I was recently called by a prospective seller who asked for advice on the value of her firm. She was told by a competitor of my firm that she should simply double the annual fees, assuming her bottom line was at least 20 percent. What he didn’t ask her were a series of questions needing answers and detail in order to fairly and accurately value her firm. There are at least ten different items needed to value a firm. He asked for none of these, and only shared his illusionary model for valuation.
Contrary to the belief of many prospective sellers, firms are not valued at a “multiple of net revenues.”
I’ve been valuing PR firms for more than twenty-five years, initially as the CPA firm for many seller firms, and then since I started my own M&A advisory firm, Gould+Partners, 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.
There’s no exact science in valuing a PR firm. Every valuation is different. PR is a business in which both actual financial performance, recast for many adjustments and several intangibles, will determine value. Items such as relationships with clients, depth of second tier of management, specialties and fee levels may also impact value.
There’s generally an element of subjectivity in valuing a firm, but there certainly are objective rules and guidelines that a professional who values PR firms should use. In addition, there’s extensive review work performed prior to doing the actual valuation report. Every PR firm has its unique components. There’s no cut-and-dried formula for valuing a firm.
|This article is featured in O'Dwyer's Jan. '21 Crisis Communications & PR Buyer's Guide Magazine
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Hiring a qualified outside organization to perform the valuation is well worth the investment required to complete them. While having a thorough understanding of your firm’s value is a good idea, there are several specific circumstances when it’s particularly beneficial to get an accurate PR firm valuation.
Establishing a baseline for a “build to sell” strategy
Potential Sale. When contemplating putting your PR firm on the market, knowing how much your firm is worth can help you tremendously in understanding the offer made by a buyer for your firm.
Partner buy-in. When adding new partners to the firm, knowing your company’s worth is necessary in order to ensure that your partners have appropriate and fair fiduciary responsibility within the organization.
Partner buyout. In order to ensure a fair transaction takes place when a partner buyout takes place, knowing a firm’s value is key, especially if the partner is retiring or moving on to her/his next chapter of their career.
Partner split-up. When firm partners split up and potentially divide firm assets, understanding the value of your firm is imperative, especially in a contentious split-up, which is often the case.
Potential merger of two or more firms. A firm valuation is a valuable resource to have on hand when considering the merger of multiple firms. Again, knowing the value of your firm will help to ensure that a fair and reasonable transaction takes place should the firm merge with another firm. It will save time and cost if the valuation is already in place.
Growth plan. Having a comprehensive firm valuation can greatly help making beneficial business decisions on a day-to-day basis. It can also provide valuable information and insight when large and small opportunities for growth come along.
Borrowing power. Any substantial loan request may require an independent valuation.
Estate planning. When organizing your estate and creating a succession plan for your business, it’s important to have an accurate business valuation on hand. This will help you with tax planning and assist you in determining who should ultimately inherit your financial interest in the firm. Valuation for an estate plan is very different than valuation for a sale of the firm.
Divorce. Whether a divorce is amicable or not, knowing the worth of your organization is a safe bet when you go into negotiations. Understanding how much the business you worked hard to build is worth can help ensure that a fair divorce settlement is reached, especially if the two owners splitting up are married.
There’s no “rule of thumb.” Every valuation is different. There are many moving parts. There are items that may add or subtract from the calculated value. And there are many intangibles that impact the ultimate valuation, for example, top- and bottom-line trends, sudden loss of major clients, death of an owner who’s a rainmaker, a key VP leaving and taking a major client and so forth.
Here’s what I recommend
- Connect with the person who may do the valuation.
- Ask for his or her education credentials, such as certification in valuations, teaching valuations at the graduate level etc.
- Ask for his or her cost range.
- Ask how long it takes to do the valuation report.
- Ask for his or her references.
- Call the references and ask the following: Was there value? Was it timely? Did they receive high-quality service? Was the cost in line with the quote?
If you have a need for a valuation, do your homework. Interview the firms that provide this service, specifically the person who will do the valuation. Determine which firm and individual will give you the highest quality of service and product for a fair price.
Rick Gould, CPA, M.S., J.D., is Managing Partner of Gould+Partners. He has previously published “Doing It The Right Way: 13 Crucial Steps for a successful PR agency Merger or Acquisition”, as “The Ultimate PR Agency Financial Management Handbook. His new book, Exiting Your Business The Right Way, was released in January. It is available to all owners of PR firms, at no cost.