Mark Pestronk
Q: We are thinking of expanding by acquiring other travel agencies and possibly a tour operator. One target has asked for a lot of confidential information about our own business, including tax returns for the company and its owners and other financial information, mostly focusing on our ability to pay the purchase-price installments. Is it normal for a seller to ask for so much? Is there a limit to what is reasonable?
A: It is not normal, but it should be, whenever the seller is not paid in full at closing. Even in the rare case of payment in full at closing, a seller should still inquire about the buyer's plans for the staff, clients and assumed contracts.
Since you propose to pay in installments, the seller is effectively lending you most of the purchase price. Like any lender, the seller wants to know whether you can and will pay what you owe.
The term "due diligence" in acquisitions refers to the buyer's investigation of a prospective seller before finalizing the deal. "Reverse due diligence" refers to the seller's inquiry process, which I recommend. The scope of inquiry depends on how much risk the seller is taking.
With deferred payments, especially over several years or tied to an earnout, the seller may reasonably ask for your financial statements; your existing debt obligations; pending or threatened litigation; your ARC standing; your seller-of-travel registrations; and your plans for retaining the seller's employees, ICs and clients and performing assumed contracts.
Personal tax returns of your agency's owners are reasonable to request if the owners will personally guarantee the payments. If the terms will call for a large closing payment, the seller needs to make sure that you have the funds or can obtain them from a bank or investor.
Keep in mind that the seller's exposure may extend beyond the installments. If you assume the agency's lease, supplier contracts or customer deposits for future travel and then later default, the seller may remain liable to the landlord, suppliers or travelers. That gives the seller a legitimate reason to examine your operating history and creditworthiness.
Needless to say, do not disclose anything before both sides sign a confidentiality agreement that restricts use of the information to evaluating the deal and prohibits soliciting your employees, ICs and clients. Even after signing it, you may need to be cautious unless you trust the seller completely.
If the target is a competitor or potential competitor, you should withhold client lists, base commission and override rates and pricing strategies entirely or share them only once you are sure that you have a deal. Stage your disclosures, as well: provide fuller detail only after the main terms are agreed. That way, if negotiations collapse, the seller has seen relatively little.
Finally, consider offering security instead of information. A security interest in the acquired assets, a personal guarantee, an escrow, a standby letter of credit or a larger down payment can reduce the seller's risk enough that intrusive financial and other disclosure becomes unnecessary.