Mark Pestronk
Q: Sometime in the next year or so, I am going to be approached by a potential buyer for my agency. I know that the first step is signing a nondisclosure agreement (NDA) with the potential buyer, but I want to be prepared for what comes right after that. What are the exact records and data that I should have at my fingertips, so I don't delay the process and cause the buyer to lose interest?
A: First, if the potential buyer already understands the particular niche of travel business that your agency is in, and if your agency is profitable, you can begin with an email that lists the following data for both the last calendar or fiscal year and the most recent 12 months for which you can produce it:
• Your total sales (also known as gross sales or sales volume). This is a rather artificial figure, as it is just the total of invoices produced by your accounting midoffice or back-office system. It is not income to your agency, but most potential buyers will use it to measure your size, so you should have it at hand.
• Your revenue (also known gross income or just income), which is the total of all of your commissions, override, fees and markups. It also can be measured by taking total sales minus the cost of sales.
• Your net income (also known as profit), which is the total of all revenue minus all expenses, and it should match the bottom line on your income statement (also known as a profit and loss statement or P&L).
• Most importantly, your itemized list of personal-type and one-time expenses that you have added back to your income statement's net income in order to show the buyer your true profit picture. This total is known as your recast income statement or seller's discretionary earnings (SDE for short).
The most recent 12-month period is also called the trailing 12 months (TTM or T12) or latest 12 months (LTM), and that is what most sophisticated buyers look at first or even exclusively. Therefore, it is useful to have the data updated and at your fingertips every month on a rolling basis.
As you have undoubtedly noticed, there are many financial and accounting synonyms, and it is sometimes hard to know what the other party is talking about, but you should be familiar with all of the synonyms.
The most popular back-office system for retailers is called Trams, and fortunately, that system is easily able to produce a trailing 12 months' income statement and a balance sheet as of the last date of the income statement. If your system can only produce annual or quarterly financials, you may be at a disadvantage if you are not able to produce exactly what the potential buyer is looking for.
In my experience, prior years' financials are not very important in buyers' decision-making. You will certainly need to provide those figures as part of the due-diligence process, but it is unusual for a buyer to make an offer based on a multiyear average.