Mark Pestronk
Q: As a buyer of travel agencies, I have been frustrated by the number of times that a prospective seller of an apparently successful agency has been unfamiliar with the agency's finances and unable to answer basic financial questions. Too often the answer is, "I'll have to get back to you on that," and when the seller does so, often after a lengthy delay, the answer raises more questions. What advice would you give prospective sellers about what financial knowledge they need to have before they consider selling?
A: If you are thinking of selling your agency, here is the knowledge you need to have at your fingertips:
• Last year's income statement, which is also known as a profit and loss statement, or P&L. This is prepared internally using accounting software like Trams, which many agencies have.
• By midyear, you should also have last year's tax return, and you need to be able to explain the differences between the P&L in the tax return and your internal P&L. For example, since business meals are only 50% deductible, you should be able to explain that your internal P&L reflects a 100% deduction.
• This year's income statement as of the end of the most recent month that can be compiled. For example, if the current month is March, you should have January's income statement already at hand and February's by the end the month.
• A list of personal-type expenses that you can show the prospective buyer, so that the buyer can add them back to the bottom line of the P&L to ascertain your true profit picture. When these items are added back, you get the recast profit of the business, which is what buyers need to know above all.
• The agency's balance sheet as of the end of last year and as of the end of the most recent month for which you can produce it.
• An explanation of all liabilities on the balance sheet, such as loans and other debts, as well as liabilities that offset client deposits that you may be holding before sending them to suppliers.
• Reports of receivables and payables as of the end of the most recent month.
• Lists of employees, independent contractors and top clients, all in size order, along with copies of contracts, if any. You can black out the names until you are comfortable that the buyer is not going to solicit them.
• Lists of commissions and overrides by supplier for last year along with copies of contracts.
• Your office lease, if you have one.
Except for the last item, my advice applies to agencies of all sizes, including home-based agencies.
If you don't have all this information already at hand when you speak to possible buyers, be prepared to get it within a week at most. Nothing turns off a buyer like extensive delays in providing documents and explanations.
And be sure to get a nondisclosure agreement prepared by a knowledgeable attorney before you turn over anything.