In this episode of the Chats with Chip podcast, Rick Gould of Gould+Partners, an agency mergers and acquisitions advisory firm based in New York, provides useful insights for agency owners on the process of selling their agencies — including perspective on current trends in M&A.
By listening, you will learn:
- How agencies are valued and ballpark estimates of typical multiples
- When sellers pay buyers and the current mix of earn-outs versus cash at closing
- Why owners need to prepare years in advance of a successful sale
- Why agencies should be run as if they are going to be sold (even if that isn’t the goal) to ensure maximum profitability
- What explains the recent increase in M&A activity in the agency space
- What the introduction of consulting firms and private equity to the field of buyers means for sellers
- Why middle management can often be the key to better valuations
- What agency owners an expect post-sale
- How to reward key staff after a transaction
- Why agency owners need to do reverse due diligence on buyers
- What impact geography has on M&A
CHIP: Hello, and welcome to another episode of the Chats with Chip podcast. I’m your host Chip Griffin and my guest today is Rick Gould of Gould and Partners in New York. Welcome to the show, Rick.
RICK: Thank you.
CHIP: So Rick, you’re an expert in PR agency M&A. You’ve been at that game for a long time, why don’t you tell us a little bit about what your business does. And then we’ll talk about some of the trends that are taking place in the industry overall.
RICK: Sure, happy to. My background, Chip, I started out out of college with EY, which was then Ernst and Young. I started my own accounting firm at age 27. And the way I started was, I was managing, financially managing professional hockey players. That’s what put me in business. Very, very strange way to get into business, but was a lot of fun. And like 100 hockey players from mainly from Canada. And what a break I caught in my career is I met Chet Burger, which many of the veterans in the industry probably know, he had the the supreme management consulting firm in the communications industry. I met Chet through a mutual client, we got to know each other well, he retained my firm and, and he was huge in the PR industry. So he was a one person referral machine for me. Next thing I knew, besides specializing in hockey players, I was specializing in public relations firms. Several years, several years I did that. And then I, I found that I really didn’t enjoy owning an accounting firm, didn’t like tax season, working seven days a week missing my son’s athletics. But what I loved as the accountant, I loved getting involved in mergers and acquisitions. So I said, You know what, you want to do what you love, love what you do. So I sold my accounting firm in 2001 started the m&a firm, which to this day, 19, almost 19 years later, is what I’m doing. And, you know, our our firm has two main specialties. One is doing deals, matching buyers with sellers, sellers with buyers, facilitating the transactions rights from closing. So we’re with the client from the time we start till the time they close. And the other very important division we have is preparing firms for sale, even if someone comes to me and says, Hey, I don’t want to sell for another five years, or 10 years. But I want to be sure I’m doing everything the right way. And so we help them get all the different, important points in place. So when a buyer openly looks at their firm, they’re going to be very impressed. They’re going to know it was well managed, it’s profitable, it’s growing. So that’s the other area that we do ongoingly.
CHIP: Well, I think that’s one of the areas where a lot of business owners, but particularly agency owners, overlook, they don’t realize that if they’re interested in selling, you can’t decide I’m going to sell today and be ready. And it takes some real preparation to get there if you want to get the maximum value when you go through an acquisition.
RICK: Sure, and the other important thing Chip, is that PR people, PR CEOs, PR owners are not trained to be real business people. They don’t take accounting courses. They have great creative smart new business getters, rainmakers, but they’ve never been trained to be business people. And we find that all the time. So if they don’t have like a high level CFO, which most don’t, unless they’re a certain size, they’re not, not sure which way to go, when it’s building to sell, which is my whole mantra, if you run your firm, as if you’re going to sell it, it’s going to be the most profitable and end up with the highest value.
CHIP: Right. And I think you make a good point there because most agency owners didn’t even come to the business with with the idea that they were going to create a business, right? They they started out usually most agency owners as a freelance consultant, and all of a sudden, you know, they generated enough business that it turned into a real company. And so that, you know, they didn’t necessarily make the decisions early on that that they would have made if they were truly entering it with an entrepreneurial mindset.
RICK: Exactly right.
