Q: My high-end leisure agency is doing well this year. In fact, we’re on track to match or even exceed our 2019 sales and earnings. I’m ready to retire, so I want to know if now is a good time to sell, or should I wait another year or two to make sure that we will have a few years of good financial results? If the time has come to sell, what price and terms should I look for?
A: The best time to sell is when you’ve had a year of good financial results and you’ve taken the necessary steps to prepare your agency for a sale. That moment could well be now.
Although many advisors and financial consultants advise taking an average of the financial results of the last three or more years, I find the advice to be unnecessary for two reasons: first, in the travel industry, 2020 and 2021 were so atypical that the average integrating them this year would produce very biased results; and second, the most experienced travel agency buyers only refer to the results of the past 12 months when pricing their offers.
The last 12 months are referred to as the “Last Twelve Months” or “TTM” in M&A jargon. Note that the TTM does not need to be a calendar year, so you should be able to produce an income statement (i.e. profit and loss statement) for the TTM upon request.
Experienced buyers typically set their valuations and quote prices as a multiple of the TTM redesign profit (aka “cash flow”). By “recast profit” I mean net income on the income statement plus personal type, depreciation, taxes, and one-time income statement expenses minus one-time income items such as PPP payments.
By “personal type” I mean expenses that only benefit the owner and that a large agency would not allow as expenses, such as life insurance for the owner only and personal automobile expenses.
The multiples used by buyers depend on the state of the acquiring market and the size of your agency: the hotter the market and the bigger the seller, the higher the multiple. In 2019 and today, the multiples have ranged from three to six times the TTM recast profit.
Of course, setting an offer price is only half of the acquisition negotiation. The other, potentially more important half is setting payment terms. Before the pandemic, payment terms were often fixed, meaning they were not dependent on the agency’s future sales or revenue or the seller’s volume of business.
During the pandemic, the opposite happened: payment terms were usually expressed as an earn-out, i.e. payments were mostly a percentage of revenue agency or seller’s volume of business, sometimes coupled with a small down payment.
Today, I find that offers are often a combination of fixed and earnout payments. For example, the price can be set at four times the TTM redesign profit, and the price would be paid 30% in fixed payments and 70% in top-up payments.
Keep in mind that my examples are only generalizations; what you are offered may be higher or lower.