You’re eager for a spark. You hope there’s good chemistry and scintillating conversation. If things go well during the first meeting a second meeting may hold promise for both the present and, perhaps most important, the future. It’s a fair description of dating. But it’s also an apt description of the courtship between prospective buyers and sellers of PR firms.
People who are dating are looking for a connection and would like their emotional investment to provide substantial returns, in terms of developing a long-term relationship. In a similar vein, strategic buyers of PR firms are in it for the long haul and want their financial investments to grow, while sellers want to take their firm to a higher (and more secure) level.
Whether it’s dating and courtship or managing the PR M&A process, momentum is key, and things need to keep moving lest the buyer starts to lose interest.
In an M&A setting, once the buyer and seller feel comfortable with one another there are several steps to take to ensure a successful bond. Here are a few of them to keep in mind as you consider selling or buying PR firms.
> The Offer/Term Sheet. It’s the M&A equivalent of a GPS. A term sheet, which should be fairly compact, outlines how the buyer and seller view the terms of the offer. The down payment, the earn-out model and security/retention of key executives are all included in the term sheet.
> Timing. “It’s all in the timing” is a cliché because it’s true. The right timing means a healthy premium for the seller. But the buyer has to be satisfied, too. What’s crucial here is to think that the optimal time to sell is when profitability is maxed out and the net revenue is rolling in. Rather, buyers demand growth during the earn-out period in both the top and bottom lines. When it comes to the right time to sell, showing slow yet steady growth beats streaky every time.
> Letter of Intent. This is the M&A equivalent of putting on an engagement ring. The letter of intent (LOI) puts in writing the basic terms of the transaction. It will cite the proposed structure of the transaction, the pricing model and other important items such as timing, no-shop clauses and compensation of key executives.
> Due Diligence. If the seller or buyer give due diligence short shrift it could come back to haunt both sides. “Buyer due Diligence” includes legal review of contracts and financial review of systems and management review of product(s), pitching style and depth of the relationships with clients, vendors and staff. “Seller due diligence” also includes financial review as well as gauging how buyers will integrate the seller’s firm into their parent organization. Key question: How long will the entity retain the seller name and brand? Both parties need to be clear on the answer.
> Breakup Fees. As with some engagements, one party in a deal may get cold feet and bust the whole thing up. A breakup fee is, in effect, a penalty fee used in takeover agreements if the buyer or seller back out of the deal after contracts drafted and all components agreed to. A breakup fee, or “termination fee,” is required to compensate the prospective buyer or seller for the time and resources used to facilitate the transaction. Fees are normally a percent of the deal’s value or a negotiated fixed fee if buyer or seller back out at the midnight hour, without reasonable cause. When a transaction implodes at the midnight hour, most often it is due to “sellers remorse,” meaning a seller decides he or she no longer wants to sell, after thousands of dollars have been spent on legal, accounting and consulting fees and hundreds of hours of time have been invested. I believe a buyer should be compensated if this happens. So should the professionals whose ultimate success fee was based on the transaction being consummated. Breakup fees help preserve the integrity and commitment of both buyer and seller after a Letter of Intent is signed.
This article includes content from “Doing It the Right Way: 13 Crucial Steps For A Successful PR Agency Merger Or Acquisition,” by Rick Gould, CPA, J.D. For more information, please click here.
Sign up for our email newsletter, Inside Edge…Business Strategy for PR, Media & Creative Service Agencies