The travel sector has faced some of its greatest challenges over the last few years. COVID-19 and a cost-of-living crisis have put incredible pressure on the industry. Despite the uncertainty of the last few years, there are now signs that deal activity within the UK travel sector is returning.
Buyers with a stable balance sheet may be looking to acquire businesses with strong brands or customer base. On the other hand, sellers may be looking for a sale in order to a) benefit from increasing deal value, b) benefit from a stronger balance sheet that a purchaser may provide, or c) exit before possible adverse changes to capital gains tax are brought into force.
For a seller, in addition to agreeing to a favourable valuation, five key points to consider when selling a travel business are described below:
- Know your buyer;
- Be prepared;
- Due diligence – the devil is in the detail;
- Travel business regulatory considerations; and
- Tax implications.
1. Know your buyer
Buyers are often categorised as trade (strategic) buyers or institutional (financial) buyers. Trade buyers will often look for a company to have synergies with its existing operations and pursue more strategic acquisitions. Institutional buyers consider acquisitions solely from a risk and return perspective, as they will be selling the acquired business later.
For a buyer, one of its first decisions will be whether to embark on a share purchase or an asset purchase of a target business.
Share sale
On a share sale, you will be selling the company’s shares which in turn encompasses all the company assets and liabilities; effectively “the entire business”.
Asset sale
An asset sale enables a buyer to “cherry-pick” the specific assets it wants to purchase. An asset sale may be a convenient option when you want to sell a part of the business and reposition other parts of the business operations, however, it may also mean you are left to deal with the business’ liabilities.
Generally, a share sale would be preferable for a seller trying to achieve a clean break and favourable tax treatment, but this would be specific on the facts of a particular transaction.
The buyer’s financial condition is key, especially if part of the purchase price is to be deferred. Thought should also be given to the way a buyer is looking to finance the purchase. A buyer may be looking to fund the transaction entirely out of its own resources, but it may also involve other parties such as banks, its shareholders or new investors.
If a buyer is reliant on involving third parties, this can create transaction risk as the third party may decide not to participate. Generally, it makes a transaction more complicated as more parties are involved and creates additional negotiations and legal documentation, ultimately extending the timetable.
2. Plan ahead
Running a sales process is time intensive; sellers have to find time to do this on top of doing their day job – running their business. Preparing early is key. Sellers can prepare a data room in advance of holding discussions with potential buyers so that they are not in a rush later as discussions progress. In addition, we would suggest asking your legal and accountancy advisers to review the company’s documentation before making it available to the buyer (see below for further details).
More often than not, a buyer will be given a period of exclusivity to finalise their due diligence and negotiate the final terms of the purchase. At this stage, the balance of negotiating power moves away from the seller as the seller starts to incur more significant costs. The seller may have to inform some of his/her employees or key customers/suppliers of the potential transaction. It also becomes difficult to go back to potential bidders that you have turned away if negotiations with your preferred buyer turn sour.
Therefore, we recommend negotiating detailed heads of terms (before granting exclusivity) as it may be harder to negotiate points later in the transaction.
3. Due diligence – the devil is in the detail
In M&A, a buyer will be looking to undertake varying degrees of due diligence of a seller’s business. A buyer will look to obtain a full picture of the company’s past performance, especially if the transaction is structured as a share sale, where it is taking on all of the company’s liabilities. From a seller’s perspective, preparations for the due diligence process should begin as soon as a decision to sell is made.
Legal due diligence can uncover issues regarding:
- the share capital table (the document that identifies the company’s shareholders and the number of shares they each hold)
- employment matters
- debt and security
- intellectual property rights
- data protection matters and compliance (or lack of) with relevant legislation
A well-advised buyer in the travel sector may also be looking for any potential regulatory issues in terms of compliance with travel regulation, data protection, payments regulation and consumer credit laws.
A buyer will also undertake financial due diligence which will usually focus on quality of historical earnings and profits, future prospects of the business and balance sheet issues. It will also progress with its own commercial due diligence on the target business.
The National Security and Investment Act 2021 (NSIA) is aimed at safeguarding national security by regulating investments and acquisitions in 17 “sectors” and requires the Secretary of State consent to acquisitions that result in a holding of more than 25% of the share capital or voting rights of a company. Buyers and sellers will need to be aware of their obligations under the NSIA and consider whether the target business will fall within the scope of the 17 sectors. For example, travel technology companies may fall within the remit of the NSIA if they are developing AI.
Advisers (both financial and legal) can assist sellers in the organisation of due diligence and may undertake some form of seller due diligence (prior to the buyer reviewing any documents) to help mitigate any material issues (such as contracts which have not been properly executed, missing financial records or incomplete corporate information).
Being ready for the buyer to review documentation and information regarding the business and anticipating potential issues that the buyer may want further details on will help save time in the long run. It can send a positive message to a buyer that the business is well organised, and the management know what decisions have been made and for what reasons.
The results of due diligence may allow a buyer to re-negotiate the purchase price and, along with usual sale warranties (factual statements about particular aspects of the target business), request specific indemnities in the sale documentation to protect it in respect of specific risks and liabilities. Responding to such warranties, a seller will undergo a process of disclosing information against the warranties being given, usually in a disclosure letter prepared by your legal advisers.
A properly advised seller will be able to limit its liability in the future by preparing disclosures that qualify the warranties and hence avoid a claim for damages for breach of contract. Negotiated limitations on liability including financial and time limitations will also be included in the sale documentation.
4. Travel business regulatory considerations
One of the more significant aspects of an M&A process involving a travel business is the impact of ongoing regulatory compliance, as well as complying with a regulator’s rules on approving a change of ownership or control. For a buyer of a regulated entity, ensuring that business critical licences and authorisations continue post-closing is vital.
A sale of a business is a change of control which is likely to trigger obligations to notify certain regulatory bodies both in the UK and internationally (depending on where the travel company operates). For example, the ATOL scheme, ABTA and IATA all include change of control provisions in their licensing terms, which means that you may need their consent before completing a transaction.
Please note that each regulator has their own notification process and timeline to comply with and, depending on the circumstances of the transaction, the change of control process may be rigorous. For example, the regulators may require certain financial information to be provided or they may want to review legal documentation such as the sale and purchase agreement.
It is recommended that sellers seek advice and address these points early on in a transaction to avoid delays due to waiting for third party consents. We have an expert travel team at Fox Williams who specialises in advising on M&A transactions in this regulatory landscape.
5. Tax implications
Tax implications will impact the seller’s return on the business’s sale. The structure of a transaction is often heavily driven by tax, and we recommend that detailed advice on the transaction structure is taken at the outset. If structured incorrectly, the sale proceeds can be taxed as income, especially if there is deferred consideration that is conditional upon the seller remaining in the business after completion.
Early tax planning to provide a reward to staff at the time of a sale can also be important. We often see awards being taxed as bonuses, whereas proper tax planning can result in staff only being subject to CGT.
The target company can in some circumstances also benefit from tax savings upon the exercise of share options. A share of these tax savings could potentially be added to the purchase price of the target company. We have a team of highly experienced tax lawyers who can advise on a travel business sale’s structure and tax implications.
Please contact Andrew Woolf, Sarah Carlton or Hollie Allen if you would like to discuss how we can assist you in selling or purchasing a travel business or if you would like more information about any of the tips mentioned in this article.
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