Mark Pestronk
Q: In two previous columns ("So you want to sell your travel agency. What's the next step," Jan. 30, and "Letter of intent often sets stage for completing an agency sale," Feb. 13), you explained the typical steps in a travel agency acquisition through the due-diligence stage. What comes next?
A: In the typical due-diligence process, the buyer investigates the seller's finances, agreements and leases, policies and culture. However, not all acquisitions are typical, so some buyers dispense with most or even all due diligence.
If the parties know and trust each other and the buyer plans to absorb the seller's business into its existing office, some buyers would deem a due-diligence investigation unnecessary. In addition, certain clauses in the agreement can take the place of some due diligence. For example, rather than ask for a list of employees with the name, duties, seniority and compensation of each, a buyer could require the seller to append the list to the agreement and promise that the list is correct. The buyer would get a chance to review the list before signing the agreement.
Although we have been covering due diligence conducted by the buyer, there is no reason why the seller cannot conduct an investigation of the buyer. For example, if the purchase price is going to be paid in fixed installments, the seller might want to be sure that the buyer has the ability to pay out of its own funds without relying on the acquired agency's cash flow or hoped-for investment by third parties.
Once the parties are reasonably satisfied with what they have found, the next step depends on whether they have already negotiated the definitive agreement, which in most cases comes after the due-diligence process.
In negotiating the agreement, each side needs its own attorney. Having the same attorney represent both sides is an invitation to disaster, except in the most unusual circumstances, such as when both parties have previously done acquisitions successfully.
Even if the parties think they have agreed on all the business terms, there are many key legal issues on which the interests of buyer and seller always diverge.
Take taxes, for example. If the seller has a C corporation, it will want a stock sale; i.e., a sale of all of the corporation's stock to the buyer in return for the purchase price, which is paid to the owner, not the corporation. Otherwise, the corporation will have to pay taxes on the gains. When the proceeds are distributed to the owner, the latter must pay taxes on the distribution, with the total taxes often exceeding 50% of the purchase price.
On the other hand, most buyers would prefer to buy the assets of the seller's corporation, as the buyer can then amortize (i.e., deduct) the purchase price from taxable income over a period of years, which it cannot do if it buys stock. If the seller is not familiar with these kinds of tax issues, it should not rely on the buyer's attorney to protect the seller's interest.
I once made a checklist of all the points or issues that could be negotiated in a travel agency acquisition agreement; the total was about 70, and it has certainly grown since then. Typically, these points are resolved in favor of the buyer for three reasons: the buyer usually has superior bargaining power, superior knowledge of the process and the buyer's attorney typically gets to draft the agreement. Even if the seller's attorney successfully changes dozens of points, the residual agreement will probably still favor the buyer. Sellers can improve their bargaining power by getting more than one potential buyer interested. Not only can the purchase price increase but more key legal points can also be resolved in the seller's favor.