Cost to buy an agency is down, but still not a buyer’s market
Mark Pestronk is a Washington-based lawyer
specializing in travel law.
Q:I assume that the current recession has caused a drop in the prices at which travel agencies are being acquired. Am I correct? If so, can you quantify the decline?
Does the drop make it a buyer’s market
today? If I want to buy one or more agencies, is now a good time to buy?
sellers believe that a sales price should
reflect the average of results for the last
three, four or five years, which means
that the last 12 months’ results will only
account for one-third, -fourth or -fifth
of the purchase price. Many professional
business appraisers also use such formulas.
While counting all those years might
make sense in other industries, the most
sophisticated buyers in the travel agency
business look at only the last 12 months’
results when setting an offer price. Anything else is ancient history, given the rapid pace of change.
Because it is hard to persuade many
sellers to accept a lower price, I could not
yet call this a buyer’s market.
Nevertheless, if you can find willing
sellers, I have no doubt that now is an excellent time to buy travel agencies.
To submit a question for Legal Briefs, email
Mark Pestronk at firstname.lastname@example.org.
A:You are correct: Agency acquisition prices have definitely declined in 2009.
The next several months will be a good
time to buy if you can find a seller who will
accept a lower price than he or she had previously envisioned.
Agency sales prices depend on the seller’s profitability, revenue, sales level and
other factors, such as sales mix and length
of time left on the GDS contract. Since
most agencies have had fewer sales and
revenue this year than last, and since almost all of those agencies have had lower
profits, it follows that acquisition prices
In my experience, the majority of acquisitions are at prices that vary according
to the revenue (commissions and fees) of
the seller’s accounts or location during an
agreed period after the sale. This kind of
formula is called an “earnout.”
For example, the buyer may agree to
pay the seller 25% of the location’s revenue for two years after the acquisition,
with a small down payment that is deducted from each month’s or each quarter’s percentage payment. Assuming that
the location has the same revenue for the
next two years after the acquisition that
it had for the year before the acquisition,
the earnout will amount to 50% of the
agency’s current revenue.
look at only the
last 12 months’
With the recession, the percentages in
the earnout formulas appear to be dropping.
Although it is hard to generalize, if
I were forced to do so, I would say that
the most typical earnout formula today is
20% of the first year’s revenue and 15%
of the second year’s revenue. Let me hasten to add that I also see much higher
percentages in some cases as well as some
So, just because I see the foregoing as
“typical” it does not mean that any given
agency should or will sell for this price.
Even if it is a fair price, you might not be
able to persuade a seller to sell on these
One of the biggest obstacles to getting a
seller to agree to a lower price that reflects
its lower revenue and profits is this: Many
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