Calculating the value of an travel agency is almost as complex as running one. If you’re looking to buy or sell, it’s never as simple as A plus B equals C.

Innumerable variables go into the equation. Net earnings, discretionary income, IC contributions, the client database, future bookings – all these pieces, and more, must be fitted together to determine a value.

“There is no magic formula,” Tim Courtney, director of franchise and network development for CruiseOne and Cruises Inc. cautioned.

Veena Lana, president of Veena Lana Business Brokers, an agency broker since 1983, agreed. “It all depends on the agency,” said Lana, whose office is in Santa Monica, Calif.

Travel Market Report asked Courtney and Lana to outline the key variables that go into appraising a travel agency. Here’s what they consider most important.

Net earnings
How much an agency brings in, minus expenses – but before taxes – is a main determinants of an agency’s worth. This is also called an agency’s EBIT (earnings before interest and taxes).

Every agency should keep at least three years of EBIT records.

Discretionary earnings
Referred to as SDE (seller’s discretionary earnings), this refers to items that are usually tax write-offs. Such items could include auto insurance, business dinners or personal travel, etc. These are basically personal expenses that the owner chooses to categorize as business expenses, so they can be added to the net earnings.

Clients of ICs
If more than one person is bringing business to the agency, an appraisal must take into account whether the “staff” consists of in-house agents or independent contractors. The clients of outside sales agents generally do not “belong” to the agency and therefore should not be counted.

But clients of independent contractors do have value if the agency buyer plans to maintain a relationship with the ICs. How much value depends on the contract between the agency and its independent contractors.

Lana said she generally counts the value of those clients at 50% of what they earn in commissions. If the seller has been paying its ICs a larger percentage of commission, then the value of the clients goes down.
 
Client mix & location
The type and location of clientele is also important. What is the demographic mix? What types of travel do they typically book? High-end or niche travel is more sustainable than commodity travel and should be factored in an appraisal.

Are most of the clients baby boomers who only have 10 or 15 more traveling years left? Are there any young families in the mix?

In terms of geographic location, are most of the clients located in a small town where economic growth is slow? Or are they in a city with big or varied businesses?

Number of clients
How large is the client database? If most the agency’s business comes from a handful of large clients, the value is less, since if just one or two were to leave, the agency’s profits would be dramatically impacted.

Commissions still due
Outstanding commissions on any travel that has been completed must also be taken into account. Is there a lot of commission due? Who gets that commission?

Upcoming business
Another factor is business that is already on the books for the future.

CruiseOne’s Courtney said a certain cancellation percentage should be figured into that mix as well, most likely at an overestimated level just to be on the safe side.

Agency history
The history of the agency beyond the requisite three-year period of profit and loss statements is also a variable. How many years has the agency been in existence? How long have the in-house agents been working for the agency?

Agency location
Leases for storefront or office locations also are assets. However, if a buyer does not plan to keep an agency’s physical location, leases lose their value.

Cash or terms
Whether a buyer plans to pay in cash or through a term agreement also impacts an appraisal. A cash transaction will generally be for a lower price, while terms will net a higher price, since the money will be paid over a longer period of time and may include interest.

For more on how to appraise a travel agency, see: “Up for Sale: What Is Your Agency Worth?” Nov., 21, 2011.