How Much Is Your Agency Worth?

As sales of travel agencies heat up, especially among corporate-focused agencies, buyers and sellers both have to grapple with the same question: How much is the company worth?

Most businesses, travel agencies included, are valued based on some multiple of sales, said Bob Sweeney, president and CEO of the agency broker Innovative Travel Acquisitions.

A formula
There are no hard and fast rules on pricing, he explained, but the more profitable an agency, the higher the multiple. For instance:

•    An agency that generates up to $150,000 in free cash flow each year will likely sell for 2.5 to three time earnings.

•    An agency that generates between $150,000 and $500,000 in free cash flow each year will likely sell for 4.5 times earnings.

•    An agency that generates between $500,000 and $1 million in free cash flow each year will likely sell for about 5.5 times earnings.

Running the numbers
At Directravel, where Ed Adams has been heading up a consolidation drive for several years, target companies are evaluated using a standard accounting measure – earnings before interest, taxes, depreciation, and amortization, or EBITDA.

The typical purchase price is around five times EBITDA, according to Adams. There is always room for adjustments based on specific situations such as less productive family members on the payroll or particularly valuable accounts tied to specific agents.  

Adams started consolidating companies for Silver Oak Partners, under the Directravel banner, in 2011. He had a list of potential targets and enough capital to amass companies with between $25 million and $30 million in EBITDA, he told Travel Market Report at that time.

Better times
With earnings soft, many potential sellers decided to hold on to their companies and hope for better times. Now that earnings are on the rise, EBITDA is up, and those would-be sellers are coming back into the market.

“We are paying a multiple of EBITDA, so we don’t have a problem with business improving. If EBITDA is up, that’s fine with us,” Adams said.

While leisure and commercial travel sales both took a beating during the recession, business travel has come back sooner and stronger. That has put business agency owners in a stronger bargaining position than leisure agency owners.

What to sell?
The terms of an agency acquisition are as varied as the parties involved. The simplest deal may be an outright purchase of 100% of agency assets and the old owner walks away.

But business deals are seldom simple.

“It all depends on what the seller is looking to accomplish and what their timeline is,” Sweeney said. “If the seller is in his 70s, it might make sense to sell everything and walk away. But some other arrangement might be more appropriate for an owner in his 50s.”

Buyers also have their preferences, Sweeney continued.

Frosch typically buys 51% and keeps the current owner in charge. World Travel Partners usually buys 80%. Directravel typically buys 100%. And all three can be flexible if the right agency is on the table.

“There are a number of players who are buying 51% interest and keeping the owner fully engaged,” Adams said. “We’d be willing to entertain that as well if an owner wanted to keep some skin in the game.”

Happening all the time
Acquisitions are a familiar part of the agency landscape. Travel agencies, particularly commercial agencies, change hands in good times and in bad.

“Acquisitions happen all the time,” said long-time industry consultant Mark Miller in Atlanta. “Most of them just aren’t publicized because buyers and sellers are privately held firms and have no reason to talk about their financial affairs.

“More times than not, when there is a shift in the market that impacts traditional revenue streams, it impacts business owners and business ownership,” Miller said.

“Companies are in acquisition mode to expand their operations and apply what have been very successful methods to new geographic areas.”