Some things never change. Almost five years ago there was chatter in the PR space that agency valuations are not worth the time and money. At the time, I vigorously disputed the notion and explained in great detail why that’s a bad idea.
Unfortunately, those comments by the same individual have reemerged, and I feel compelled to provide PR firm owners and executives with yet another reality check regarding why agency valuations are a crucial aspect of strategic PR management.
Whether you’re planning to sell your firm or simply building your firm “as if” you will eventually sell, understanding your firm’s worth is vital.
It can help with several issues — manifest of the many items we review — ranging from creating efficiencies in the day-to-day operation to reducing over-servicing to maximizing the sale price of your firm. A business valuation can also bolster your financial house if you’re planning on staying for the long haul and selling is not an immediate goal.
Either way, you’re constantly building the value of your firm, and now more than ever considering the hyper-competition for PR dollars from brand-side marketers. Below, I reiterate the reasons why PR agency valuations are key and necessary.
Costs are Reasonable
Valuations typically include detailed analysis, numerous conference calls and emails with the CEO and/or CFO, a written report and follow up with the principles of the firm. They also involve going through the valuation report page by page. Worst case, the result is a clear understanding of how firms are valued, as well as a game plan for the future.
Valuations are Not Just for Firms Considering a Sale
Valuations are not just done for firms considering a sale. There are many other reasons for firms to get valuations. Examples include:
- Buy-Out of Partners AND Buy-In of Partners
- Management Buy-outs (MBO)
- Cross-Purchase Agreements
- Insurances-Life, Disability
- ESOP Purchase Price
- Estate Taxes
- Gift Takes
- IRS Audits
- Financial Analysis
- Expert Testimony
- Benchmark Analysis
The Valuation Document is a Valuable Resource
The valuation document is never given to a buyer by a seller. It is used as a basis for discussions and as a frame of reference for strategic planning within a PR agency. While a valuation is never ‘cast in stone,’ it should be used as a guide and it is used to negotiate the down payment on a sale. The valuation document is a valuable resource with logic and method behind it. It is grounded in and validated by dozens of actual transactions as well as by the years of valuation experience and industry knowledge possessed by the expert who performs the valuation.
Every Valuation is Different
When it comes to PR agency valuations, there is no ‘rule of thumb.’ Every valuation is different, and 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, including top and bottom line trends, sudden loss of major clients, death of an owner who is a rainmaker, or a key VP leaving and taking major clients with him or her.
There Are Numerous Ways to Calculate the Value of a Firm
There are several methods used to determine the value of a PR agency. These methods include:
- Traditional Model Using Multiples of Recasted EBITDA
- Weighted Average
- Discounted Cash Flow
- Enterprise Value
- Book Value/Net Worth
There are also various situations that call for discounting the calculated value, such as:
- Restricted Stock
- Lack of Control
- Lack of Marketability
Below is a step-by-step guide to getting the valuation process started:
- Determine which firms may be right for you to do the valuation. Reach out to your law firm or CPA firm or colleague for referrals.
- Call the person(s) that may do the valuation
- Ask for their education credentials, including courses they take and/or teaching valuations on the graduate level, seminars & webinars. Are they industry experts?
- Ask for an estimated price range for the cost of performing your valuation
- Ask how long will it take to get the valuation report for your firm
- Check out their LinkedIn and website.
- If you want additional validation call the references and ask the following questions:
- Was there value in the services provided?
- Was the valuation done in a timely fashion?
- Did you receive high quality service?
- Was the final cost in line with the quote?
- Do you believe the person doing the valuation was an ‘expert’ in financial management of PR firms and doing valuations?
For more information on agency valuations, see my recently published book, “Doing It The Right Way: 13 Crucial Steps for A Successful PR Agency Merger or Acquisition.” You can also email me, [email protected], and I will send you the chapter on Valuations.