CHIP: So, as we look at the the PR agency space, there’s there’s been a lot of, I think, m&a activity over the past couple of years, at least, as that’s my perception that there’s been more lately than there had been in say, in the preceding five years or so, first of all, is that an accurate perception? And what trends overall, are you seeing?
RICK: Yes, very accurate. I know we had the best year we had, last year was by far the best year our firm has ever had. And that’s because of all the m&a activity. And there’s a bunch of reasons for that. I say the number one reason is that the baby boomer generation is coming of age, where you have many, many owners that are in their late 50s, 60s or 70s, that say, you know, if I don’t sell soon, I might never be able to sell, because there’s only a limited number of buyers out there. So there’s always more sellers and buyers. So, many firms end up where the owners retire or go on to do something else where they’re not getting the value for their firm. So that’s that’s one one reason, the baby boomer generation. Another one is what I call growth gridlock. What growth gridlock is where a firm could just get to a certain size, and they can’t get any bigger, that $1 million benchmark is really the first level where they might work for four or five years, get to the million dollar level. And then they see, they might lose a big account. So now they’re down to 7-800. They’ll make it up, they’ll stay right around the million, but they’ll go on for years and years without having the ability to grow. So they’ll say, Okay, let me get into a bigger playing field, let me sell my million dollar firm, go with a larger firm, have the support and the digital capabilities and all the things a larger firm has, and I’ll be, I’ll be able to win pitches and grow my own book of business within a larger firm. Okay, that’s, that’s the second reason. The other reason is, and this links into the lack of training and the financial management is the back office, most small PR firm owners hate the back office, they don’t like getting involved with payroll, and with paying landlords and all the non PR related things that an owner has to do. So the back office, getting rid of that is a blessing and a new awakening for them when they can be done with back office. The other thing is lack of services, where the larger firm just has more specialties. They can offer more services, they could cross refer to a firm that just sold to them and they’ll win more pitches, because that’s really what it comes down to. So it’s I’d say, you know, those are five reasons. And then, in addition to that, the global playing field. Clients, major clients want more than just a US office. I mean, we’re doing work in London now in Singapore and Sydney, Australia, in Nairobi, Kenya, we have a PR firm client, Mumbai, India, you know, the Tel Aviv, Israel, we have a client, so it’s really a global playing field right now. And that’s one reason for all the m&a activity. Any questions up to there or….?
CHIP: Yeah, yes, I wanted to drill in on one of the points you made sort of at the start of that, which is, you know, that, that so many agencies seem to have trouble breaking through the the million dollar barrier, if you will. And I’m curious, you know, what, what is it that you think is the main reason that that agencies sort of find that as a roadblock level?
RICK: One of the main reasons is what’s critical for any PR firm to grow is that second tier of management. And when a firm ultimately wants to sell, a buyer looks right beyond the CEO owner, and says, okay, what’s let’s look at that pyramid. Let’s look at your staffing. Who do you – do you have a number two, do you have a number three. So what happens in less, the owner is willing to invest money in getting high priced quality, second tier of management, they’re not going to grow, because it’s just the CEO and a bunch of account execs for a million dollar firm. So that’s one reason is just get that infrastructure in place. And it might mean, the owner makes less money, for several years, because they’re building their team, they’re building what they’re going to need, ultimately, when they sell.
CHIP: And do you find that when these agencies sell that they get a price premium, if they have a good second tier of management, you know, so that it’s not just dependent upon, you know, really the owner in his expertise in his network or her network?
RICK: Absolutely. The second tier adds value to the firm, because the buyer is going to assume that the CEO owner is going to want to do something else with their life, especially if they’re in their 50s or 60s, most, most people that sell aren’t going to stick around for too long, you know, if their earn out, which is there buyout if that’s four to five years, which is pretty standard, after that’s over with, they might decide to leave and do something else. Or if they are having fun and making good money and love that bigger playing field, they might stay, but the buyer assumes the owner is going to leave.
CHIP: And that makes sense, right? Because the the agency owner is not used to being an employee at that point. Typically, they’ve owned their own firm for 5, 10, 20 years, whatever. And so the notion of having to have a boss, a real boss, not just your client bosses, I imagine is daunting, to many agency owners?
