Mark Pestronk
Q: What would you say are the most common controversies between buyers and sellers of travel agencies following an acquisition? What can be done to avoid them?
A: Here are the five most frequent controversies that follow an acquisition:
First, most purchase prices are at least partly earnout-based, which means that the amounts paid depend on the money that comes in after the acquisition. Typically the price is a percentage of commissions, revenue, gross revenue or gross income for a fixed period after closing.
In some agreements that I see (even if drafted by lawyers), the terms quoted above are either not defined or defined quite inadequately.
As a result, the buyer is leaving itself open to claims for overrides, GDS incentives and incremental or preferred supplier commissions from better supplier deals than the buyer might have. In addition, the agreement may fail to address whether gross income is recognized on an accrual or cash basis or how group markups and expenses are treated.
Second, there are many kinds of transactions before closing for which money is received after closing. One example is a cruise commission for which the seller collected a deposit before closing, and the buyer collected the final payment after closing. These kinds of transactions are typically a major area of dispute, and the parties often end up compromising.
Third, there is yet another category of money that causes frequent controversies: the seller's prepayments of office expenses and advances out of its own funds for future trips. Typical examples would be prepaid Yellow Pages ads and the agency's deposits for cabins that a group will occupy in a year or more. If the buyer does not reimburse the seller for these items because the agreement does not so specify, the seller will want reimbursement later on when it discovers the problem.
The fourth source of controversy is the buyer's right to close the purchased agency and move the business into the buyer's location. If the sale is earnout-based, future payments could drop if the closure resulted in loss of business, which it usually does.
Fifth is the question of which party is responsible for employee vacation days that accrue before closing but are taken after closing. If employees have weeks or months of accumulated leave, the buyer will resent having to take on this liability without compensation.
As you can see, the most common controversies are about who gets or keeps what money. However, there are also nonfinancial issues, including whether and how long the buyer retains the seller's employees and independent contractors.
As sharp readers will have guessed by now, the moral of the story is that you should cover all these points in the agreement. So give your attorney this checklist to make sure it's all covered.
Note to readers: You have probably noticed that a lot of my recent columns deal with acquisitions. The reason is that much of my work lately has been representing either buyers or sellers (mostly the latter) in such deals, and I usually write about what I am working on. I apologize to readers who aren't interested in this subject and promise that I will be covering other topics soon.