Mark Pestronk
Q: It's hard to believe that, in the current environment, some agency owners are contemplating or actually doing acquisitions. How can the present time possibly be a good time to buy travel businesses? How can I justify spending precious cash on acquisitions when I have laid off many of my employees?
A: Now is a very good time to buy travel agencies and tour operators. Prices have never been lower, and terms have never been more favorable to buyers.
As reported by Jamie Biesiada in Travel Weekly's Sept. 7 issue, "Travel agency consolidation is fueled by pandemic, retirements," most deals do not involve any down payments or fixed installments. Rather, they are based on the seller's business' performance in future years, a model known as an earn-out.
In most deals, the seller closes its location, and the buyer absorbs the clients into the buyer's location. The earn-out is typically based only on the book of business that exists at the time of the acquisition, but it can also include referrals.
Acquisitions can make sense if you believe that business will pick up in 2021, as the increased client base will bring increased volume, possibly resulting in more revenue on each sale. Commission levels can increase with sales levels for cruises and other suppliers, and GDS segment incentives can increase with volume.
Bringing in sales on preferred suppliers can increase market-share overrides, as well. For corporate agencies, increased market-share overrides from adding business on preferred carriers can go a long way toward paying for the acquisition.
Absorbing business can fill unused capacity and achieve economies of scale, too. If you have unused office space, you can fill it up through acquisitions. If your back-office personnel don't have enough to do today, you can keep them busy with the new business.
Acquisitions can sometimes help you expand into new specializations. If you have a corporate agency, adding high-end leisure sales will help you survive, as business travel sales may lag behind leisure in the next couple of years.
If you are thinking of selling in a few years, once profits have recovered, adding business now at a low price may boost your eventual selling price. On average, the larger the seller, the higher the selling price as a percentage of total sales, revenue or profits.
Finally, as one client once explained to me, acquisitions sometimes bring unforeseen opportunities. You never know what is going to come in over the transom once you bring in new clients.
Of course, acquisitions are not without risks and pitfalls. That's why due diligence and a good contract are absolute necessities to avoid unpleasant surprises and getting stuck with the seller's liabilities.
If you are concerned about how an acquisition would look to your employees and laid-off personnel who see you spending time and money on acquisitions, you might explain that absorptions bring in new business for them to handle. The added business can create a more long-term and secure environment for them.