans likely to amortise or refinance sooner?
Lender concentration Receipts and balances by lender How much cash flow is exposed to one lender’s policy, product or payment change?
Borrower concentration Related-borrower and household mapping Would a small number of client decisions remove a disproportionate share of receipts?
Arrears and non-payment Status codes, zero-trail months and exception correspondence Are gaps temporary, contractual or evidence of declining collectability?
Deductions Current agreements, schedules and statement line items Which deductions follow the book and which are seller-specific?
Transfer conditions Aggregator and lender correspondence, consent requirements and cutover plan When does the buyer become entitled to receive and service the trail?
Servicing cost Contact volumes, complaints, annual reviews, staff time and systems What capacity and compliance work is required to retain the client base?

APRA publishes aggregate residential-mortgage statistics for authorised deposit-taking institutions (APRA). These can provide market context, but they do not establish the refinance behaviour, arrears profile or value of a particular trail book. The target’s own loan-level history remains the primary evidence.

Use several price lenses

Run at least three lenses and reconcile why they differ.

Cash-flow lens. Forecast net receipts loan by loan or by defensible cohorts, deduct ongoing servicing and administration costs, apply base, downside and severe-but-plausible run-off assumptions, and discount for timing and risk. Do not extend current receipts indefinitely.

Market lens. Compare genuine completed transactions where the income definition, transfer rights, data quality, mix, age and conditions are sufficiently similar. An advertised asking multiple is not a completed comparable. Adjustments must be explicit rather than hidden inside a selected multiple.

Replacement lens. Estimate the cost, time and uncertainty of building a comparable contactable client base and obtaining equivalent rights. This is a cross-check, not an automatic floor: acquisition may transfer imperfect records or limited rights, and new origination may have different economics.

The result should be a supported range, not false precision. Show which assumptions cause the range to move most. If small changes to run-off or servicing cost erase the buyer’s return, the price is fragile even when it resembles a market convention.

Convert uncertainty into terms, not optimism

Evidence gaps do not disappear because a price model uses decimals. Where retention or transfer cannot be verified before completion, consider whether the commercial terms should allocate that risk through:

  • a deferred component linked to clearly defined, independently measurable receipts;
  • a retention adjustment measured over an agreed period;
  • holdbacks for unresolved commissions, disputes or transfer failures;
  • conditions precedent for aggregator consent, data delivery and payment redirection; and
  • warranties and indemnities drafted by the buyer’s lawyer.

Define the measurement population, start date, deductions, excluded events, data source, access rights, dispute process and payment timing. An earnout is not a substitute for sound valuation; it changes when and on what evidence part of the price becomes payable.

A practical decision record

Before making an offer, require the acquisition team to record:

  • the exact receipt measure used and its reconciliation to bank cash;
  • base, downside and severe-case run-off assumptions by cohort;
  • concentration, seasoning, arrears and data-quality adjustments;
  • continuing deductions and fully loaded servicing cost;
  • transfer approvals, rights obtained and timing assumptions;
  • the valuation method, cross-check and excluded evidence;
  • acquisition debt service, liquidity buffer and buyer return hurdle; and
  • the maximum price under each scenario, separate from the seller’s ask.

An accountant can test the historical receipts and model mechanics; a lawyer can assess what rights and obligations transfer; a credit-compliance specialist can review servicing and regulatory exposure; and an independent valuer can select and apply an appropriate valuation basis. The final offer remains a commercial decision, but it should be traceable to evidence rather than inherited from a single market saying.

Frequently asked questions

Is a trail-income multiple useless?

No. A consistently defined multiple can be a useful shorthand or market cross-check. It becomes unsafe when the income base, comparable transactions and embedded risk adjustments are unclear, or when it replaces the loan-level forecast.

Should the buyer use the latest month of receipts?

Not alone. Reconcile a sufficiently long monthly history, explain seasonality and adjustments, and test whether recent receipts are supported by the current loan population. A strong month may reflect timing or a correction rather than a durable run rate.

Can a retention adjustment justify a higher price?

It may narrow one uncertainty if its formula and data are robust. It does not correct an overstated starting income measure, unaffordable debt, weak transfer rights or underestimated servicing cost.

Sources

Disclaimer

This article provides general information only. It does not constitute legal, tax, accounting, financial, credit, valuation or other professional advice. Circumstances differ. Obtain advice from appropriately qualified advisers before acting or entering a transaction.