Valuing Your PR Firm ‘As If’ It Were Your Home
By Rick Gould CPA, J.D.
Your home has been good to you. You have invested a chunk of money into sprucing it up throughout the years and the work has paid off nicely. You are ready to sell.
As you brace for a sale you remember that tiny crack in the wall near your bedroom and some chips scattering the kitchen floor tiles. It was OK to put off repairs in the past. No longer.
To drive the best valuation possible, you best make sure the entire home is structurally sound, down to the last detail. It’s the same thing with selling your PR firm. You need to run your business “as if” you are ready to sell it. Before you engage with buyers you have to take detailed inventory in order to calculate the overall value of the firm— and there are many moving parts.
There are PR consultants who treat this process lightly. They will say to PR firm owners, “You can get one-to-three times your revenues for your firm,” without providing or knowing much else. But they’re blowing smoke and attempting to get your expectations for a huge payday when, as they know, it will not happen.
These folks are trying to get your business, with no regard to results. They are offering to evaluate the firm for “free,” which cheapens and degrades the worth of their work, mainly because they are not qualified to perform this function. You need to ask hard questions, such as getting references and evaluations from the firms they have worked with, including names. Ask them to explain their process.
Getting maximum value is both an art and science. There is no boilerplate formula. There is a mathematical starting point and also many intangibles that are analyzed to determine firm value. It takes education, expertise and experience to do this the right way and get the maximum result.
Accounting records, of course, need to be in perfect shape before you start talking to buyers. You should have CPA financials. Unfortunately, many PR firms don’t have strong financial statements. They may be on a “cash” basis. They are not “recasted.” That’s a red flag for buyers, and you’ll lose credibility immediately.
You’ve got to possess professional financial statements to give buyers reason to move forward. If you don’t it makes your firm look sloppy and unserious about your intentions to sell and/or qualifications to be in a larger playing field with a buyer.
There are three types of financial statements:
> Compilation. This is generated by the firm itself. No serious buyer will accept these statements at face value. When it comes to length of time, buyers will generally want to view detailed statements that date back at least three years. They’ll also want interim financials for the current year. A compilation is not good enough to present to a savvy buyer. If your financials are a compilation the buyer will either ask you to upgrade your financials to a review report or substantially increase their due diligence. That will cost you time and money incurred by your CPA firm and/or internal accounting staff. It’s much less expensive to do it the right way from the start.
> Review Report. Geared to PR firms (with revenues under $20 million), a “review report” demonstrates that a CPA firm has signed the financial statements and assumed a greater level of accountability for their veracity. A review report is generally affordable for most PR agencies and can be completed by your CPA firm. A review report boosts your credibility with buyers, bankers and other third parties.
> Certified Audits. These are statements that have been audited by the bigger, well-known accounting firms. The highest level of financial statement is necessary for larger firms (more than $20 million in revenues). Sellers rarely need this level of financials.
Prospective buyers will regularly ask for an analysis of the firm’s revenue stream(s). They’ll want to know which clients are responsible for what percentage of overall revenue. It works against the firm, of course, if just one specific client is generating an inordinate amount of revenue. (As you build your firm you’re going to need an increasingly diverse portfolio of paying clients, if not business sectors.)
Suitors will want to see your projected revenue stream for the coming year, as well. They’ll want to know how much spending clients have committed for the current year, as well as how each client is likely to spend throughout the next several months. Buyers will also want a look-see at the new-business pipeline and make sure the traffic is steady.
Rick Gould, CPA, J.D., managing partner of Gould+Partners, is the author of “The Ultimate PR Agency Financial Management Handbook: How to Manage By The Numbers for Breakthrough Profitability of 20% or Greater,” and “Doing It The Right Way: 13 Crucial Steps For A Successful PR Agency Merger Or Acquisition.”
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