Mark Pestronk
Q: In a recent column on agency acquisitions, "Many factors weigh in for the travel agency acquisition trend" (May 16), you noted several factors driving sellers' wishes to sell and buyers' wishes to buy. What do buyers look for in order to decide whether to buy and how much to offer?
A: Most of my recent experience consists of representing sellers to serial buyers that have their own ideas of what makes an attractive acquisition candidate. The buyers overwhelmingly agree that one factor is by far more important than any others: profits.
Buyers look for profitable sellers. Purchasers and their investors, especially the largest ones, want to be able to show a good return on their investment in the acquired agency.
For example, if your agency has $100,000 in profits and the buyer pays $300,000, all of which is paid at closing, the buyer's return on investment is 33.3% in the first year after the acquisition. Such a percentage is quite high, so your agency would be an attractive candidate at that price.
The lesson here is simple: to maximize the selling price, you should maximize your profit. In my example, every dollar of incremental profit turns into $3 in selling price.
By "profits," I mean commissions, fees, overrides and markups minus the company's expenses. The result in accounting parlance is "net income," which is what I mean by profits.
Ironically, most small businesses try hard to minimize profits, preferring to expense as much as possible in order to avoid income taxes. Buyers know this, and they also know that you can recast your profits to increase them.
By "recast," I mean add to your net income all of the truly personal items that a larger agency would probably not allow you to expense. One example is owner compensation that exceeds what a larger agency would pay a manager to replace you. If you would not need to be replaced, then add back all of your compensation.
Over the years, I have seen at least 25 different kinds of add-backs of these personal-type expenses, ranging from vacation costs to housekeepers on the agency payroll. While you may worry about the ethics or audit risk involved in having taken such expenses, buyers, in my experience, do not care.
To find recast profits, you should also add back any extraordinary, one-time expenses that you can find. Examples would be moving costs, a new telephone system or litigation costs.
To complete the exercise, you would find your earnings before interest, taxes, depreciation and amortization (EBITDA), which means that you would add back any interest payments, any income taxes, any depreciation and any amortization. Most agencies have little or no such expenses, so EBITDA and recast profits are usually about the same.
The period of time for which you would measure your recast profits is the most recent year or two. Some buyers focus only on the most recent 12-month period for which you can produce an income statement.
If, like most midsize or larger agencies, you have the Trams accounting system, then producing an income statement for a recent 12-month period is not hard. If you are looking to sell, then try to keep an up-to-date, recast income statement for your most recent 12 months.