Mark Pestronk
Q: Our agency has a very large corporate account that has comprised the vast majority of our sales over the years. We have an excellent relationship with top management at the company. Like all corporate agencies, our business is currently deeply depressed, and we have no idea how soon it will pick back up. Would it make any sense for us to propose that the corporation acquire our agency in this environment?
A: It would make a lot of sense for a corporation wanting to get into the business. It could also make sense for you, if you are looking for a good exit strategy.
As you probably already know, acquisition formulas have changed. Before this year, travel management companies (TMC) acquisition prices were based on multiples of profits (Ebitda, short for earnings before interest, taxes, depreciation and amortization), but without any profits, formulas have shifted to earnouts based on percentages of sales or revenue.
However, in my experience, large corporations generally do not use earnouts. Absent current profits, they would typically offer a price that is a multiple of projected Ebitda once the pandemic ends. For sellers, such a formula could result in more money and faster payments, so such an acquisition could make sense for you, too.
Further, you could take advantage of your excellent relationship with top management by becoming a well-paid travel-management consultant to the corporation. Your staff could benefit, too, since corporations invariably pay travel employees more than agencies do.
From the corporate client's viewpoint, there are good reasons to acquire a TMC. First, the corporation can acquire expertise, experience and talent that will help cut its travel program costs, especially if the company has no corporate travel manager now.
Second, acquisitions make sense because the corporation can stop paying transaction fees to the TMC, resulting in savings that could go a long way toward justifying the purchase price, if the company's travel volume was big enough before the pandemic.
One caution: The agency may not be able to keep all its supplier contracts, as airlines do generally offer overrides to corporations, and GDS deals for corporations are not generally not as good as they are for agencies.
The corporation could not legally keep the acquisition confidential and thereby try to keep its supplier deals in place, as both ARC and Iatan require you to submit change of ownership applications. The carriers would be informed of the change, and eventually more suppliers will learn about it, too.
There are no regulatory obstacles to such an acquisition. Although both ARC and Iatan have a separate category for corporate travel departments (CTDs), your agency would not become a CTD just because it was acquired by a client. Gone are the days when you could not get an ARC appointment if you made more than 20% of your sales to "yourself" or an entity under common control with you.
Some industry veterans may also remember a time when travel suppliers refused to offer commissions for sales to corporations that owned the agency. However, those days are long past.