Mark Pestronk
Q: I am thinking about selling my agency, but I am concerned about the large number of unredeemed gift certificates that the agency has sold over the years. The total is well over $100,000, and we have spent all that money. Was it legal for me to have done so, or did I have to keep the money in some sort of escrow or trust account until the recipients got their tickets? Will the buyer have to honor those gift certificates? If so, will I have to transfer money to the buyer at the closing on the sale of my agency, or can I wait until each gift certificate gets used?
A: No law requires a travel agency to retain the proceeds of sales of gift certificates. Therefore, it was not illegal for you to have spent the money instead of putting it in a trust account or the like.
Although the seller of travel laws in California, Florida, Nevada and Washington have special rules for "travel certificates" and "vacation certificates," the statutory definitions of those terms make clear that the requirements do not apply to ordinary gift certificates. Instead, they apply to sales of certificates that provide some sort of discount, membership or specific travel service.
If you sell the stock of your corporation or the ownership interest in your limited liability company, the buyer must honor your gift certificates by definition, since your agency's liabilities remain unchanged. On the other hand, if your agency sells its assets, the buyer does not necessarily have to honor the gift certificates.
Nevertheless, it is inconceivable that a buyer would refuse to honor them, as refusal would ensure loss of clients and create ill will in the community. Therefore, a smart buyer will require that you reimburse the buyer for the value of the gift certificates.
In my experience, there are three ways to structure the reimbursement. First, in the simplest transactions, the seller reimburses the buyer at closing for all outstanding gift certificates, just as the seller would normally reimburse for customer deposits that you are still holding as of closing.
Second, in cases where the amount of gift certificates is very large in relation to the agency sale price or where the parties think that some of the gift certificates may never be redeemed, the parties' agreement can provide that the seller will reimburse the buyer each time a gift certificate is redeemed. So if some certificates are never redeemed, the seller benefits.
Third, in the largest transactions, including those where the buyer is backed by private equity, the seller is required to have an agreed amount of working capital at closing. Since gift certificates are liabilities on the seller's books, the seller is required to cover them with current assets (i.e., cash and accounts and commissions receivable) left in the business.
If you have to reimburse the buyer at closing, and if the amount due exceeds the buyer's down payment, you will find yourself in the unenviable position of having to pay your buyer at closing, instead of vice versa. Therefore, if the buyer's down payment is not large enough to cover the amount you owe at closing, try to get the buyer to agree to let you reimburse the buyer only as each certificate is redeemed.