Build “As If” to Sell

By Rick Gould, CPA, JD

The mindset of managing your PR/PA firm “as if” you were about to sell it not only maximizes value—but also maximizes profitability. This mindset forces an owner to put his or her best foot forward each day by believing that an external sale is imminent and that buyers are courting them. Firms become more disciplined with profitability-building from a day-to-day operations perspective, and they also become more disciplined with financial and managerial controls when they know someone on the outside is watching. These levels of accountability don’t usually happen without this “as if” mindset.

Personal Brand to Valued Asset

The real challenge for every new agency owner is to transform the start-up. Evolving from a personal brand into an overall one is the key to creating a salable company. And a salable company is always more profitable, even if the owner never decides to ultimately sell. The overarching truth I have learned in my three decades of counseling PR firms is something that I have been sharing with PR firm CEOs for years. The single most important way to create value is to “run your business as if you were to sell it tomorrow.” Yes, the day you put your name on the door should be the day you start your exit plan. If you manage your business this way, you will manage for profit and growth—

Strategic Planning- Your Vision

By Rick Gould, CPA, JD

“There must be a steadfast commitment and disciplined approach to ensure that EVERY major business decision is measured against—and in complete alignment with—your vision,”  “This is where even the most respected business leaders fall short. Some of the most essential decisions will often have an adverse financial impact in the short term but true visionaries always keep their eye on the long-term prize.” Tony Signore, CEO and Managing Partner of TAYLOR

Thinking BIG Strategically- “A Goal is a Dream with a Deadline”

By Rick Gould, CPA, JD

You Must:

1.      Create the possibilities

2.      Write-it down

3.      Imagine the goals and work backwards

4.      Outline the steps you need to take

5.      Create a timeline

6.      Regularly review your goals, timeline and programs made toward the goal.

For example, if your goal is to sell your PR agency in five years work backwards to what you need to do each year, each quarter, each month from now until five years out.  Creating an infrastructure, building a quality book of business, creating a fee structure that is profitable, hiring great people and monitoring the growth of your top and bottom line. 

PR Agencies Continue Downward Trend In Profitability

2013 was a disappointing year for PR agency profitability. Looking at the last several years of the GouldPartners annual Best Practices Benchmarking Survey/Report, Operating Profit was as follows:

• 19.7% in 2007 (Pre- recession) 
• 15.6% in 2008
• 13.5% in 2009
•  15.6% in 2010
• 18.6% in 2011
• 18.8% in 2012
• 15.8% in 2013

In 2013

• Firms under $3 Mill at 15.3%, down from 18.7% 
•  Firms $3 Mill to $10 Mill netted at 14.8%, down from 18.2% 
•  Firms in excess of $10 Mill up to $25 Mill netted at 18.6%, down from 19.2% 
•  Firms in excess of $25 Mill netted at 17.9%, down from 21.4%

One of the most promising findings of the survey is that what I label as “Model Firms”, the dozen agencies consistently meeting or exceeding the model performance criteria, continue to remain far above average performance.

These firms averaged an operating profit in excess of 20%, due to the their ability to hold professional staff salaries to under 40% of net revenues., total labor costs at 50% & operating expenses at no more than 25%.

Other factors 

• Revenue per professional staff was at $200,710, down from $210, 539 last year.
•  Firms in excess of $10 Mill in net revenues averaged $221,000. 
• For the second year in a row the PR agency field did not increase their hourly rates in 2012. 
• Productivity, measured by percent of available client hours to total available hours (consistently around 1,700) has been consistently below 90%, a goal reached by almost every firm achieving 20%+ profitability.

The bottom line

Labor costs increased, billing rates were flat and increased costs were not passed on to clients. The 3% drop in profitability is all in the labor cost. 

The PR M&A Marketplace - What is your firm worth?

I have been valuing PR firms for over 20 years, initially as the CPA firm for many seller firms, and then since I started my M&A firm, GouldPartners in 2001.

