From time to time, we are asked for advice in buying or selling a travel business.  The best advice is to start preparing now, and do not wait until the last minute because selling requires careful planning.  This includes cleaning up and organizing financial and tax records, updating old operating systems, and perhaps even ramping up marketing to boost sales and command a higher asking price.

To help us, we spoke to Bob Sweeney, an expert in this area and he offers this advice:

Sellers Discretionary Cash (SDC) is the key number we utilize when determining the value of tour and travel industry related companies. If you’re considering the sale of your business in the near future, buyers will want to see all the benefits of owning the business. It’s important to have an objective idea of the true worth of your business. This process is known as recasting. In the example below, the income statement and tax returns might show $100K in earnings, but $150K is the true recasted total SDC.

As an example, a business that produces revenues of $1 Million in gross profit might show a net income of about $100K on tax returns. Buyers look for discretionary spending on items other than fixed costs, such as rent or payroll. Examples of sellers discretionary spending are life, disability and health insurance, vehicle, vehicle maintenance, cell phones, travel, meals, cleaning services, non-working family member on payroll, conferences, etc. For this example, those items could amount to say $25K.

Excess owner’s salary counts too. Does the business pay the owner a salary above scale versus hiring a manager? If so, add the difference. If the owner is absent, then add back the whole amount. For this example, let’s use $25K for a total of $150K SDC. On this size of an operation, the business would be worth around $300K.

When having your company appraised, it is best to provide CPA-reviewed monthly income statements and balance sheets for the previous 3 years prior to listing. In today’s market a small travel and tour industry related company usually, commands about 2 times SDC. Mid-sized travel and tour industry related companies usually command about 3 times SDC. Larger travel and tour industry related companies usually command about 4 times SDC. In other words, the higher the profit, the more the multiple expands.

5 Tips for Sellers 

1. Never limit your buying pool in any way. This most frequent mistake costs sellers tons of money.
2. Have finances and tax records organized and ready to review, including all non-recurring expenses that will go away under new ownership.
3. Keep your head out of your heart as emotions are to be kept in check as the sale is a business decision.
4. Understand your competitive position in the market.
5. Find a business broker.

5 Tips for Buyers