Prospective TMC buyers should, if not beware, exercise considerable care when doing business.
WE LIVE IN COMPETITIVE TIMES where travel bookings reflect an uncertain economic cycle. Business growth for travel management companies (TMCs) is difficult to achieve organically, and there is a strong market at present for consolidation by merger and acquisition. Many small- and medium-sized TMCs are either looking to sell, or alternatively to grow their business by taking on a thriving competitor. The process of buying a TMC is not straightforward and requires specialist assistance in negotiation and in achieving the correct commercial terms, both financially and legally.
DUE DILIGENCE
Any initial skirmish into the world of a competitor with a view to purchase will involve signing a non-disclosure agreement, so that the commercially sensitive data of the target company can be secured, particularly if the deal is abortive. Once this is signed there can be commercial discussions about the nature and performance of the business, and about the price. If these proceed successfully, the parties will typically enter into non-binding heads of terms, setting out the commercial terms for the possible deal.
This will usually then be followed by a due diligence process, where accountants will review the target company's books and records - including its property, employees and contracts with customers and suppliers - to be able to advise the buyer of the true performance of the business. The process of due diligence may well affect the structure of the purchase and the price to be paid.
ASSET OR SHARE SALE?
When any part of a larger business is being acquired, then the transaction will usually proceed by way of an asset sale, where the goodwill, certain assets and customer base of the target TMC are transferred to the buyer. The alternative route is a straightforward share sale, where the existing shareholders agree to transfer their shares to the buyers for an agreed consideration. There are clear reasons to opt for either an asset or a share sale. If the shares are acquired, then the buyer will also acquire all of the target's debts as well as the assets. On the other hand, an asset sale can cause difficulties if schemes and bodies such as Air Travel Organisers' Licensing (ATOL) and the International Air Transport Association (IATA) are involved, as the licences issued here will not usually be transferable, requiring the buyer to obtain the necessary regulatory approvals.
With a share sale, contracts with customers and suppliers stay in place, although a careful check should be made for any change of ownership clauses entitling the other contracting party to terminate where there is a change in the shareholding of the target business. With an asset sale, the buyer needs to consider the concept of novation, where a contract between a customer or supplier with the TMC can be changed from the old TMC to the buyer.
With employees, a share sale does not alter the contracts of employment with the staff of the target company, and with an asset sale, the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) are likely to be invoked to transfer employee contracts to the buyer. Care needs to be taken if there are likely to be redundancies at the target company as a result of the sale of the business, which can be deemed unfair and may lead to employment tribunal claims.
Often, the key management staff and owners of the target company will be kept on to ensure an orderly hand-over of business contracts. This is often achieved by tight consultancy agreements, and also non-compete clauses from the sellers, ensuring continuity of business for the buyer.
If the target company has property, then careful consideration needs to be given to whether these premises are to be kept, and on an asset sale, transferred into the name of the buyer. Alternatively, the buyer may wish to exit the lease with the consequences that may involve - for example, landlords' claims for repairs.
These terms will be negotiated in a comprehensive share sale agreement or asset sale agreement. This will contain extensive warranties guaranteeing the performance of the target company and these are likely to be backed up by personal liability of the seller's shareholders. This gives the buyer enforceable rights for any breach of warranty claims that might arise.
Consideration should also be given to the timing of completion and the split, between seller and buyer, of booking revenue, transaction fees and commissions applicable to bookings, both before and after the completion date.
CONCLUDING THE DEAL
Both buyer and seller need to consider their professional team from the outset. Existing advisors may be good for audit and management accounts, but not specialist enough to fully protect the interests of their clients. Also, the structure of the sale may depend on any personal tax advice of the sellers, not least to mitigate capital gains tax and other personal tax issues of the shareholders of the seller.
Finally, following completion, the buyer will need the support of the seller for a charm offensive with the new customer and supplier base to ensure a successful merger of the businesses, and to keep the corporate customer on-side.