RICK: Absolutely right. When someone is ready to sell, they have to realize they’re no longer going to be the boss. They’re going to be reporting to someone. And that often creates what I call seller’s remorse, where they start having second thoughts do I really want to sell? Do I want to give up my freedom? Do I, you know, I won’t be able to take off any days I want to take off and play golf or whatever, whatever else they can do as the owner today, it’s going to be a little bit more restrictive once they sell.
CHIP: And if you were to sort of guess, you know, what’s, what is the percentage of agency owners who at least in the near term come to regret having sold versus those who are like, you know, that was I really made the absolute right decision at the absolute right time.
RICK: I think most owners that sell are happy they sold if they get paid in full what the expectation was, and I believe that should happen if the integration of the firms is done right. And integration starts before the closing, not after the closing when it when we’re representing the seller. And we believe we have a letter of intent, and we believe this closing will happen, we immediately recommend set up a committee with the buyer, the seller, let’s talk about the synergies, let’s talk about the mix of cultures and plans for the sale, if you do it the right way. It should be successful. But you know, there have been instances where it hasn’t been. And I attribute that to poor integration.
CHIP: Right. And, you know, I think most of the the agency owners who listen to this podcast probably have not gone through an acquisition process themselves either as an acquire or as the acquired. So, you know, why don’t we talk for just a minute about, you know, typically what these deals look like, as far as you know, payment upfront, earn outs, you know, just let’s talk in some of the basic things that that an agency owner contemplating a possible sale might want to be thinking about?
RICK: Sure, the the first step always is getting an evaluation of the firm done, because you have to know what your frame of reference is, and any seller or prospective seller should know that well before they start meeting buyers. Say okay, this is what I’m told the value of the firm is and you know, outsiders do evaluations, we do evaluations, but what once that number is is presented, then the next step is going matching, of course, we have to match the buyers, the sellers, once we introduce sellers to buyers, and everyone likes each other, the culture looks right. Because you have gonna have to live with with the buyer and the people. So you want to make sure the culture is a good fit, then the letter of intent is presented to the seller, a letter of intent is simply the proposed terms of the deal. And those terms are usually, what’s the down payment? Okay, so let’s just say for argument’s purposes, that a firm is valued at $2 million, typically, a seller will get 20 to 25%, at closing, so they would get, say, four to 500,000, at closing. And then a grid is setup where the expectations are laid out that buyer and seller agreed to saying what do we expect the gross to the of the firm in net revenues, and net revenues are simply fees plus markups. And what’s the profitability that’s expected. So and it’s all the grid will have multiple throughout each box, where depending on how the seller does revenue growth and profitability will determine the ultimate value, we call that an earn out. An earn out just means you’re going to get paid based on performance. So I mean, it’s hard to explain in a couple of minutes, but you get paid based on performance. Excuse me, so. So you, you’re not getting the price fixed, like it was in the late 90s, where you knew what you’re getting for your firm, that’s not the case anymore. Now it’s you get a down payment, and then based on performance, you get an annual check.
CHIP: And that’s really why. So that’s really why finding the right fit matters, right? Because you’ve got to find, you know, it’s sort of like selling your house, except that you’re going to live with the new buyer. Right? You know, so it’s, it’s a, it’s a very different dynamic than I think what most agency owners looking to sell might initially be thinking of.
RICK: Yes, hundred percent, Right, most agency owners think that we’re going to negotiate a price, and that’s going to be it and they get paid over four or five years of it. That’s not the way it works anymore. I mean, 100% of the deals today are based on performance. And the other important thing chip is that the, the seller also gets a market salary. So you’re not working for four to five years just for your earn out, you buy out, you’ll get a market salary which could be 200, 250 a year, besides what you’re getting for the firm. So, you know, financially, you’ll be very secure and stable, as well as whatever you’re going to get for the firm. And there’s employment contracts in every deal.
CHIP: But it’s, I mean, I guess the you know, sort of the the upshot is that the agency owners are are taking on a bit more risk in the process today than they might have when it was a fixed price, you know, years ago, so, you know, they need to be aware of that if they’re going into the process and and factor that into their decision making.
