Mark Pestronk
Q: I am interested in acquiring travel agencies. I am represented by one of the nation's leading mergers and acquisitions law firms. However, our attorneys have never been involved in travel-industry acquisitions. What kinds of industry-specific issues and concepts should our attorneys grasp?
A: Here are five such issues that your attorneys probably don't know about:
ARC: Travel agencies in the U.S. that want to issue airline tickets need an appointment from the Airlines Reporting Corp., which is a company in Arlington, Va., that, among other things, approves changes of ownership of travel agencies. Consummating an asset acquisition without ARC's prior approval is a violation of the standard ARC agreement and may subject the agency to major sanctions such as suspension of ticketing. Depending on the form of the acquisition and your tolerance for risk, you may want to obtain ARC approval before closing on the deal.
Overrides: If you are going to acquire a large corporate agency, it probably depends heavily on bonus commissions (overrides) paid quarterly based on its share of sales on the paying carrier. If you do not time the acquisition and notification correctly, the agency could lose one or more quarterly payments because the override agreements enable the carrier to suspend payments until the quarter after it approves the change of ownership.
Client receivables: Since almost all business travel is paid for via credit card, it is rare that a corporate client would owe money to the agency, but such relationships still exist and are often on the verge of being bad debts for tickets and fees. These accounts receivable need to be checked, and the purchase price should also be adjusted to account for them.
Supplier receivables: One of the hardest concepts for outsiders to grasp is the varying ways in which travel suppliers and GDS vendors pay a travel agency. Airline commissions, if any, are paid much differently from hotel and car commissions, for example, and cruise lines and tour operators have varying commission payment policies.
The purchase agreement needs to provide for which party keeps which supplier revenue received after closing for which kinds of sales made before closing. A buyer that lets the seller keep it all is losing a major cash flow source, but a seller that lets the buyer keep it all is losing the benefits of its efforts.
Earnouts: If any portion of the purchase price will be dependent on percentages of sales, revenue or profits after closing, it is vital that the parties develop precise definitions of what client or supplier payments comprise the base to which that the percentage is applied. For example, if you are going to be paying the seller X% of revenue during the year after closing, does revenue include GDS segments that are received a month after the year ends? What about override payments received during the first month that pertain to the quarter before closing?
In my experience, earnout issues are the biggest source of attorneys' mistakes in travel agency acquisitions.