Q: My agency wants to absorb the accounts and employees of a
neighboring agency, which will close its office. We have already
arrived at a price using your formula, but what kind of agreement
should we use and what, besides the price, should it cover?
A: With agency absorptions, the best kind of contract is usually
a "consulting agreement" which expresses the price as payment for
services rendered to you. Those services can be post-closing
transition assistance or continuing availability and advice by the
seller's owner.
The consulting agreement is usually advantageous to your agency
for two reasons: first, you can treat the payments as business
expenses, instead of having to amortize them as the purchase of
goodwill. This means that, for tax purposes, you can deduct the
payments as made, instead of deducting just one fifteenth of the
total price each year for 15 years.
The second reason is that the creditors of the absorbed agency,
including its landlord and CRS vendor, are much less likely to make
claims against your agency than if you characterize the transaction
as a stock purchase or even an asset purchase.
If your agency is also going to acquire some of the other
agency's fixed assets, such as desks, you may need a separate asset
purchase agreement, but the amount paid for these assets should be
quite small in comparison to the amount that will accrue under the
consulting agreement.
The consulting agreement should contain most of the protections
that an asset purchase agreement would. For example, you should
provide the usual seller warranties that the account lists and
financial statements are accurate. The selling owner should also
agree not to compete in a defined geographic area for a specified
number of years.
If the price is expressed as a percentage of future commissions
and fees generated from the transferred accounts, the seller may
insist on a provision that turns the price into a fixed amount if
the buyer goes out of business or sells its own business. The
seller may also insist on personal guarantees by the buyer's
owner.
These type of consulting agreements are ideally suited to
absorptions of small travel agencies that have been hit hard by the
commission cuts and have owners that are tired of low profits. If
your agency wants to grow, you will probably find many absorption
opportunities in the months ahead.
Mark Pestronk is a Fairfax, Va.-based attorney specializing
in travel law. He moderates TW Crossroads' Legal Issues bulletin board.