RICK: Yes, correct. And, you know, I hear that a lot from people that are considering selling like, hey, that’s that’s my risk, but my answer is, what about the buyers risk, they just wrote a check to you for four or 500,000. So the buyer’s at immediate risk, the seller’s not. All the seller has to do is perform. You know, most of them are great PR people, they’re great rainmakers, just go out there and have breakfasts and lunches and dinners, and and leverage your network that maybe you haven’t leveraged for many years, because you’ve been too busy working, go out there and bring in business and every single buyer wants the seller to do that. They’re saying go out there and have fun, and do what you’re probably great doing and delegate the actual PR work to people under you, other than like the most important clients, of course, of course.
CHIP: And are you – the deals that you’ve been seeing and talking to people about, are most owners achieving, you know, all or at least a substantial portion of their earn outs? Or, you know, are you seeing, you know, a lot of these deals where they end up falling short?
RICK: Most of them do achieve it because, again, as I said before, if you do it the right way, it should be achievable. I mean, one, one thing I recommend, and every deal is for the owner CEO, to bring in the second tier into the deal financially, you know, what I always recommend is take 10 to 15% of every check, you get and distribute it to the key people that are helping you achieve your earn out. Very, very important, you don’t want to lose these key people, especially during the four to five year earn out. So that’s one way to handcuff them is bringing them into the deal with and it also excites them, they’re more motivated, they’ll help you bring in business. So that’s a critical point.
CHIP: And chances are that, you know, they’ve done a lot to help you get to where you are and be able to sell. So, you know, it’s you know, I think there’s there’s the element of using it to leverage future performance. But it’s also, you know, in appreciation for, you know, some of the, you know, the sacrifices that they’ve made to help make it for a good day for you as the owner.
RICK: I agree. And what I often recommend, most of the time actually, is Phantom stock is stock issued to key people, but they don’t cash in until the firm is sold. So if someone comes to me and says, Hey, I want to sell four to five years, I of course, one of the first questions I ask is Tell me about your people. Tell me about who’s underneath you, I ask for an organization chart, so I can see the makeup of the staff. And I say okay, these two people are your two VPs, why don’t you, if they’re great and they’ve been with you, you know long enough for you to know they’re great, issue them phantom stock, there’s nothing whatsoever to lose. And you’re going to probably handcuff those key people. So they’ll hang in there until you sell.
CHIP: And I think phantom stock is something that a lot of agencies overlook as a tool. And I think it’s a really powerful one, because it allows you to, to cut someone in on a potential sale, but you know, without sort of the the mess and bother of real equity and the issues that that can create both tax wise and operations and all that sort of thing. So I you know, I think a lot of agency owners should be contemplating the the use of phantom stock in the appropriate instances.
RICK: Yeah, and the important thing is, is that any of those employees leave, they lose the phantom stock, right. So the condition is they have to be there. And we want them there throughout the earn out, we don’t want them there just for a closing where they get a little piece, like a bonus, we want them there for the whole earn out. So they can help you grow it and and make it profitable.
CHIP: And, you know, I think one of the things that tends to to the mystify a lot of agency owners, when they’re looking to sell is the, you know, talking about multiples, right? So you have a lot of these conversations with agency owners, at least I do. And they’ll say, you know, what, what, you know, what kind of multiples are you seeing? You know, this is what I’m told, I need to think about multiples. And, you know, what I always explain to people is that, you know, multiples often are backed into, right, someone figures out, you know, what do they want to pay, and then they explain it in terms of multiples. But, you know, if you were looking at it, you know, how do you see, you know, the issue of multiples today? And you know, is there a typical one or does it really vary so much from agency to agency and their own their own cases?
