Q: Are you seeing a lot of agency acquisitions these days? If so, have you spotted any trends in prices, terms or anything else that might motivate me to sell my agency?
I am seeing seven trends in buying and selling agencies in late 2012. Keep in mind that, for every one of my generalizations, there are exceptions, and your deal might well be different. 1)
Agency sales prices are increasing. A small agency that sold for about 30% of revenue (i.e., commissions, overrides, fees and markups) at the end of the recession in 2009 may well sell for 40% in late 2012. This is a 33% increase in value.
The increase in sales prices is probably due to increasing profits, since sales prices are usually calculated based on a multiple of profits. The higher the profit margin, the more an agency is worth, when all other factors are equal.
Of course, when I mention such percentages, it does not mean that your agency is worth that much or will sell for that much. These are only averages that I am seeing. 2)
My anecdotal experience is that the number of sales is definitely picking up, based on the increasing number of acquisition clients that I have at any given time. I believe that attorney colleagues and business brokers would confirm my impression.
The faster pace might be due to the fact that lots of baby boomers are nearing retirement. It might be due to a calculation that it makes sense to sell when business is booming and profits are relatively high, or it might be due to both. 3)
Unless your agency has at least $6 million to $10 million in sales, you can usually expect only a small down payment or none at all, with the balance paid as a percentage of either your location's revenue or your client list, depending on whether the buyer plans to keep your location or absorb the business into the buyer's headquarters. Higher down payments and fixed installments are generally offered to larger agencies only, but there are exceptions. 4)
In GDS contract renewals and conversions, all the GDS vendors have been offering acquisition incentives that partly or even mostly subsidize the cost of any acquisition of an agency with a different vendor and a contract that can be terminated or is expiring. Although such incentives have been offered to big agencies for decades, the vendors have begun offering them to small buyers making even smaller acquisitions. 5)
ARC appointments are becoming less important to buyers, who often now require the seller to give up its ARC appointment at the closing on the sale. If the buyer keeps the seller's location open, the location simply gets its tickets issued by the buyer's headquarters, apparently without much difficulty. 6)
As I have mentioned in previous columns, even home-based agencies can be sold for good prices to interested buyers such as your host or a fellow hosted agency. This phenomenon might be due to the declining importance of ARC appointments and bricks and mortar. 7)
Although the relevant field of law is called "mergers and acquisitions," there are, in fact, almost no mergers in the agency business. With a merger, you get one or more partners, which is probably an undesirable outcome for most entrepreneurs. Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at firstname.lastname@example.org.