Bigger is Better – But Not “Too Big”

We have been consistently advising PR Agencies to grow their top line for maximizing value, as long as they maintain bottom line consistency, targeting 20+ percent.

But there is a footnote to this advice. Being “too big” may actually decrease the payback.

The sweet spot for PR firms has been the $10-$25 million net revenue size.  Again, net revenue is “fees + mark-ups”, does not include the cost of the rebillable.  If a trip to an out of town client cost $3,000 and you bill the client $3,600 (20% mark-up) only the $600 mark-up is included in net revenues.  If the fee for that trip was $10K, $10,600 is included in net revenues, not $13,600 ($10,000 + $3,600).

We need to stress that up front in that many firms perceive Net Revenues as Total Revenues.

Our 2019 Best Practices Financial Benchmarking Survey Report, released, Friday, June 21, again supported the “Bigger is Better But Not Too Big” approach to maximizing profitability and value.

Of course, a $75 million firm with 15% profitability will command a larger valuation in “dollars” than a $25 million firm with 20% profitability but the effort to run, build, manage a $75 million firm is much more of a challenge, with multi offices, MD’s in every office, staff, rent and other substantially higher operating costs.

So, I question whether a firm “building to sell” should pull the trigger when they are between $10-$25 million.

For the past few years we have been tracking these two categories and have to wonder if the time and effort it takes to build a mega firm is worth the effort if a $25 Million firm doing 20% operating profit can command a $30-35 million valuation, with huge upsides for growth post-sale. Something to think about.

What do you think?