RICK: Okay, happy to answer that. But before I even give you the number just so everyone’s focused on the same concept, you have to ask a multiple of what? Exactly, yes. Right? We get into multiples, it’s not just the whatever your CPA firm has as the bottom line on your financial statements. To me, that’s a starting point, what we do, when we’re valuing a firm, we take the CPA prepared financials, and sometimes internally prepared financials, which I don’t really like, but, but we we live with it if that’s all we have, and we retest the financials, we recast the p&l, we add back perks, we add back bonuses, if they’re really a distribution of profit, we add back one shot costs, like if you had a lawsuit and you had to sue a client, and that’s one shot, it’s not operational. If you moved, if you move, moving costs are quite expensive, we add that back. So we come up with a recasted operating profit, that’s and then any buyers going to average the last three years. So you want three full years. And if it’s in the middle of a year, three years plus the interim period, that’s what we’re going to be multiplying by that average. And the average – now I’ll tell you the answer to your question, the average in the PR industry is a five, five multiple is the going average multiple. If the firm has a unique specialty, let’s just say they’re a great crisis firm, they’re known for crisis, they’ll get a higher multiple, if it’s a digital firm, or very, very heavy digital, you know they might get a seven or an eight multiple. So the five is the average, if a firm is on the downslide, which sometimes the baby boomer owned firms are because they waited too long to sell. So they’re going the other way, they might get a four offer. And and they might not do any better than that. So but it does change every year, Chip, that that at the end of year one after a firm is sold, they do a new valuation, the end of the year, two, three and four, every year evaluation is updated on a cumulative basis. So the multiple could change, it could go up if the firm today is an average firm. And so let’s just say the initial valuation was a five, and then they hit it out of the park, they’re going to end up with a much higher multiple and, and a classic example of that, a firm we sold Schwartz, in Waltham, Boston area, we sold them to MSL Publicis, and those guys hit it out of the park during the earn out. And they got beyond anyone including my own expectations of what they would get for the firm. So there is a could be a huge upside if it’s done right.
CHIP: And actually, that’s it. That’s a good point, you know, because there are there are different kinds of earnouts, you know, some earnouts are capped, right. So it’s just, you know, you achieve these goals, you get this fixed number, some are, you know, there you can, you can, you know, go as far as you can achieve as far as, you know, revenue or profitability, whatever the earn out is based on so there, there are different kinds, and sellers need to be aware of that.
RICK: Correct, every deal is different, I mean, no two deals that I’ve done in almost 19 years are exactly alike. I mean, it’s customized because the conditions are different, staffing is different. So we try to customize a transaction and an earn out so it’s a win for buyer and seller, because you have to remember, the buyer wants to seller to do great, because if the seller does great beyond expectations, the buyer is going to do great as well. And once that earnout’s over, that’s all theirs, so at the end of four or five years, that’s the buyer’s profitability. So that’s often in many deals, the buyer doesn’t make any money on the acquisition until after the earnout.
CHIP: Right. And I should just for for the clarity for folks who are not familiar with the m&a process, when we were talking about multiples, we were talking about multiples of earnings, not revenue. And that’s, I say that simply because sometimes when you Google online for these sorts of things, you know, folks will see in other industries where they do multiples based on revenue. And that’s, you know, that is not what typically is done in the agency space.
CHIP: So, you know, what, one of the things that I’ve noticed, in the, you know, the last year or two really in particular is a lot of nontraditional buyers of agencies. So, you know, it’s no longer sort of just, you know, one agency buying another or one of the big holding companies, you know, there are, you know, some of the consulting firms are getting into the picture. You know, there’s there’s a lot of changes that are taking place. And I’m curious what your take on that is, is that is that good for agency owners? How is it changing the whole dynamic?
RICK: Okay, the landscape definitely has changed drastically, there’s been a lot of disruption to the industry, I mean, ad agencies, even that they’ve always bought PR firms – they’ve stepped it up. There’s a lot more, lot more ad agencies that have buyers, now, private equity firms are buying PR firms, they that was unheard of a few years ago with PE firms just said, Hey, the asset is what goes up and down the elevator. We don’t have hard assets, we’re not going to invest in public relations. That’s changed. There’s been a couple of major major transactions now with PE firms. I’m working with one right now in New York City. A pretty decent, well respected PE firm that is looking to do a roll up of PR firms. So we’re working with them to identify and facilitate PR firms transactions. Another is foreign buyers. The major deal that we did last year was Avenir Global in Toronto, bought Padilla. Padilla is a $40 million firm that, you know took us nine months but we we got it done. There’s many buyers in the UK now. In Japan, Dentsu is a player, India, there’s a major firm that’s doing buying now. So it really the foreign buyers has changed the landscape where it used to be US firms buying US firms. Another – tech firms, Amazon, Google, Facebook, they’re all starting to get in to the m&a area. And you mentioned consulting firms. I mean, Accenture buying Droga5, last week, that was major, major news, and you know, PR industry and Deloitte is a player now they’re doing acquisitions, EY, PWC, IBM, these are all consulting firms that are trespassing on our territory. So I wouldn’t, I don’t think it’s really good. If I assess it, is it good for the PR firms? I mean, could be good if it allows more buyers to be out there. But it’s a little uncomfortable, I think for a PR firm to be bought by a consulting firm, they’re not sure what to expect and we don’t have a history of it. So I couldn’t even share what to expect. We don’t know yet. But it is, it is prevalent.
