Mark Pestronk
Q: I am with a private equity firm that is interested in acquiring travel agencies. One task that always comes up in due diligence is an examination of the seller's existing contracts. What kinds of long-term contracts do travel agencies typically have? Which of those cannot be terminated on 30 days' notice? Based on where you see the industry going, which ones would be advantageous for us to assume? And which not?
A: With rare exceptions, the larger the travel agency, the more long-term contracts it has. The largest agencies have dozens of such contracts, while small agencies may have none at all.
Large TMCs have multiyear deals with technology vendors, landlords, travel suppliers, consortia or franchises, corporate clients and sometimes employees. Most technology contracts have one-year, noncancelable terms with automatic renewals unless one party gives advance notice of nonrenewal.
GDS contracts stand out because they are typically five to eight years long. Except in the rarest cases, they cannot be terminated early without incurring substantial penalties.
As you already know, large TMCs have one or more offices, and landlords typically require multiyear contracts with no option to terminate early. While many travel agency offices have become virtual, every TMC still seems to have at least one physical office.
Unlike GDS contracts and office leases, contracts with travel suppliers are typically for one year or less and are usually terminable by either party on 30 days' notice or less. Commission and override agreements fall into this category, and the ARC and Iatan agreements can be terminated by the agency at any time.
Consortia and franchise agreements are typically multiyear deals, but they are often terminable by giving several months' notice. Even if they are not terminable, an agency can usually negotiate an early termination if desired.
Corporate client contracts vary. Some are terminable at will and some are multiyear. Contracts with government agencies are typically one year, but the government agency usually has options to renew for several more years.
TMCs sometimes have contracts with employees, but those with nonexecutive staff are usually terminable at will. Some executive employment agreements have multiyear terms, often as protection for the executive against being fired following an acquisition.
A savvy buyer from outside the industry would want to try to assume those contracts that have favorable business terms and are hard for newcomers to get. In this category, I would place the seller's GDS contract (if it has very good incentives), corporate online booking system agreements, commission and override agreements and all profitable corporate and group client contracts.
Less important to assume would be those agreements that, as a private equity buyer, you are probably already familiar with, such as office leases, phone system contracts and other technology system contracts that all large service companies have these days. You can probably negotiate better terms than the seller has been able to obtain, as office rents and technology licenses costs will probably be going down in the years ahead.