Q: I have never sold a travel agency before, so I am really at sea when it comes to what steps are involved. Actually, not only am I at sea, but I feel I am surrounded by sharks ready to bite if I misstep. Could you go through the typical steps involved in an acquisition, starting from the very beginning, assuming that I know nothing except that I am thinking of selling?
A: It is hard to generalize because most acquisitions deviate at least a bit from the typical path. However, here is a list of the most common steps involved in what I would call the typical sale.
First, let's assume that you already have one or more interested buyers and you have made up your mind to sell your business. Your next step is to come to an understanding on the sales price.
Most buyers would probably set an offer that is a multiple of your agency's recast profits for the most recent 12 months. By "profits," I mean the bottom line on your income statement (also known as a profit and loss statement or P&L). By "recast," I mean adjusted to add back owner compensation that is in excess of what you would pay a replacement for yourself, plus personal expenses such as travel, plus extraordinary or one-time expenses such as moving costs.
If you can figure your recast profits, the typical negotiation turns to what multiple the parties will agree on to establish the purchase price. In today's market, a buyer typically offers a multiple of three, and the seller typically counters with four.
Although many agencies sell for a higher or lower multiple, this is the range that I would call typical. Here, the parties may compromise on 3.5 as the multiple, but it depends on each party's negotiating power.
For example, let's say that your recast profits for the most recent 12 months were $100,000. The buyer would probably typically offer $300,000; you might counter with $400,000; and you might compromise at $350,000.
Second, the parties need to agree on payment terms. Paying the entire purchase price at the closing of the sale is unusual. More typical is a down payment of about 20% to 50% of the purchase price with the remainder paid in installments over one or more years. Even more typically, the payments take the form of an earnout, which means that the payments are geared to the commissions, overrides, fees and markups ("commissions," for short) generated during the year or two after closing.
For example, let's say that you have agreed on $350,000 and that your agency's commissions for the last 12 months were $800,000. If the parties agree on a down payment of $150,000, the balance of $200,000 would be paid not as fixed installments but rather as 25% (200,000 over 800,000) of the commissions generated by your clients or your location during the year after closing, typically payable monthly.
Although the foregoing is typical, there is a great deal of variation and negotiating room in how much of the purchase price is allocated to the earnout, the payment interval (monthly, quarterly or annually) and the length of the earnout. Generally, the larger the agency sold, the less is allocated to the earnout and the more is paid up front.
Third, once you have agreed on price and terms, there are two other key business issues that you need to negotiate: who keeps which commissions received after closing for sales made before closing (i.e., commissions receivable) and what your personal role and compensation will be after the acquisition.
Once you have agreed on all these business terms, you are ready for the next step, which I will cover in a future column.