It was June 1, 2001. Google was just a pup and Facebook and Twitter hadn’t been born yet. Advertisers were still purchasing print media. As far as creative services firms were concerned buyers had a clear delineation between marketing and PR shops.
June 1, 2001 was also when I sold my CPA firm and started my M&A Advisory firm, Gould+Partners. Three months after I began my new firm, the Sept. 11 attacks happened, and the world changed.
Prior to the attacks, things were pretty robust for PR M&As. The late 1990s and 2000 were the heyday for industry consolidation, with a steady flow of deals encompassing multiple business verticals.
The major advertising holding companies, such as Omnicom, Interpublic Group (IPG), WPP and Havas, were acquiring PR shops, bringing in new talent as well as fledgling content marketing programming.
However, regardless of who was doing the purchasing, firms were being overvalued. Sellers were garnering prices they thought they could only dream about. Even sellers of mediocre firms were becoming multimillionaires as many buyers incurred losses because the firm’s past financials didn’t live up to future expectations.
At the time, the financial teams cutting these transactions were not so savvy when assessing the value of the targeted firm. Adding insult to injury, pre- and post-integration plans — a vital M&A component today — didn’t really exist 20 years ago and then the Sept. 11 attacks seriously hampered PR M&As. With buyers understandably skittish about the impact the attacks would have on the global economy the appetite for creative services firms diminished, and deal activity slowed to a standstill.
The economy sputtered along for a few years before The Great Recession in 2007-2008, which brought PR M&As to a virtual halt. Strategic buyers were strapped for cash while private equity players — who had jumped into the ring to land PR, marketing and ad firms in the late 1990s and early 2000s — put their roll-up plans on hold.
But, in cyclical fashion, M&As for creative services firms returned to adequate levels and have picked up in the last years along with the spiking economy. Investors remain pretty confident these days.
Twenty years later successful agencies have been earning solid multiples. Most of them have been modeled on a “Build to Sell” strategy, meaning focusing on top-line growth and consistent profitability before going to market.
These independent agencies have been acquired by much larger firms, the holding companies, or relatively obscure firms with a war chest saved up for acquisitions. The acquired firms, now have access to the resources and talent that could take their firm to a new and more profitable level, a win-win for both seller and buyer.
At the same time, other PR firms with longevity, a great brand and quality clients, have been passed by. They have enjoyed the fruits, perks and financial flexibility of running a lifestyle firm, but it has cost them dearly.
Even those principals who decide that now is the time to sell could be in for a rude awakening. Unless they have a second tier of management that is ready to take charge of the firm and aggressively build on its clients, staff and creative services, the firm may be unsalable.
It begs the question: Aside from perhaps waiting too long to sell, why does the value of these firms come up short? They have the talent, in terms of having a deep bench and, I have little doubt, a desire to bolster the overall appeal of their firm and generate more lead revenue.
The answer is classic and simple. Many otherwise competent PR pros, who do terrific and award-winning work on behalf of their clients, simply neglect to manage their firm properly. Their salary and perks are too excessive for the net revenue level. There’s too much overservicing and very little long-term planning.
Many owners have run their firm to suit their lifestyle, not suit their lifestyle based on what the firm can afford. Their rent is too high. Their total salaries are not in sync with best practices benchmarks. They ignore what I have been preaching through all the market fluctuations throughout the last 30 years: the economic necessity of building a profitable business and managing your firm “as if” you’re going to sell it, whether that event is now or several years down the road.
Too many owners continue to ignore what I call managing their firm “the right way,” which encompasses a set of business practices designed to maximize the value of agencies and put acquired firms on a path for financial success and monetization.
Unfortunately, the pattern of resistance that existed 20 years ago is still swirling around in 2020. What’s puzzling is that the resistance persists despite the seismic and ongoing changes in PR and marketing communications in the last two decades.
The key difference between 6/1/2001 and 6/1/2021 is many firms that sold for prices that were not an accurate reflection of their business’s value got away with it in 2000. In a much more savvy business environment, with buyers having a keener eye on what they want to acquire and the potential upside, firms won’t get away with it any longer.
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.