Q: My agency used to be profitable but has been operating in the
red since the commission cuts. How should I now evaluate my agency
for a potential sale, merger or estate plan? Your previous
evaluation formulas used a multiple of profits, but what if the
agency has no profits now? What new formula should I use?
A: Most travel agencies in the U.S. have been operating at a
loss since early October, even after adding back excess owner
compensation, such as owner compensation (and cash benefits) over
and above what a general manager would be paid by a large agency to
fill the owner's position.
The only exceptions to this depressing generalization would be
the following:
Agencies that successfully have implemented service fees for
all airline tickets.Very productive agencies with very low costs.Agencies that sell mainly high-priced international tickets,
cruises or tours.Agencies that have fee-based pricing arrangements with most
corporate clients and that have succeeded in getting them to pay
for more than the ticket prices.Therefore, since we need an evaluation formula that we could
apply to all agencies, it would be useful to develop a formula that
does not rely wholly on profits. Furthermore, an agency that had
profits prior to Oct. 1 should not be judged on the basis of those
profits, as too much has changed in three months.
Conversely, it would be wrong to look only to percentages of
commissions or sales as the basis for an evaluation, as these
formulas stupidly assume that any two agencies with the same amount
of commissions or sales are worth the same.
What we clearly need is a formula that combines both commissions
and profits, while also taking into account certain special
characteristics of each agency. For the past several weeks, I have
thought a great deal about what post-cut formula would first make
sense for all agencies and then reflect the negotiated prices that
I see each week in my practice.
I have, therefore, devised a formula that I call the
"30-Plus-3-Plus-10 Three-Step Formula," which works as follows:
Step 1: Take 30% of your agency's total commissions, overrides
and fees for the last 12 months. Include commissions from all modes
of travel.
Step 2: Take your operating profit (including overrides) for the
period since Oct. 1, 1997. Add back your depreciation, expenses not
related to the travel agency, and excess owner compensation.
Measure the excess as the amount over .2% of ARC sales for each
working owner (but not less than $30,000 nor more than $150,000 on
an annualized basis for each working owner).
For example, if your salary and bonuses for the fourth quarter
of 1997 totaled $40,000, and if your agency does $12 million per
year (or $3 million in the fourth quarter), then $34,000 was excess
compensation. The total is your "recast" profit for the period.
Then, annualize your recast profit (e.g., multiply it by four if
you have had only one quarter's recast profit), even though
fourth-quarter profits usually are low. Finally, multiply your
recast profit by three.
Step 3: Add the amounts from Step 1 and Step 2 together (i.e.,
30% of commissions plus three times annualized recast profit).
Then, for each of the following 10 factors that pertain to your
agency, add another 3% to the total. For each factor that does not
apply, deduct 3% of the total of Step 1 and Step 2:
1. You do not rebate (except to fee-based or accounts where the
client makes all reservations).
2. You are not more than 25% dependent on three or fewer large
accounts.
3. You, the owner, would be available to help with the
transition in a sale or merger.
4. Your key personnel would probably make the transition to the
new ownership.
5. Your sales are not more than 10% dependent on accounts
receivable.
6. You have written noncompete agreements with your key
personnel.
7. Your CRS contract has less than one year left.
8. Your office lease has less than one year left.
9. Your nonowner salaries and benefits are less than 50% of your
total expenses.
10. Your financial statements are audited, compiled or reviewed
by an outside CPA firm.
Finally, if you contemplate selling your corporate stock (as
opposed to the assets of your company), add the total of your
assets minus the total of your liabilities from your balance
sheet.
Readers should feel free to send their confidential comments
about my new formula to me by fax at (703) 591-9116 or via e-mail
at [email protected]. I will adjust the formula in response to
helpful comments and publish a future column on any revisions I
make.
Mark Pestronk is a Fairfax, Va.-based attorney specializing
in travel law.