ore than 500 U.S. travel agencies were
sold last year. The rate of ownership changes has leveled off
compared with the churn of the early post commission-cut era, but
the pace of agency sales remains brisk enough to keep Bob Sweeney
hopping.
Sweeney is president of Innovative Travel Acquisitions (ITA) of
Roswell, Ga., a brokerage firm that specializes in sales of travel
agencies. ITA handles about 10% of all agency sales.
In January alone, ITA did five deals, including the sales of
agencies ranging from $4 million to $17 million in volume and the
acquisition of one air consolidator by another.
A wide range of factors come into play before a travel agency is
sold.
Among them are the seller's demonstrated ability to sustain
volume and profit, the tenure of its staff, its location, GDS
contract and client list.
But intangibles, particularly the positive feelings buyers and
sellers have about each other, are critically important.
"It's a lot like running a dating service," according to
Sweeney. "When all is said and done, sellers and buyers have to
feel good about each other all the way throughout the process. If
they start to get a shaky feeling, the odds are that feeling will
magnify itself as they go along," he says.
The vast majority of ITA's business begins when a prospective
seller makes contact with the firm and agrees to pay a commission
based on the purchase price.
In a few cases, buyers hire the firm on a fee basis to conduct a
search for acquisition prospects.
ITA lists agencies for sale at its Web site at www.travelbusinessbroker.com, but the listings
describe the agencies only in general terms, giving their location
and a brief description of the business.
In some cases, the purchase price is listed, but many of the
listings describe the price only as "market value." The identity of
the travel agency is withheld.
"We don't tell a prospective buyer the identity of an agency
until we get a confidentiality agreement," Sweeney says.
Travel attorney Mark Pestronk, who often represents sellers of
agencies, says confidentiality is "vital."
"A travel agency generally known to be for sale is worth less
than an agency not known to be for sale," says Pestronk. "This is
because employees and clients of the seller become nervous and are
thus more likely to leave in the near future."
Once the potential buyer signs the confidentiality agreement,
negotiations get under way. Sweeney estimates that the typical deal
takes between three and eight months to complete, although Pestronk
says he has seen some deals done in a week, while others can take a
year.
In deals involving larger agencies, the steps to completion may
include an agreement in principle followed by a period of due
diligence, but Pestronk says "the typical deal is an absorption,
and the parties go right to contract."
Arriving at the right price involves a range of criteria, but
Sweeney says there generally are two types of deals, one for travel
agencies that aren't making money and another for agencies showing
profits.
"In the case of an agency that isn't showing a profit but where
the owner is earning a salary, buyers usually look at the retained
income and, on average, pay about 40% of that figure.
"When an agency makes $200,000 or more, the formula switches to
a multiple of earnings and the higher the profit, the higher the
multiple," Sweeney says.
Adding it up
Sweeney estimates that the ratio of break-even agencies to
profitable ones is about 50/50.
Sweeney believes that the typical break-even agency is retaining
about 7.5% of its annual sales, a figure that was closer to 10% in
the days before airline commission cuts.
Using his formula, an agency doing $4 million a year and just
breaking even would keep $300,000, and its sales price would be
$120,000 -- down about $40,000 from the figure it would have
commanded before commission cuts.
Among the profit earners, Sweeney says an agency earning
$200,000 in profit might receive a multiple of three times that
figure, or $600,000, while an agency producing a profit of a
million dollars might earn a multiple of four, or $4 million
dollars.
The more an agency can demonstrate its historical ability to
achieve those profits over time, the higher its valuation is likely
to be. Another factor contributing to valuations is what Sweeney
calls the "portability" of the agency.
"Some agencies, particularly Web-based businesses, can be
operated from anywhere, and that makes it easier for the buyer in
terms of absorbing that company. Usually, these are businesses with
only a handful of employees who specialize in particular product
lines," he says.
The completion of a deal doesn't mean that the agency seller
walks away with the purchase price.
Although Pestronk has seen deals in which the purchase price is
paid without regard to the future activity of the agency, buyers
typically make a down payment and base the payment of the remainder
of the purchase price on the agency's ability to retain its income
over a period, usually two years.
The installment-plan payout is a key incentive in keeping the
former owner and staff busy at continuing to operate the
business.
In most cases, the owner of the selling travel agency earns a
separate salary to remain on the payroll during the payout
period.
And how do Sweeney and his five brokers at ITA make their money?
They get commissions on a sliding scale based on the purchase
price.
But like the seller, Sweeney has to wait for his full commission
until the agency has shown its ability to retain its income,
usually over a two-year period.
He says that about 75% of selling agencies hit the income
retention goals.
Sweeney says that most agency sales are done without a broker
and, in many cases, break down because they have not been carefully
handled.
"We have sellers coming to us after they have closed deals,
asking us what to do now," Sweeney says.
Sweeney believes that the majority of deals are done without a
broker and some are handled by general business brokers, whose lack
of industry knowledge can be a problem.
To contact Editor-at-large, Alan Fredericks, send e-mail to
[email protected].
Seattle travel agency serves as a case
study
ROSWELL, Ga. -- One of the agencies for sale handled by
Innovative Travel Acquisitions (ITA) here in the past year was
Select Travel American Express in Seattle, with annual volume
exceeding $5 million.
Owner Karin Feldt started the firm by signing a 10-year deal as
a Uniglobe franchise in 1986.
"The first five years were very good. When we hit the $3 million
mark, we started to outgrow the Uniglobe model," Feldt says. When
the contract ended in 1996, Feldt moved on to become an American
Express representative office.
In the fall of 2002, she decided to begin the search for a
buyer. "I wanted to stay involved, keep the office open here in
Seattle and keep the very good people working here," she says, "but
I also wanted to slow down a bit."
Enter Frosch International Travel of Houston, a growing agency
with $150 million in volume. Edna Frosch, who had a keen interest
in cruises, had founded the agency in 1972 and sold it five years
later to Richard Leibman, a successful businessman from South
Africa who had moved his family to Texas.
After growing within the Houston market, Frosch began an
acquisition program a few years ago that has led the company to
purchase agencies in 11 cities from West Palm Beach, Fla., to Palo
Alto, Calif. The company, which does about 60% of its business in
corporate travel, now has 200 employees.
"There was nothing scientific about our acquisition strategy,"
says Richard Leibman's son Bryan, who serves as Frosch's president.
"We are a high-quality agency with high integrity, and our main
goal in acquisitions is to add good people."
Sweeney, the broker, says the match between Frosch and Select
Travel was evident from time that Bryan Leibman and Karin Feldt
met.
"Select is a high-class operation as is Frosch," he says. "Bryan
made a real effort to make Karin and her staff comfortable. He flew
them down to Houston and showed them the Frosch operation. He
recognized traits in Select that fit well within the Frosch
culture."
Leibman also liked the fact that Select's location in Seattle
was strategically close to shipping interests. A growing part of
Frosch's business is its marine travel division, handling
arrangements for offshore oil companies and cruise lines that
require frequent movement of crews.
How important was it to Leibman that Feldt remain on the
job?
"We like our owners to stay forever," he says. He says that
Frosch has succeeded in keeping former owners and their key staff
with the company and that the acquired agencies have retained and
added to their income after the sales.
Feldt had built her business largely on performance-based
compensation for her staff and a good benefits package, including a
401k program and a liberal vacation policy. The performance-based
pay, she says, gives her people "unlimited upside."
"I was happy to meet Bryan and learn that Frosch would not only
keep our philosophy going but enhance it. I was particularly glad
that we are able to keep our office open." --
A.F.