There is no such thing as a simple merger and acquisition transaction. Because every deal involves people, an M&A transaction is by definition complex. In addition to the technical variables, such as legal structure (e.g., asset versus stock), entity issues (corporations, partnerships, LLCs, etc.), and various other factors such as undisclosed liabilities or contingent purchase price agreements, your advisor through the process may be asked to act as an armchair psychiatrist.

Buying or selling is also one of the most expensive decisions a PR firm can make, and one of the most dangerous. The truth is that many M&A deals, if not planned properly and without an experienced advisory team, fall through. Either the buyer or the seller, or both, gets cold feet. Even worse, many of the deals that do close end up below expectations. Therefore, it makes sense to have a plan for avoiding pitfalls while taking advantage of all opportunities. The road to success is to have a great team helping you through the process.

One of the best M&A advisors I know to the public relations industry is Rick Gould, CPA, J.D., Managing Partner of GouldPartners, LLC. I recently asked Rick for some insight about the M&A marketplace for 2014 and beyond. The balance of this column is his views on the marketplace.

The Marketplace Today

The M&A marketplace is active, it is robust, there are more buyers and sellers than ever before. There are many new buyers out there, buyers that know they can capitalize on pricing, on intellectual capital, on cross-referrals.

The marketplace is a very healthy environment, not just dominated by the holding companies, as it was in previous aggressive buying periods.

  • Why are new buyers evolving? Strategic acquisitions are the new normal. Buyers are acquiring to improve specialties, locations, quality of staff, clients and name brands and an integrated marketing strategy.
  • Who are the new buyers? Many are one office firms acquiring in locations that will facilitate and improve services and firm depth. They recognize a need for niche specialties. They realize that integrated marketing services is the way of the future.

Is Bigger Better?

Firms are realizing "bigger" is better. With size there are economies of scale and these economies go straight to the bottom line.

Why Are Firms Selling?

The pool of sellers has increased. There are many quality firms available to be sold. Several profitable firms are in play. Owners are looking to monetize their years of sweat equity. They want relief from back office distractions. They need regional and/or international reach. They desire expansion of brain trust and depth of staff needed to grow. The owners prefer to once again practice PR versus build and manage their firm. They see complementary specialties to gain additional clients, efficiencies of scale by sharing labor and operating expenses and cross-selling. They hope for more disciplined financial practices, expansion of the firm's capital base and borrowing capacity. Ultimately maximization of profits is the goal. The earn-out (buyout) is very incentivizing if the sellers achieve their profitability goals.

Small Firms, What Are The Issues?

Small firms just cannot compete with those firms that work on a national and global scale. They cannot invest in what it takes to stay current with technology and social media. They do not provide all the integrated services needed by clients. There is increased competition from other marketing communications firms for the same clients and services.

So what are small firms doing about this? First, there are many small firms that are well run and profitable. I have many clients that are small and successful and have no interest in selling. Nevertheless, smaller firms may lose pitches that they could have won if bigger. They realize that having financial resources and the intellectual capital of the buyer is a huge advantage in winning and retaining clients. Sellers do not have the depth in all cases to compete on a global scale that regional and/or international agencies can reach. It may be difficult for them to stay current with cutting edge technology. They want bigger and more profitable clients.

Does Size Matter?

Firms want to get to the next plateau. For example, from $3 million to $10 million. Firms with higher quality net fee levels will demand a higher price. The buyer will recoup the higher price when they in turn sell. They recoup their investment plus more if they retain the clients and key staff of the seller. Clients need more services, whether it be crisis, IR or digital. They expect their agency to provide these services. There has been an increase in boutique firms as the strategic target of buyers. Clients needs have expanded in both services and geography. For example, digital agencies still are the most in demand. Clients require their PR agencies to be at the cutting edge of their needs.

The Age Factor

The boomer generation of CEO's are now at the age where selling makes sense to monetize their 20-30 year invested asset. Buyers do not want to buy firms where the owners are in their late sixties or seventies, thinking they may not have enough gas in their tank to fulfill their earn-out obligations and stay beyond. Buyers are willing to acquire seller firms with older C-Suite executives if there is a solid, experienced second tier of management.

So What Is Next?

The next generation of deals will focus on synergy, services and scales, creating an integrated service network. There will be a need to combine key services that clients will need with a focus on specialized, best-in-class strategic offerings. The synergistic matching of client needs with agency offerings will be the pinnacle of opportunities and agency success. There will be a very active M&A market with the merger of public relations and advertising agencies, and branding and interactive firms. Integration will be a challenge but performance will be optimized once that is achieved.

Gameplan For The Future?

The Rick Gould mantra has always been: "If you run your agency as if you are ready to sell it, you will realize more rapid growth, maximize your bottom line and build value to your firm." That is the best value added advice I can offer.

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Richard Goldstein is a partner at Buchbinder Tunick & Company LLP, New York, Certified Public Accountants.