Travel Weekly - July 27, 2009

LEGAL BRIEFS

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 mark@pestronk.com.

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 have declined.

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.

Sophisticated agency buyers look at only the last 12 months’ results.

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 fixed prices.

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 terms.

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

Get showered with rewards.

The Hertz Agent Gold Rewards Program’s one-year anniversary brings great rewards.

When you help your clients choose Hertz, everybody wins. Including you. The

Agent Gold Rewards Program lets you choose from high-end merchandise, travel rewards, and sports, theater and concert tickets. Enroll at hertzagentgold.com.