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TAANZ - Travel Agents Association New Zealand link to website

T. 09 524 6178      F. 09 524 6179     E. contactus@taaccounting.co.nz

How Can You Grow The Value Of Your Travel Business?  JULY 2015

I am a Chartered Accountant that specialises in the Travel and Tourism Industry.

I get asked to value Travel Business’s every few weeks.

A valuation for a Travel Business is usually completed using 3 methods:

Firstly a Return on Investment method – which says that if you invest your money in this Travel Business what return should you expect from your investment – is it going to be a risky investment – then you will need a higher rate of return. Is it a safe investment? – the return can be less. You can work this out for yourself:

Example

Net Profit Before Tax                                         $100,000

Add Back Owners Expenses and Salary             $90,000

Add back home office and vehicle                     $12,000

Subtract a “fair” owners salary                            $80,000

Arms Length Profit                                             $122,000

Multiply this by an appropriate multiplier taking into account the consistency of earnings, reliance upon owners, and continuity of staff, market and economic conditions. This could be between 0 and 5 for a private company. This is the accountants “Return on Investment” valuation.

Secondly an Income Valuation method – which is based upon the amount of gross profit or commission and other income that the business earns – when the new owner takes over they can assume that the income is going to continue to be earned  by the Business. This method ignores the expenses of the business, because they can be so variable. This method may be very relevant in a merger. I would use a formula of 30% to 50% of income.

Thirdly a Market Valuation – this takes into account what travel businesses have recently sold for in your area. As we are involved in a number of these each year we have this information.

The Actual Sale Value of your business will hopefully be somewhere in the range of values predicted by the methods above.

There are a number of other factors that contribute to the value of the Business?

  •   How many customers does it have?
  •   Is the business in constant contact with the customers?
  •   Does the Business get repeat business?
  •   Does the Business get referrals?
  •   Who are the staff and what do they contribute to the results?
  •   Does the Business have a database marketing system?
  •   Does the business have good reliable systems?
  •   What is the owners contribution to the results?
  •   How long has the business been around?
  •   Can the business run without the owner?
  •   Does the business have a brand, a website and unique products and services?

What are you buying when you buy a Travel Business?
– You are buying substantially Goodwill because there are not many tangible assets.

To improve the value of your business it is best to plan carefully to groom the business for a sale.
This may take 3 to 5 years.

It takes time to put in place all the factors that are necessary to generate the best results.