Thinking of Selling Your PR Firm?

Rick Gould

Selling your PR firm will be the most challenging event of your career. When you launched your firm, you were motivated and working within your comfort zone. But when you decide to sell, you’re entering a new and unfamiliar arena and relying on others to drive that process. Having insight into the top drivers of value will be invaluable in deciding whether your firm is ready to sell—and can increase the odds that you will be offered the maximum value possible.

So, what are the main drivers of value? Here are ten.

1. Premium financial valuation. Profitability is the main driver of firm valuation. And the financial valuation is the main driver of the firm’s total value. Other factors are important—and many sellers have perceptions that their firm is worth more than the numbers will support, due to misleading advice or an article they may have read—but ultimately, financial performance will be what impresses a buyer most, and without historical growth and profitability, there won’t be buyer interest.

2. Professional financial presentation. I caution you not to turn over your financials to a prospective buyer without first having the financials reviewed and recasted. The recasting process includes adjustments that are appropriate for M&A valuation purposes. Your financials are the financial PR piece for your firm, and they should be professionally prepared, preferably by an outside CPA firm. When a buyer sees that the firm has invested funds into having the review work necessary and the preparation done by an outside firm—in the recommended format—it casts a positive impression. It will also decrease the amount of due diligence performed by the buyer and, as a result, save both the buyer and seller substantial professional fees.

Some other recommendations:

• Never have Cash Basis financials. They’re fine for tax preparation but must always be on the accrual basis for M&A purposes.
• Never have accounts in your P&Ls called Other, Miscellaneous or Unclassified.
• Never use categories that aren’t self-explanatory.
• Be sure you show revenues as Net Revenues: simply Fees + Mark-ups. Net Revenues (versus Gross Revenues) are what buyers use as the basis for measuring labor, operating costs and profitability.
• Always include “labor” in its own category, directly under Net Revenues.
• Never include account labor and account freelance labor in “rebillable” costs.

3. Quality second tier of management. A buyer will always look beyond the owner to the next level of management. A buyer also needs assurances that once the seller/owner is paid off and potentially leaves the firm, the clients will remain. So, there’s a logical strategy for you.

You must transition from doing the work or making all the decisions to true delegation. You must slowly remove the firm’s dependency on you. Ask yourself, “If I went on vacation for the next month, would the business suffer?” You need to break free from any dependency others have on you. Your job is to scale the business, crafting operational efficiency, productivity and meeting industry benchmarked utilization stats. You must give key people the autonomy to make decisions. Let them make mistakes. Empower them to succeed.

4. Intention of the owner(s). The prospective buyer will always be interested in the owner’s intentions, especially if there’s only one primary owner. How long is the owner intending to stay? That’s the key question.

Buyers would like at least a three- to five-year commitment, and their hope is that the seller will stay even longer. On occasion, a buyer will agree to a phase down of owner commitment if there’s a strong second tier of management and the owner can show that she/he will not be needed full-time after a certain period. If you’re a prospective seller, you should be aware of your timeline so your exit can be strategically planned. And, most importantly, be transparent with the prospective buyer.

5. Staff talent. A prospective buyer will perform a top-to-bottom review of your organization and will analyze your staff at every level, including any records you have on time management. Having stats on utilization is recommended: staff client hours divided by “available” client hours. They’ll also want a detailed staff census, showing staff titles, salaries, bonuses, years with the firm and the clients they service.

6. Cultural profile. Your firm’s culture is of immediate interest, even before any financial analysis. Is your firm a Best Place to Work firm? Have you won industry awards for quality work? Do you belong to professional organizations? Is your firm fully or partially remote? If your firm is mainly remote but the prospective buyer is back in the office, you’ll need to agree that your staff is willing to return to the brick-and-mortar office. This will be a major shift in culture and should be seriously weighed.

7. Quality and concentration of clients. A prospective buyer will want to analyze your client mix: a list of your clients for the past three years showing net revenues, dates of engagement and which senior staff member serviced the client. They’ll also want percentages of each specialty and service sector.

A buyer will do an in-depth analysis of the concentration of your major clients. The general rule is that your largest client shouldn’t exceed 20 percent of the total book of business. It’s strictly based on buyer risk assessment. If this is your only negative box checked, and you have one client as high as 35 percent concentration, I would still move forward and hope there are enough positive aspects to offset this negative. Client concentration is a critical value driver. A firm where no one client exceeds 10 percent of the total book of business will be looked at favorably and will spike the firm’s value.

In addition, some firms maintain lists of the types of clients they won’t accept, such as cigarette brands or fossil fuel companies. You need to be sure that your major clients won’t land on these lists or you may be asked to give up the client.

8. Brand value. In addition to your own brand value, your clients also have brand value that may drive up the valuation of your firm. Having well-known logos on your website helps.

9. Seller network. The seller’s contacts are invaluable. In every transaction, a buyer hopes to capitalize on cross-referrals. A seller who’s been in business for decades should have a robust contact list and will be encouraged to rekindle relationships and sell the services of the larger, combined, multi-service firm.

10. Unique specialties. Having a unique specialty may be attractive to a buyer looking for that specialty and, as a result, may drive up value. Firms that specialize in healthcare, sports, digital and crisis have warranted premium valuations.

I would be remiss if I didn’t stress that you should use professionals who understand both the PR business and the M&A process. Planning for, facilitating and closing a transaction takes experience and expertise. Having the right team working with you may ultimately be the top driver of value.

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Rick Gould is Managing Partner of Gould+Partners, a merger and acquisition consultancy specializing in the PR sector.