Is your agency ‘sale ready’? And how much is it worth?

By Judith O’Neill*

travel agency for saleA friend of mine recently sold her home in Sydney and bought and moved to another state in a seamless and very elegant transaction process. Her secret she said was that her Sydney home was always “sale ready”.

I have used this expression several times recently in advising travel agency and travel company owners that they have to prepare and manage their companies so that they are always “sale ready” (even if the sale is proposed for 10 years down the track!).

Prepare your business for sale

It is important to take a critical look at your company and identify any areas of weakness which a buyer could use against you during the sale process and therefore enable them to negotiate a lower sale price, or at worst cause the sale to fall through.

Weaknesses in your business may not be obvious to you or be difficult to recognise so I recommend an open discussion with your accountant and/or advisers.

The value of a company or business is eventually based on future cash flow and future maintainable earnings for the buyer so you, the vendor, need to focus on the fundamentals of your business and have a vision and strategy for the future.

How much is my agency worth?

Now? In one, two or three years’ time? At any given time? These are the big questions that cause consternation particularly for the seller who often thinks the company is worth far more than a buyer is willing to pay.

Most business owners think their company’s value is based on some multiple of sales, and this can be the case. However, the reality is that a buyer is mainly looking at where the earnings are and come from and what more can be earned, eg cash flow/profitability.

The formula really is: The more profitable an agency, the higher the multiple of the earnings.
With a travel agency for instance:

  • An agency generating $150,000 EBIT each year for three to five years may sell for 2.5 times that amount;
  • An agency generating between $150,000 and $500,000 EBIT each year for three years is more likely to sell for three to 4.5 times that amount; and
  • An agency that generates between $500,000 and $1 million in EBIT each year will likely sell for between 4.5 and 5.5 times that amount of earnings.

The EBIT amount is Earnings before Interest and Tax. Alternatively, sales value can be evaluated on a standard accounting measure of EBITDA: Earnings before Interest Taxes Depreciation and Amortisation.

A typical selling price of around three times EBITDA will be based on adjustments specific to productivity and earnings taken out by the owners/directors on the payroll.

Terms of sale

The objective of the buyer in under-taking due diligence is to uncover areas of risk that can create additional liabilities or costs after acquisition.

You will need to focus on maintaining the sales, profits and margins of the business during negotiations to ensure that the business meets or exceeds its forecasts and does not move backwards.

It would be simple and wonderful if a travel agency could be sold outright and the owner walk away.

However, that seldom happens. Most likely, the owner would be required to stay with the business for a period of time to reassure clients and key team members (staff) that the business will continue to provide them with the same high standards of advice and service “with improvements”.

Be prepared!

Ensure you are structured appro-priately and that you have advisors who understand the sale process.

Additionally, you must have accurate information for disclosure to the potential buyer – particularly clear financial and sales reporting information with clear audit trails.

And finally, have a realistic assessment of what the company or business is worth. Remember, selling the company is quite different from selling the business (only).

The keys to a successful sale process are maintaining confidentiality, maintaining revenue growth, controlling the information flow, having clear and concise financial and marketing information available and having a sensible time frame.

Start preparing your exit strategy NOW!

 

*Judith O’Neill is a management consultant, business and corporate coach. She is the principal of Aspirations Consulting and is a graduate of the Australian Institute of Company Directors. Judith can be contacted on telephone (02) 9904 3730 or email or visit www.aspirationsconsulting.com

 

 

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