What is the strength of your agency’s financial management? This is one of the four keys to determining the value of your travel agency – operations/resource management, market position/agency image, financial management and business history. I am addressing each issue in separate articles.*
Let’s consider financial management strength today.
Q: Do you operate under the accrual or cash method of accounting?
A: If you’re on a cash system, ask your CPA to convert your books to accrual. If you prefer staying with cash accounting, be certain that your income is reflected properly so that a buyer will know what he is buying.
Q: What is your net worth?
A: This is probably one of the most important valuation criterion in establishing price.
Q: Do you receive a monthly balance sheet and P&L?
A: If you don’t, it will be difficult for a buyer to assess trends, growth and your overall financial management.
Q: Have you kept track of key financial ratios in order to get an early warning of changes in your business, such as:
o Sales per employee and/or customer and/or vendor?
o Commissions as a percentage of sales?
o Percentage of override commissions by vendor?
o Percentage of return sales by customer or account?
o Percentage pre-tax profit of commission revenues or sales?
A: Very few agencies have a formal program that reviews the “quality” of their customers. I have seen a tendency to serve anyone just to get the business in the door. If you look at some of those ratios above, you might find out that the XYZ Corporation’s account that you finally landed is costing you more than you’re making on it. A buyer will be more impressed with strategic thinking along these lines than with a single number of sales.
Q: How are you doing with your collections?
o Are your accounts receivable properly aged?
o What is your reserve for bad debt and actual write-offs for the past five years?
o What is your collection mix of credit cards vs. invoice?
o What do you do with un-collectables?
o What credit analysis procedures do you have when taking on a new account?
A: Again, these items are important and reflect on your abilities as a financial manager. Bear in mind that the buyer of your agency may not necessarily have the same business acumen you have, yet you obviously want him to succeed.
Q: Do you have a formal annual budgeting process?
A: This is a truly impressive feature to a buyer. Even if you haven’t performed to your budget, with proper variance explanations, nothing instills confidence like a well-thought out budget.
Q: Do you have bank references readily available?
A: If you have a positive cash flow and generated income from your surplus investments, your banker will say very nice things about you. If you’ve borrowed money to meet the occasional air report and repaid it promptly, your banker will also have nice things to say about you.
The key feature in all the criteria above is feedback. It’s like driving a car – do you have full and properly calibrated instrumentation or are you driving with the dashboard painted over? I have seen agencies with outstanding “instrumentation” and I have seen others with even the wind shield painted over.
If all you know is that you’re in the travel business but you’re not really sure of any of the ratios or data above, how do you expect a buyer to make an assessment as to what he should pay for your business?
Your answers to these questions will help determine your agency’s net worth – and its value in the marketplace. Travel business consultants such as Travel Business CPR will review and prepare your operation for sale on your behalf.