Travel agency M&A transactions – the legal considerations

The travel sector is tightly regulated. The controls that individual agencies are subject to depend on the scale of their business, their customer base, and the international locations they sell into. Regulatory and licensing frameworks that buyers need to assess include:

• ATOL licensing obligations – The Air Travel Organisers’ Licensing regime is particularly relevant to travel agents. Compliance with rules relating to the issuing of ATOL Certificates to clients, use of approved terms, marketing, record keeping and payment handling is essential
• The Package Travel and Linked Travel Arrangements Regulations 2018
• ABTA membership obligations
• Trading Standards rules and Consumer Protection from Unfair Trading Regulations 2008
• Financial Conduct Authority rules where the agency offers travel insurance to customers.

Buyers should scrutinise the scope of specific licences owned by the target company and investigate any historic regulatory interventions. Certain regulators may need to be notified of any change of ownership of a travel agency. Buyers must be satisfied that approval for the change of control will not be unduly delayed or refused.

The nature of the travel business means agencies hold client funds for significant periods ahead of departure. The way this money is held is subject to strict rules. Buyers should bear this in mind when examining the accounts presented to them by the seller during due diligence.

Deposits and other monies should normally be held in segregated trust accounts, ring fencing them in case of insolvency of the agency. Trustees of these accounts are restricted in the way these funds can be used. They may, for example, be directed towards advance payments to hotels, airlines, and other suppliers, but cannot be used by the company for day-to-day expenditure.

Regulators and HMRC expect customer monies to be fully protected so it is crucial for buyers to understand:

• The legal structure of segregated accounts
• The specific release conditions of monies held
• How these separate accounts are treated in the target company accounts

In M&A transactions, buyers should ensure there is a clear distinction between cash the business has access to and monies held in restricted accounts. The danger for anyone acquiring a travel agency is that working capital is overstated, giving an unrealistic snapshot of the target company’s financial wellbeing.

Travel agencies are party to a vast array of supplier contracts – with airlines, cruise companies, rail operators, and others. They will also have ongoing relationships with hotel groups, tour operators, and travel franchises. The intrinsic value of the agency will be closely tied to the scale of these agreements, revenue generated, and the rights and obligations the acquirer will assume on completion of the deal.

Where any supplier agreement is at risk as a result of the acquisition, the material value of the target business could be significantly downgraded.

It is, therefore, essential for the buyer to scrutinise all supplier agreements and, in particular, to verify that these will survive transition to new ownership intact.

Important clauses to check include any change of control conditions, whether contracts can be assigned with ease and how commissions payable under existing agreements will be calculated post completion.

Verifying that the target company is fully compliant with UK GDPR is an essential part of due diligence for the buyer. This is because travel agents have access to highly sensitive personal data of customers including passport details and financial data. They may also obtain health information such as vaccination history, dietary requirements and disabilities.

Older customer databases should be checked to ensure that consent records meet current UK GDPR requirements. Where consent has not been lawfully obtained, the value of these important datasets may be of limited use and of minimal value post completion.

Sellers can expect to be asked for details of all internal GDPR compliance processes. Ahead of going to market, sellers should pay particular attention to cybersecurity and the status of older booking platforms. They should also be ready to provide details of any safeguards that have been implemented to ensure travel agents working at home do so in a secure, compliant environment.

Buyers should obtain all relevant information on any previous GDPR breaches and look for indemnities against liability for historic breaches.

The proliferation of online travel agents, consumer demand for bespoke unique travel experiences, and the value attached to existing customer databases mean that digital assets and IP are integral to the value of travel agency businesses.

Buyers should carry out detailed checks on how these are owned and protected. They should also establish ease of transfer of these assets and identify any hurdles a change in ownership may create.

Questions to be asked of the seller include whether brand names, logos, and marketing slogans are registered as trademarks or similar, whether trademarks and licences are registered in relevant overseas territories, and whether there have been any infringement proceedings or other historic disputes.

In addition, the ownership of websites, social media channels, and domain names associated with the target should be verified. Where due diligence reveals that these are registered in the name of the current owner or third party (such as the original web developer), the logistics of transferring ownership should be clarified before completion.

The UK travel agency market offers considerable opportunities for investors and existing businesses wishing to merge and consolidate their sector presence. Deals in the sector are also driven by founder agents seeking to exit the industry.

These are complex transactions, however. We have highlighted some of the main legal considerations to bear in mind during any M&A, and we are ready to explore these and other risks with you in more detail.

Some other areas of concern to buyers and sellers include staffing and retention of key staff, outstanding consumer claims/refunds and the question of how market volatility can affect valuation of the target business. It is also important to think carefully about how to structure the deal, and whether it should be managed through the purchase of shares or of specific assets.

If you are entering or exiting the sector, get in touch.  Without any obligation, we’ll go through your options and help you understand the legal and financial implications. The team of experienced mergers and acquisitions lawyers at DMH Stallard has all the resources and expertise you will need.