Q: I run a home-based agency consisting of a part-time employee and myself. I would like to retire in the not-too-distant future. I have always assumed that my business could not be sold because it is so small and so dependent on me. Even if it could be sold, I have assumed that the price would be so small as to not be worth the effort. Am I correct?
A: You are probably incorrect. If you run a profitable home-based agency, there is no reason why your agency could not be sold for a respectable price as part of your retirement plan.
To some buyers, a home-based agency might even be worth more than a brick-and-mortar business with a similar sales volume, as the former generally has no long-term contracts, such as an office lease or GDS contract. If a buyer wants to absorb your business into its office, it would certainly prefer not to have to worry about such commitments.
Your first step would be to determine your profit. To do this, you would begin by producing an income statement for the most recent 12-month period. Then, in addition to the bottom line, you would add back all the personal-type expenses that you deducted that a large agency would not allow a manager to charge to the agency.
Examples of such personal-type expenses are life-insurance premiums, cellphone costs, car expenses and out-of-pocket travel expenses. There are many other such types of expenses, and you probably know what they are in your case.
Next, you would subtract an estimate of what you think a large agency might pay an agent or agents who replaced you. The amount would depend on your geographic area, your years of experience and your business mix. You probably have an idea of the amount of pay in question.
By taking your bottom line and the personal-type expense add-backs and deducting the agent compensation noted above, you would get your profit. To get a rough idea of the value of your agency, multiply the profit by 2.5.
If your profit is negative, then multiplying by 2.5 will yield a negative amount, so you will need a different formula. For money-losing agencies that buyers can absorb into their existing businesses with little added expense, a typical formula is 30% of the previous 12 months' commissions and fees.
At Travel Weekly's CruiseWorld and Home Based Agent Show in Seattle on June 18, I will go through concrete examples of the foregoing formulas during my seminar, "Selling Your Book of Business — How to Evaluate It, How to Do It and How to Protect Yourself."
Regardless of the formula used to evaluate your agency, almost all buyers will avoid paying you a fixed price, either all at once or in installments. Instead, they will pay a percentage of the future revenue from your book of business, and the payments will add up to the evaluation amount if the business remains.
The most typical payment period is two years, and the most typical payment interval is monthly. However, there are many different sets of payment terms, depending on each party's preferences and negotiating ability. Some sellers prefer smaller payments over a longer term, turning the sale into a kind of pension to supplement Social Security.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at [email protected].