Valuing PR agencies is a complex process.  It takes financial expertise, knowledge of the M&A marketplace and an understanding of how buyers create offers/term sheets.

Term Sheets presented by buyers to sellers for the acquisition of the seller firm are customized based on several factors.

1.      Recasted Operating Profit for the past three full years plus current interim period operating profit (i.e. seven months ended July 31, 2014).

2.      Net Revenue (Fees + Mark-ups) growth for the same periods.

3.      Net Worth of the firm.

4.      Working Capital (current assets less current liabilities) position as of sale date.

5.      Other intangible factors as second tier management, quality of staff, quality of clients, office lease, client contracts in place, what percent largest clients comprise of the total client portfolio and other factors are all considered when a buyer prepares a term sheet.

The goal is that the terms are fair for both seller and buyer.  There is no cut and dry statement that can be made about how a buyer values a seller.

Contrary to the belief of many sellers, firms are not valued at a multiple of “net revenues”.  I was recently called by a client saying he read that firms with 25% operating profit may be valued at 3X revenues.  He was ecstatic thinking that his $4 million firm is now worth $12 million.  He also was told if the agency had an operating profit of 25% (his was 26%) the seller could get half the value, $6 million, at closing for his $4 million PR agency.  I, assured him that, in my opinion no buyer would ever offer terms this favorable.

Buyers need to minimize risk.  The down payment is their risk.  For a $4 million agency with a 25% operating profit the seller may get 20% - 35% at closing.  The seller may also get less, depending on many factors.  The balance will be paid over 4-5 years and based on “performance” what we call an “earn-out” model. The past determines the down payment percent.  The future determines the ultimate amount to the seller.  The multiple used for valuation and payment has been averaging around 5x times EBITDA (Earnings before interest, taxes, depreciation/amortization). Often a sliding scale is created, where the multiple may be less or more if certain goals are met regarding top & bottom line growth. An earn-out can be described as a deferral portion of the purchase price which is conditional on the seller’s achievement of predetermined operational or financial goals within a specified time frame.

Firms that have historic flat net revenue growth and operating profit of under 15% will receive lower multiples, lower valuation and lower down payments.

There may be other “Revenue-based” models offered by buyers in the term sheet.  In a revenue- based model the sellers main function will be to bring in quality business.  The buyer will manage and be responsible for the operating profit.  A revenue-based model can be very lucrative for sellers who are good rainmakers but, for whatever reason, have not been very profitable due to poor staffing, distracted by back office, lack of capital, excessive rent, losing pitches as a result of being too small, etc.  With a larger firm the seller will have the financial and intellectual capital needed to grow in both top and bottom line.  The revenue based model has become much more prevalent in today’s PR M&A marketplace.  I believe it is s valid option for many sellers to consider.

The key point is there is no general rule to apply.  Any PR practitioner considering selling their firm should do two things:

1.      Have a valuation completed by a qualified appraiser, knowledgeable in the industry.

2.      Have experienced representation using professionals that know and understand the PR M&A marketplace and the nuances of firm valuation and deal structure.

I have included a link to a June 2014 article on PR M&A, authored by CPA/O’Dwyer columnist Richard Goldstein.  I was a contributor to his column.  Navigating mergers and acquisitions in PR

Re-Launching of GouldPartners

Today represents a new era for my career – the re-launching of GouldPartners.

Where SGP Worldwide is predominantly a Mergers & Acquisitions firm, and will continue to be, Gould + Partners is a Total Financial Services firm.  Our offerings include all aspects of accounting and legal services. 

We have a magnificent team in place-

• Financial professionals, with all levels of experience – from full service CPA services to the basic Bookkeeping services needed by every start-up business to international tax services. 

• Legal professionals, from the most prestigious attorneys in the M&A space to the one person law firm to handle basic compliance legal needs. 

• Mentoring professionals to help clients become savvy entrepreneurs in addition to great PR professionals. 

Gould+Partners is a one-stop resource.  We can satisfy almost all financial and legal services needs.

Checkout our new website just launched today www.gould-partners.com