Doing the math on your agency's value
Q: Last year turned out to be a very good year for my travel agency; we achieved record sales and profits. So I was thinking that now may be a good time to sell my agency and retire. However, 2023 looks to be even better, so maybe I should wait another year and get a higher price. What’s your opinion? In any case, I know I need to start by finding out the value of my agency. Can you help me?
A: With so many financial experts predicting a recession in the near future, I wouldn’t bet that 2023 will turn out better than 2022. Since agency acquisition prices reflect your most recent financials as well as the general economy, now may be a better time to sell.
The evaluation formula that makes the most sense to seasoned buyers is one based mainly on the profits of an agency for the last year. By “profits,” I mean recast profits, which I define by starting with your bottom line (known as “net income” if you have the Trams Back Office system).
Next, you add back all of the following if they appear as expenses on your income statement (aka profit and loss or P&L statement): a) owner’s compensation above what a larger agency might pay a general manager employee; b) all other expenses that benefited you personally and that a larger agency would not have allowed a general manager to take; c) all expenses that weren’t ordinary ones in a typical year of operation; d) depreciation and amortization expense; and e) 401(k) or similar expense.
Once you figure out your recast profits for 2022, then you multiply the total by a generally accepted multiple in the travel agency industry. Today, the multiple ranges from 3 to 6, but the average seems to be about 3.5.
Factors that influence the multiple include your sales volume, sales mixes and revenue. For example, a larger agency will be worth more than a smaller one, all other things being equal, and a high-end, leisure specialty will enhance the value of your agency.
Finally, a good evaluation also considers other factors pertaining to the agency, such as the ratio of salaries to total expenses, length of your GDS contract and any over-reliance on a small number of large accounts. These are just a few examples of the kinds of factors that sophisticated buyers examine before making an offer.
Contrary to popular belief and what other experts may tell you, some irrelevant factors would be your financial results for years before 2022, whether you have a brick-and-mortar business or are home-based or whether you have a lot of ICs and few employees.
If you are uncomfortable with doing your own evaluation or want to present a prospective buyer with a polished product, there are consultants, accountants and attorneys who can do it for you.
Once you establish an evaluation, you need to consider payment terms and taxation, which I will cover in future columns.
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