By Chris Photi, Head of Travel and Leisure at White Hart Associates
Thinking of acquiring?
Most travel industry entrepreneurs dream of selling their business and retiring in luxury after a big final pay day. And despite uncertainty over Brexit leading to a difficult market, there is still plenty of appetite for expansion through mergers and acquisitions. But what makes a business attractive to potential suitors? And for those thinking of acquiring or merging, what steps should they be taking?
What makes a business attractive?
Any company that has a track record of profitability will put itself in the spotlight, but potential acquirers will look far deeper than that. They will want to see evidence of high-quality management that have developed strong distribution and supplier relationships to drive the company forward. Anyone that sells will probably have to stay on for a number of years on an ‘earn out’ – receiving their full purchase price over a set period provided certain targets are met. So, it’s important that acquirers have a chemistry with the management and believe in them. A company that is seen as a ‘disruptor’, doing something a bit different to other businesses in their sector, can also be attractive. Online Travel Agent (OTA) Love Holidays was sold to private equity investor Livingbridge in 2018, because it ticked several boxes. The company has strong management that has grown the company quickly, with potential for expanding overseas. It also does something a bit different, by offering customers a ‘destination-less’ search – they can look for holidays without even having to say where they want to travel. Although people are a company’s most important asset, a slick and effective technology platform is vital. Behind the scenes, the sourcing and selling of hotel beds is complex but a customer just wants instant and reliable results when searching, so companies either need to have invested in their own platform or be working with a third-party supplier that can provide this. Companies operating in a niche are also attractive and it’s no co-incidence that in recent years, sectors such as cruising, escorted tours, OTAs and top-end tailor-made travel have all attracted investment.
Have a plan
It seems obvious, but anyone planning a merger or acquisition needs a proper plan before approaching a company. Think about when to start, because it will take up a lot of your time, and have a mid and long term strategy. If it’s a merger, you’ll be under the spotlight as much as the company you are merging with; due diligence of your business will be invasive and highlight whether you are in good shape or not. You’ll need proper advice. Do you have that specialism in-house or should you source it? Of course, we would recommend using outside specialists. There will be a cost, but the cost of getting it wrong by using inexperienced people will be far higher. Internally, you need to ensure your business has the structure to cope with change – are your management and systems capable of doing that? There may also be a regulatory impact of any change to your business, for example around customer protection, so you need to be aware of the laws in this area.
Paying for it
How are you going to generate the finance you need for an acquisition or a merger? It might be through debt, equity, earnings in the business or money raised by existing shareholders. It’s also possible to raise money from outside investors and, in recent years, crowd funding has been an attractive option for some businesses. If the company is the subject of a Management Buy Out (MBO), financial institutions may be prepared to back a team that it has found impressive. All these methods of generating finance will have some impact on your business and need to be carefully considered.
Getting through the pain barrier
Buying or acquiring a business may be worth it in the end, but you need to be prepared for some pain along the way. Proper due diligence of any company can be time consuming and if you are planning a merger there will be scrutiny of your business. Any deal can take up a lot of management time and it’s important that there are structures in place to ensure that business can continue pretty much as normal – taking your eye off the ball and letting your business suffer will be self-defeating.
White Hart Associates are specialist accountants for the travel industry. Visit whitehartassociates.com or contact 0208 878 8383 for more information.