It’s no surprise that the economic hardships associated with the coronavirus pandemic have triggered a wave of consolidation among travel agencies. But those who have been actively involved in agency mergers and acquisitions since the spring say it is being accelerated by another factor: The number of agency owners who are approaching retirement age.
Both Robert Sweeney, CEO of Innovative Travel Acquisitions, and Mark Pestronk, industry attorney and Travel Weekly’s “Legal Briefs” columnist, said their acquisition-related business has doubled in recent months.
“Joining arms in times like this usually makes more sense than trying to swim upstream yourself,” Sweeney said, noting agencies of all sizes and types are being acquired.
The way an agency sale is conducted has shifted since the beginning of the pandemic. Little to no cash is being offered upfront, and most deals are based on the agency’s performance in the coming years, a model known as an earn-out.
“Buyers are in cash-conserve mode,” Sweeney said. “There are plenty of transactions that are taking place, but they’re all back-end-loaded.”
Most acquisitions today, Sweeney said, are based solely on earn-outs over the next three years, with payments made either monthly or quarterly. Typically, the buyer will pay from 10% to 20% of gross profits derived from business from the seller’s client list as well as new business.
Pestronk agreed that, with most sales today, the price of an agency is set as a function of that agency’s results in the coming three years. In one deal he’s been involved with, terms are extended into 2024, he said.
In recent years, Bob Joselyn, CEO of Joselyn Consulting Group, has been increasingly involved in valuing agencies for sales. He has not seen an uptick in acquisition-related business like Sweeney and Pestronk have, but he posited that’s because people are no longer valuing agencies, opting instead for a structured earn-out.
This is a departure from the norm just a year ago, Joselyn said, when agencies were often bought at a fixed price, or with a fair amount of money handed over at the time of closing.
Among those selling based on future revenue, some are even stipulating what kind of revenue qualifies for the earn-out, Joselyn said. For instance, some won’t include revenue from low-cost cruises or small service fees for things like air ticketing.
While a pandemic-induced cash crunch has spurred a number of agency owners to sell, age is also a big factor this year, Pestronk said. A number of agencies opened during favorable business conditions in the 1970s and 1980s. On the leisure side, they were drawn by increased commission levels, which rose from averages of 5% and 6% to 10%. And on the corporate side, rebating became legal.
Now, that group of agency owners is approaching retirement age.
“Even if there were no pandemic and this were a record year, we’d probably have a large number of acquisitions,” Pestronk said. “I think that’s fairly significant.”
The Western Association of Travel Agencies is experiencing some consolidation among members, but that wasn’t unexpected, according to COO Mike Estill. Some see the pandemic as an opportunity to move toward retirement faster.
“It’s not a revolution, just evolution, sped up a bit,” Estill said.
Consortia have been acting as matchmakers of sorts for agency owners who wish to close their doors but keep working.
At MAST Travel Network, the owners of two agencies that shut their doors this summer morphed into independent contractors, realigning their operations under other MAST member agencies, said John Werner, president and COO. Werner says he expects some other members to follow suit as the pandemic continues.
Signature Travel Network has been making recommendations and introductions for members interested in selling, many of whom want their business to stay within Signature’s network to maintain access to its set of resources, said Kimberly Waters, vice president of member acquisition and engagement. When the consortium held a conference call among CEO Alex Sharpe and three agency owners talking about mergers and acquisitions, more than 80 agency owners registered to listen.
Sweeney said the prevailing advice for agency owners is to stay in business if possible, because once they see some meaningful recovery there will be a shift back to being a seller’s market with more favorable conditions.
If an owner does decide to close, however, he encourages them to look for an agency willing to acquire their business and accept a transaction based on earn-outs. Some are simply walking away, but Sweeney said there are opportunities for future paychecks.
He feels that agencies that survive through the pandemic have a bright future.
“It’s like a controlled burning,” Sweeney said. “The industry, it’s burned down, but what grows out of it is healthier and sometimes better. I think there will be fewer agencies, but the ones that are there will be even more profitable.”