Mark Pestronk
In last week's Legal Briefs column, I covered the first steps for any travel agency owner who wants to sell their agency and retire. This week, we continue with a bunch of follow-up questions.
Q: Is my agency worth less or less likely to sell at a good price if we are home-based instead of having a real office?
A: No. Prospective buyers do not value a home-based agency less than a brick-and-mortar one. Indeed, the opposite may be true, because the absence of rent expense increases your profits, and, as you already know, your agency's value is largely dependent on its recent profits.
Q: When you say, "dependent on your recent profits," do you mean that the purchase price depends on the agency's profits after the acquisition?
A: No. Very few purchase prices are set as percentages of profits after the sale. I generally advise sellers against such a formula, because the buyer will be in control of the agency's expenses and can therefore lower profits by increasing expenses.
Q: In that case, do most acquisitions have fixed purchases prices, such as so much down, so much each month or year?
A: No. Very few have fixed prices, and even fewer have fixed prices paid at all at the closing. Most selling prices are mainly earnouts, i.e., a price that is paid as a percentage of post-closing revenue (commissions and fees) for a year or more.
Q: When you say, "a year or more," what is the typical term of an earnout?
A: You have to distinguish between the period to which the earnout applies, on the one hand, and the payment term, on the other hand. For example, the price could be set at 60% of the agency's revenue during the first year after closing, but it could be paid in installments over two or three years. However, most of the time, earnouts cover two or three years' revenue paid over the same period.
Q: Do most buyers buy the corporate stock (or LLC equity) of the owner, or do they buy the assets of the agency?
A: The vast majority of acquisitions are asset purchases, not stock purchases. Buyers generally get to dictate the form of the acquisition, and sellers generally go along. The main attraction for buyers is that asset purchases don't automatically assume all of the selling entity's liabilities, like they do for stock purchases. The second reason is that asset buyers get tax deductions when they depreciate assets, but stock buyers get no deductions.
Q: How much are the legal fees that sellers typically pay their attorneys?
A: For the simplest acquisitions, legal fees should not exceed a few thousand dollars. As the terms become more complex, legal fees can add up to $25,000 or more, especially if the buyer is represented by a large law firm.
My final advice this week: Remember that what is typical is not necessarily what your deal should or will be, so don't be discouraged by my generalizations.