When it comes time to sell your travel agency, how will you know its worth?
Determining an agency’s value involves far more than appraising the furniture or tallying up past revenue. In fact, for both seller and buyer, there are plenty of landmines to avoid when entering a purchase agreement, experts say.
Rule #1: Get help
Here’s their first piece of advice. If you’re contemplating the sale of your agency, get an appraisal from a knowledgeable source. Don’t rely on your own guesswork or even on prior appraisals.
“Times are better now, so your agency may be worth a lot more than you think,” said Houston-based travel industry attorney Rose Hache.
Assess future business
Few agencies are ever sold at a fixed price, according to Robert Joselyn, president of Travel Agency Management Solutions (TAMS) and a leading consultant on agency evaluations.
Instead, most are sold at a variable price, which means the final sale price will vary depending on an agency’s performance after the sale.
In a variable-price sale, a big part of determining an agency’s value is calculating what’s called the earn-out. This refers to the expectation of future business based on current revenue.
“For example, if customers generate $1 million in revenue, the expectation is that they will generate $3 million over the next three years. This is the earn-out,” Joselyn said.
Will clients stay on?
Perhaps the most important question to consider when determining future business potential is this: Will the business of an agency’s current clients be readily transferrable to the new ownership, or will that business be lost?
“In a small agency, the owner may handle all the high-end clients. What happens to that business when they leave? This has to be figured in. If half the profitable business goes away with the sale, the buyer doesn’t pay for that,” Joselyn said.
Potential agency buyers should examine existing relationships with clients and consider the likelihood of retaining that business, Joselyn advised.
For their part, agency owners who want to receive the highest possible compensation for their business may want to take steps that ensure clients will be comfortable working with staff who stay on with the agency after the sale.
Independent contractor concerns
The question of business retention can be especially problematic when an agency has independent contractors. While an agency owns its internal database and can transfer it to a new owner, that is not the case with independent contractors – their databases are their own.
“Independent contractors can move far more easily than employees can, so if they don’t like the new owner, they can leave,” Joselyn said. “That means the revenue promised the buyer might not be there.”
That’s one reason that Joselyn recommends that agency owners consider agreements with independent contractors that would enable the owner to buy their databases.
Market niches have value
Profitable market niches that your agency has developed over the years should be factored into future business potential too, according to Hache.
“I had a client who specialized in the South Pacific islands who sold his business for $600,000,” said Hache. “He had great contacts and agreements that were valuable.”
Only recent data counts
It’s important, however, that the value of the market niche, like any other type of agency business, be based on recent sales.
“People (sellers) want you to buy their history, so they might give you five years worth of data,” Joselyn noted. “But no one buys history, they buy the future. Only the most recent data counts.”
Among potential minefields to avoid in agency sales are possible disputes with agency employees. Are there any pending employee lawsuits that could raise debt levels for a future owner?
“You need to look at whether the agency has a history of employee problems,” Joselyn said.
There are other potential employee-related pitfalls as well –– for instance, unresolved questions over unused employee vacation time.
“I know of one owner who had an employee with $45,000 worth of accrued vacation time on the books. It destroyed the deal,” Hache said.
IC compensation issues
Buyers also need to factor in how much an agency compensates its independent contractors. “When an agency has independent contractors who are over-compensated, it means the new owner will have a real problem in reducing that compensation,” Joselyn said.
On the seller’s side, it is usually advisable to limit the number of independent contractors an agency has on board when it goes up for sale, Hache said.
“When it comes to independent contractors, keep only the ones who produce and share your values,” she said. “Get rid of the rest –– the ones who are just there for the IATA number.”
Consider existing contracts
Other issues that need to be ironed out before a sale are an agency’s existing contracts with employees, facilities or vendors.
“If you’re the buyer, you need to know about all the contracts and stipulate that you only want the ones agreed upon,” said Joselyn. “For instance, you may not want their GDS contract.”
In some cases there may be existing contracts or leases that the owner cannot get out of. “This can be a real pitfall for the seller,” Joselyn noted.
Is it fixable?
When a potential buyer encounters a negative aspect of an agency that’s for sale, it’s essential to look at whether the problem is fixable or non-fixable, according to Joselyn.
For instance, “if an agency is in a bad location or is paying too much rent, that’s fixable because you can move it,” he said.
See related story: “Your Travel Agency Without You – Protecting Its Future,” Nov. 14, 2011.