We live in competitive times where travel bookings reflect an uncertain economic cycle. Business growth for TMC’s is difficult to achieve organically, and there is a strong market at present for consolidation by merger and acquisition. Many small and medium sized TMC’s 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, both in negotiation and achieving the correct commercial terms, both financially, on the accounting side and with full legal protection.

Process

Understandably, any initial skirmish into the world of a competitor with a view to purchase will involve signing up Non-Disclosure Agreement so that the commercially sensitive data of the target company can be secured, particularly if the deal goes abortive. Once this is signed there can be commercial discussions about the nature and performance of the business, some raw financial data, and a discussion about the price. If these proceed successfully, the parties will typically enter into non-binding Heads of Terms, setting out the bullet points of the commercial terms for the possible deal.

This will usually then be followed by a due diligence process, where accountants will review the books and records of the target company to be able to advise the buyer of the true performance of the business. Legal due diligence involves the buyer’s lawyer reviewing the legal side of the target business including their property, employees and contracts with customers and suppliers. The process of due diligence may well affect the structure of the purchase and price to be paid.

Asset Sale 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 and particular 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 considerations to be considered before opting either for an asset or share sale. If the shares are acquired, then the buyer acquires also all of the debts of the business, as well as the assets. On the other hand, an asset sale can cause difficulties if trade licences such as ATOL and IATA are involved, as these licences will not usually be transferrable, requiring the buyer to adjust its own arrangements and to obtain 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, where this is possible.

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 TUPE Regulations are likely to act to transfer employee contracts to the buyer. Careful consideration needs to be taken if there are likely to be redundancies of employees at the target company as a result of the sale of the business, which can be automatically unfair resulting in Employment Tribunal claims. Similar issues arise when employees might be expected to move location to the buyer’s premises.

Often, the key management staff and owners of the target company will be kept on to ensure an orderly handover of business contracts with customers and suppliers. 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 involves, not least claims for dilapidations and repairs by the landlord.

These terms will be negotiated in a comprehensive Share Sale Agreement or Asset Sale Agreement. In addition 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 sellers shareholders. This gives the buyer enforceable rights for any breach of warranty claims that might arise after completion.

Finally, consideration should be given to the timing of completion and the split of booking revenue, transaction fees and commissions applicable to bookings both before and after the completion date going to the benefit of the seller and buyer respectively. If a transaction completes during a financial period prior to audit, the buyer may wish to hold back some of the price to be paid to ensure the final accounts at the end of the accounting period matches up to the seller’s projections.

Advisors

Both buyer and seller in this process need to consider their professional team at the outset of negotiations. Existing advisors may be good for audit and management accounts, but not specialist enough to protect the interest of their clients in the due diligence, financial and accounting advice, tax issues and legal drafting that are required to protect the interests of each party. 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 in the seller.

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.