Q: My high-end leisure agency has been doing well this year. In fact, we are on track to match or even exceed our 2019 sales and profits. I am ready to retire, so I want to know whether this a good time to sell, or should I wait another year or two to make sure that we have a few years of good financial results? If now is a good time to sell, what price and terms should I be looking for?
A: The best time to sell is when you have had one year of good financial results and you have taken the necessary steps to prepare your agency for a sale. That time may well be now.
Although many financial advisors and consultants advise that you should take an average of the last three or more years of financial results, I find that guidance to be useless for two reasons: First, in the travel business, 2020 and 2021 were so untypical that averaging them in with this year would produce badly skewed results; and second, the most experienced buyers of travel agencies refer only to the most recent 12 months’ results when setting their offer prices.
The last 12 months are called the “trailing twelve months” or “TTM” in merger and acquisition parlance. Note that the TTM does not have to be a calendar year, so you should be able to produce an income statement (aka a profit-and-loss statement) for the TTM on request.
Experienced buyers usually set their evaluations and offering prices as a multiple of the TTM’s recast profit (aka “cash flow”). By “recast profit,” I mean the net income on the income statement plus the personal-type, depreciation, taxes and one-time expenses on the income statement minus one-time income items such as PPP payments.
By “personal-type” I mean expenses that only benefit the owner and that a larger agency would not allow as an expense, such as life insurance for the owner only and personal automobile expenses.
The multiples that buyers use depend on the state of the acquisition market and the size of your agency: The hotter the market and the bigger the seller, the higher the multiple. In 2019 and today, multiples have ranged from three to six times the TTM’s recast profit.
Of course, setting an offering price is only half of the acquisition negotiation. The other, potentially more important half is setting the payment terms. Before the pandemic, payment terms were often fixed, i.e., they did not depend on future sales or revenue of the seller’s agency or book of business.
During the pandemic, the opposite occurred: payment terms were usually expressed as an earnout, i.e., payments were mainly a percentage of the revenue of the seller’s agency or book of business, sometimes coupled with a small down payment.
Today, I am finding that offers are often a combination of fixed payments and earnout. For example, the price may be set at four times the TTM’s recast profit, and the price would be paid as 30% in fixed payments and 70% in earnout payments.
Keep in mind that my examples are just generalizations; what you are offered may be higher or lower.