With the changes we have seen in the travel industry, many may be thinking about getting out. Maybe it is time to sell? Maybe it is time to buy? As with life itself, timing is the key to acquisitions. Despite the recent economic hell, we are a very resilient industry having recovered from 9/11, SARS, Desert Storm, recessions etc…
While some of this information may seem a bit negative, there is still a very strong market for acquisitions and mergers. The overall trend for what buyers are willing to pay for break even, small, retail agencies has plummeted from 100% of gross profit in 1990 to 33% of gross profit currently. Spouses of doctors, lawyers etc. were overpaying in the late 80s for break even hobby shops. Today’s buyer is the corporate warrior looking to control his own destiny. These buyers are willing to pay three times the net profits for small operations; and up to five times the net profits for larger operations. Please be sure you know the difference between “gross” and “net”—it is critical.
Banks are not anxious to loan money on these types of businesses without collateral. Banks view travel agencies differently than a manufacturing or trucking business where there is value in machinery and equipment. Investing in the travel industry is considered risky due to the very cyclical nature, dependence on consumer discretionary cash, and economic conditions. Travel is not like a food company or supermarket. With the advent of clear video conferencing and webinar style meetings there is pressure to keep the cost of travel in reach of the average consumer.
There are always buyers on patrol for good acquisitions. Today, the market still remains firmly in the buyer’s hands. But that does not mean as a seller, you will not receive a fair value. If you are thinking of selling consider these 10 steps to be ready to let go of your baby:
- Refrain from signing any long term contracts as buyers want to negotiate own terms.
- Obtain a contract of non solicitation from your key staff whereby they agree never to contact house clients if they are no longer employed by the owner. This may be deemed unenforceable if challenged in some courts, but it is a comfort to a buyer and a deterrent to a less than loyal employee.
- Keep your top 5 accounts under written contract.
- Zero out your accounts receivable to 100% credit card business.
- Review and prepare financials with a CPA firm.
- Record a detailed list of personal expenses such as car insurance, club membership, personal travel, meals etc. you have taken as an owner.
- Eliminate non-essential personnel.
- Do not give raises prior to closing the sale. Let the buyer do it.
- Defer all non-essential equipment purchase or leases.
- Do not make any material changes in the way you do business–implementing fees, changing compensation formulas, etc.
Sellers need to be prepared to sign a non-compete agreement barring you from contacting any ex-clients or from setting up a similar business after the sale—typically these are in the three year range, but can go as high as ten years.
Selling your agency is about relationships. You will need to form a relationship with the buyer and work together to make the transition as seamless as possible. However, like in any relationship, things can go south. In my experience, there are 4 major deal killers.
- Buyer terminates negotiations after seller insists on too many concessions during too many rounds of negotiations.
- Seller’s volume drops precipitously during negotiations, with no coherent explanation.
- Word of impending sale leaks out and the seller’s employees decide to leave and competitors decide to raid the seller’s accounts.
- The buyer has too many other acquisitions in the works and the seller becomes disgruntled with the buyer’s lack of attention.
However, the CPAs and attorneys that do not specialize in tourism and travel industries are often times deal killers themselves. CPAs and non-travel attorneys do NOT want to lose you as a business account and often will steer you into a deal that may not be as good as it can be. Additionally, the travel industry is a unique business and it is best to have someone represent you that knows the ropes.
Sellers should never play games in this, or any, market–it will backfire. It’s always best to receive two offers. This precludes dealing only a single potential buyer. Most transactions with only a single interested potential buyer never consummate. Comparing one offer to the other is fine, encouraged, and to be expected; playing one off the other is never wise nor is it nice. More likely than not, you are emotionally vested in your business. My best advice is to not sell without a middleman. You must keep your head out of your heart in these negotiations and a third party is the probable answer. Terms are more important than price in many cases. Negotiations are tense. Use a professional who has been through the trenches and knows the pitfalls in the minefield of mergers and acquisitions. Check your ego at the door and approach any sale (or purchase) as what it is–a business transaction.
Innovative Travel Acquisitions, Inc. president Bob Sweeney and staff have completed 506 acquisitions of tour and travel related businesses since their inception in 1991. Bob has been in the brokerage industry for 18 years. He is a proud member of ASTA, NTA and many other known industry affiliations. Known as “the Matchmakers for the Travel and Tour Industry” they are available to answer any questions you may have by contacting them via phone 800-619-0185 or by sending an e-mail to firstname.lastname@example.org.