Q: In the latest email newsletter sent by Innovative Travel Acquisitions, company owner Bob Sweeney wrote: "Travel companies that specialize in corporate, government, educational or religious travel are doing well and are still able to receive up to 5x EBITDA due to supply and demand." What is EBITDA, and what does "5x" refer to? Does this refer to all agencies that specialize in these kinds of travel? What about agencies that don't?
A: EBITDA stands for "earnings before interest, taxes, depreciation and amortization." It means net income or profit after you add back the expenses in the four categories.
EBITDA gives you a better idea of a company's true profit picture than the bottom line on a regular income statement (also known as a profit-and-loss statement, or P&L) because interest and taxes are not really operating expenses, and depreciation and amortization are not cash expenditures. So, you take those items and add them back as though they were nonexistent.
When it comes to privately held companies, such as all but a handful of travel agencies, you cannot stop at EBITDA if you want a true profit picture. As I know Sweeney would agree, you also have to add back all expenses that benefited you personally (and that a larger agency would not have allowed a manager to take) and all expenses that weren't ordinary ones in a typical year of operation.
Typical examples of expenses that benefited you personally would be owner compensation in excess of what a general manager would earn, car expenses, life insurance premiums, nonworking children on the payroll and vacation expenses that you deducted on the theory that they had a business purpose. In my experience, virtually every travel agency has taken some if not most of these expenses. Examples of expenses that were not ordinary would be moving expenses, lawsuit settlements, tax audits and expenses related to office closings. So, the best statement of the true profit picture of a travel agency is probably "EBITDA-plus-personal-plus-nonordinary."
"5x" means five times; it is also called a "multiple of five." So, if a seller's EBITDA-plus-personal-plus-nonordinary was $100,000 for 2009, then Sweeney is saying that an agency with one of those specialties can be sold for "up to" $500,000.
Generally speaking, the larger the agency, the higher the multiple that it will command. A multiple of five probably applies only to agencies with sales greater than about $20 million or so, but there are exceptions.
However, in the majority of cases, the $500,000 is not a fixed amount but rather a goal that would be achieved if all the business stayed during the year or two after the sale. Most sales are "earnouts," i.e., transactions where the bulk of the price is going to be dependent on the performance of the agency (or the client list) for a year or more after the sale.
For example, assume that the agency's revenue (i.e., commissions, overrides, markups and fees) before expenses was $1 million for 2009. So, the $500,000 evaluation is 50% of that revenue.
Instead of paying a $500,000 fixed price, the buyer might offer 25% of revenue in monthly or quarterly installments over the next two years. Assuming that revenue remained level during that time, the installments would add up to the $500,000, but if revenue dropped, so would the price.
Finally, as a sign of your good faith, you probably need to offer a fixed down payment, but you would deduct it all from the monthly or quarterly installments, pro rata. For example, if you paid $50,000 down, and then paid quarterly, you would deduct $6,250 from each installment. Nevertheless, there are agencies that sell for fixed prices. As with multiples, the larger the agency, the more likely it is to sell for a fixed price rather than through an earnout.
Agencies that don't specialize in corporate, government, educational or religious travel can sell for a multiple of up to five as well, but only if they have a stable, high-end leisure or group clientele. Otherwise, a multiple of three or perhaps four is probably more typical today.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at mark@pestronk.com.
