Mark Pestronk
Q: In three previous columns ("So you want to sell your travel agency. What's the next step," Jan. 30; "Letter of intent often sets stage for completing an agency sale," Feb. 13; and "Settling divergent interests of buyer and seller in agency sale," March 13), you explained the typical steps in a travel agency acquisition through negotiation of the agreement. What comes next?
A: Once the draft agreement is acceptable to both buyer and seller, there is typically another step that needs to be taken before signing the agreement: attaching the various exhibits that are called for in the agreement. These are usually called "schedules" to the agreement.
Schedules typically take two forms: lists, such as of employees and independent contractors, and actual documents from the seller's files, such as financial statements. The agreement refers to each schedule, and the seller warrants that it is correct, which means that if the exhibit contains false information, the seller has breached the agreement.
In a typical asset purchase agreement, there are between five and 10 schedules, including those mentioned and others such as the list of bookings for which the seller received final payment before closing, the list of customer deposits held by the seller and a description of any lawsuits or proceedings. In major acquisitions, there can be as many as 30 such lists and documents.
Compiling the schedules takes the seller at least a full day and often more. Since most agency owners don't have all the required information at their fingertips, they need to enlist the help of at least one trusted employee, such as the agency accountant or bookkeeper, who should promise confidentiality.
Sellers often complain that the required exhibits largely duplicate what was already provided during the due diligence phase. This is true, but the material produced in each phase is used for different purposes.
In the due diligence process, the documents and lists are to help the buyer decide whether to proceed with the acquisition. In the schedules process, they are used to ensure that the seller has not misrepresented any facts that could create problems for the buyer after the closing.
After the buyer is satisfied with the schedules, the parties can either sign the agreement and set a closing date in the near future, or they can decide to sign and close at the same time, either now or later. Generally, the larger the acquisition, the more likely it is that the buyer will want to sign and close at the same time in the near future.
For example, on May 1, the parties may decide that the agreement and the schedules are ready, but the buyer may set May 31 as the date for signing and closing. This tactic gives the buyer the freedom to back out until the moment of closing.
If closing is set for a future date, the next step is satisfaction of any conditions to closing. Typically, the seller needs to satisfy a few conditions, such as obtaining the landlord's consent to assign the office lease to the buyer.
Another condition that I sometimes see is ARC approval of the change of ownership of the agency. The ARC agreement expressly requires its prior approval of such a change, but this is a rule more honored in the breach than in the observance. In my experience, ARC very rarely objects when it finds out that an acquisition of an ARC agency has taken place without its prior approval. However, be very cautious about transferring control of your agency, as the seller remains liable to ARC and the airlines for every ticket until ARC approves the change. Not every acquisition requires ARC approval. For example, if the seller's business is being absorbed into the buyer's office, the seller can simply terminate its ARC appointment.