Mark Pestronk
Q: I want to acquire a competing travel agency in my city. The business is excellent, and our combined volumes would produce good synergy. Ideally, I would like to absorb the business into my current location and convert their reservations system to the GDS that I use. Here is my problem: The seller has a lease that stretches for three more years, a GDS contract that has more than two years left and a multiyear franchise agreement that would cost a lot to terminate early. Is there any way I could accomplish this absorption or will the existence of these contracts kill the deal?
A: If you purchase the seller's assets, you do not have to assume (i.e., take over) any contracts that you don't want. The trouble is that the other parties may end up suing the seller for breach of contract and suing you for inducing the breach.
Therefore, almost no sellers are willing to sell their agencies, keep their contracts, walk away and then deal with creditors afterward. Few buyers would take on the risk of suits, too.
However, there are three ways to deal with contracts that you don't want to assume.
There is no guarantee that any of them will work, but it may be worth it to try one or more, depending on how valuable the acquisition is going to be.
First, you can try to negotiate a mutually agreeable termination with the landlord, GDS vendor and franchisor.
If you tell them that the seller will no longer exist and that their alternative is to get nothing at all, then they may offer a big discount paid out in one lump sum.
You can think of the payouts as an addition to the amount you have to pay for the agency, so you would have to get a big enough discount to make the acquisition worthwhile. You could even try to get the seller to take a lower price to compensate you, although I don't think many sellers would agree to such a concession.
Second, you can assume the contracts and pay the monthly amounts due without using the seller's office, GDS or franchise rights. In some cases, it may still be worthwhile to do this.
GDS contracts are a good example. Today, small agencies with few GDS segments have monthly bills in the tens of dollars, with little or no penalties for not using the system. You can take over the contract and park the system.
Third, you can do what the airlines have often done when one carrier acquires another: require the seller to put the agency into Chapter 11 bankruptcy, where it can freely repudiate any long-term contract or lease that it wishes while still continuing to operate. You can then acquire the agency free of such contracts.
It is surprisingly easy and relatively risk-free for a travel agency to file for bankruptcy.
ARC has no problem with it, as long as you keep current in your reporting and remitting.
Clients do not have to be told unless you owe them money.
Since there is no guarantee that any of these methods will work smoothly or profitably, the lesson for potential sellers is clear: If you are thinking of selling, refrain from entering into any long-term contracts or leases.