TMC M&A Tied To Clients: Retention Is Critical To Purchase Price

When New Jersey travel management company VTS Travel Direct bought in-state competitor Stratton Travel in a deal announced last month, it was the fourth different acquisition model employed by VTS in as many recent attempts.

"There isn't one formula," said VTS president Patrick Fragale. "Every deal is unique."

While other industry sources and consolidation brokers agreed that there are many ways to go about evaluating an agency's worth, they also said all deals have one thing in common: a customer retention component.

Asked how common are client-retention clauses, Innovative Travel Acquisitions president Bob Sweeney said, "Hal Rosenbluth is still riding around on his horse out there on an earnout. He still doesn't know the final purchase price." That's because the price American Express eventually pays for Rosenbluth International depends to some degree on retaining clients.

"Historically, so many buyers were burned with fixed-price deals that now they all want to make sure they get what they pay for," Sweeney said. "It's tough for sellers to fathom sometimes, but what's for sale is nebulous. What's for sale is the relationship between the agencies and the clients, and you can't put a fork in that."

According to WorldTravel BTI president Danny Hood, "You're really just buying a revenue stream, so you need to withhold something based on retention and a smooth integration. This all puts clients in the driver's seat. Here you just paid an earnings multiple of four or five or more, and you need to keep that business for eight or nine years to get a return on investment. You're also trying to get synergies, but not to the point of losing the business, so the customer service teams pretty much stay intact."

When service suffers, agency integrations can cause "major heartburn," said Management Alternatives president Carol Ann Salcito. "Integrations can leave a lot of question marks, particularly when agency employees are concerned about who will keep what job, but agencies have learned hard lessons in recent years and are now more intelligent in the way they are approaching clients and in how they are doing the integration."

Partnership Travel Consulting CEO Andy Menkes noted that as acquisitions in recent years have been based "almost solely on the client base," account managers and travel agents have tended to retain their positions.

Meanwhile, depending on contract terms, corporate accounts can sometimes exert additional negotiating leverage if their TMC is sold. "Say you had a company that recently went out to bid and the seller was the agency of choice but the buyer was not," Salcito said. "So they went out to bid again, or had some pretty strong negotiations. Then, the acquiring agency becomes much more flexible."

Still, buyers need to be on the lookout for unappealing synergies—such as one recent agency acquirer's intention to close a call center heavily used by a major account. After some talks, the TMC backed off.

Realigned supplier relationships also can impact servicing and economics.

For example, global distribution contracts represent a major consideration in the asking price. If an acquired agency is near the end of its GDS term, and if it uses a different GDS than the buyer, the buyer is likely to explore a bonus from its incumbent GDS to convert the acquired.

"With the GDS opportunity, you look at how long term is the contract and whether it's the same system you use, or a competitor," VTS' Fragale said. "Ideally, the GDS is one I'm not using."

Yet, agencies need to balance the economic opportunity of a GDS conversion with any impact on customer service. Experienced agents often grumble about having to train on a new system.

"Some agencies will say, 'Great, they're on the wrong system, let's get some bonus money,' " Adelman Travel COO Bob Chaiken said. "But you also have to look at the customer service component. You're already going to have a lot of new stuff—back-office systems, quality control processes, corporate culture—and at the same time you're trying to keep customers and revenue streams."

Many GDS company executives have said the days of lavishing incentives on their agency subscribers are coming to an end, but the evidence has yet to emerge. "We're not seeing that," Innovative Travel's Sweeney said. "It's like a honey hole that is drying up but hasn't yet."

Preferred airline relationships also play a role. A match of the top vendors generally is preferred, but Chaiken noted that Adelman in the past used an acquisition as a catalyst to change vendors.

Adding in these and such other key components as earnings performance and the economic climate of the industry helps buyers assess the value of the travel agency they are acquiring. Guarding against the risks of lost business is more important than ever, now that the goodwill of a long-term client relationship so often falls prey to the frequent rebidding engendered by procurement methodologies.

"To get a new piece of business now involves a lot more than having a neighbor who works at the company," Travizon president Jeffrey Smith said. "In an acquisition, even though you sign confidentiality agreements, there's certain information you can't get until you take the keys, like 'has the management kept the clients there, or the agents or the service in general?' "

"It's not like buying a trucking business or something," Sweeney said. "You can't kick the tires."

Protecting future revenue streams requires significant contractual creativity. Sources described a handful of different economic setups for acquisitions.

Larger or, at least, profitable agencies are selling for a multiple of about five times earnings before interest, taxes, depreciation and amortization. Even there, somewhere around 20 percent of the purchase price typically is held back until certain promises on revenue delivery are met.

Navigant International has inserted some sort of client retention component in all 55 deals it has done, said senior vice president of finance and corporate controller John Coffman. An earnout, he explained, allows the buyer to "ensure retention of the customer base or the seller doesn't get what they expected." Another method ties the purchase price to a threshold of revenue retention.

While bigger deals might put as little as 20 percent of the purchase price at risk for non-performance, Coffman said Navigant typically puts all the payment at risk on smaller acquisitions.

Potential acquisitions that have one or two major accounts are seen as particularly risky. Coffman said Navigant would exclude that business from the valuation, but "typically offer an additional purchase price if that customer re-ups."

Sweeney favors a "lease" on that one client over including it in the acquisition, "in case they leave. We've seen deals where the company has 99 regular accounts and one whopper, and so it's two separate transactions."

Industry sources expect consolidation of smaller corporate agencies to continue, but not forever. "There will be a point where the market for smaller deals will dry up," Navigant's Coffman said. "What does it do for a mega agency to buy a small one—not a whole lot. As the industry moves to a technology base, you start seeing the point at which some of the smaller agencies are unable to remain competitive. Then, 'Do we have to buy them or does their customer base leave?' "

According to Adelman's Chaiken, "It's getting harder and harder to find those opportunities. A lot of it has already occurred, and there are a few buyers out there who are gobbling up whatever they can get their hands on."