CHIP: So it’s it’s potentially good if you’re, if you’re selling now, right? Because it increases the pool of buyers and anytime, right sort of supply and demand anytime that there’s you know, more buyers out there, that’s potentially good. But I you know, I would agree with you that it it certainly can be unsettling for the the industry as a whole because it it’s likely to change the dynamic. And, you know, we’ve seen the blurring of lines between PR and marketing and advertising and all that in the you know, the last five or 10 years. So, you know, there’s there’s already been some of that where there’s been sort of organic encroachment of one kind of agency on another. So it’s it’s an evolutionary process and fascinating to watch.
RICK: Yeah, and the other thing is, there’s a lot of internal mergers within the holding companies such as as, like WPP merged Wundermen with J. Walter Thompson. That was when I read that I was really amazed because JWT has been in business 164 years, they’ve always had that brand. And WPP said, you know, we just think we’ll have cost efficiencies and just more of a collaboration if we merge these firms together. And IPG, Publicis, Omnicom, next 16 they’re doing the same thing. The emerging firms that were always like, independent within under their umbrella. They’re putting them together now.
CHIP: And I think one of the interesting things too, is, is occasionally you’ll see someone who who’s been acquired, the owners will then buy back the agency. And then now obviously, that’s not a prevalent thing to occur. But it it does happen periodically. And it’s that’s been interesting to watch as well.
RICK: Yeah, agreed. It doesn’t happen too often. But I know MWW did that with IPG. Yeah. Yeah. And that’s, that’s probably the best known one. And it hasn’t heard Michael Kempner there at all, because he’s, he’s booming, and we’ve got a bunch of work with them. And, you know, they’ve never regretted buying the firm back, but you don’t see it much at all.
CHIP: Right. Now, you’d mentioned earlier the term rollup. And I think again, because you know, most of the listeners here or not, you know, well versed in the m&a space, let’s let’s just explain what a rollup is. And, you know, sort of what the, the impact of those kinds of transactions might be on the agencies.
RICK: Sure, a rollup is just simply, let’s say, a private equity firm, that one I’m working with now wants to buy five, six, maybe eight, PR firms, different specialties, different locations, you know, different cultures, under one umbrella, merge them all together, and then eventually they’ll sell it. So they’ll sell the rolled up, you know, company of firms. And so it’s real simple as just putting putting firms together under one umbrella almost like the holding companies have done all these years.
CHIP: Right? And is that I mean, do you see that the experience is different for an agency owner going into that, then, you know, say, you know, going into a more traditional, you know, merger type setup?
RICK: The main reason firms may sell to private equity is because they offer a much larger down payment at closing, that is really the key, private equity has a war chest for acquisition. They don’t mind giving 50 or 75% of today’s value. at closing, that’s very attractive to a seller, especially if the seller is say in their in their 60s, early 70s. To get that – have the money in the bank at closing, it just means a lot to them. As far as culture fit, I think it will be challenging. With the PR firms going under that private equity structure, it could be challenging, because they’re interested in the return on investment. That’s the goal.
CHIP: Yeah, so the the PE firm is going to be managing off of the the p&l if you will, and and less wowed by, you know, the, you know, the creative activities that you’re involved in, or the things you know, the investment for the future, perhaps, you know, they’re really just, you know, looking at that bottom line.
RICK: Exactly. So a lot will depend on the personal strategic goals of the owner who’s selling, you know, what do you what do you want out of this deal? Is it just money? Is it a big down payment? Is it a bigger playing field, a bigger home for your people with more offices and maybe, maybe foreign global offices. So that that really why I say no deal is the same? Every one is different,
CHIP: Right. So if I’m a PR agency owner, I’m thinking, you know, you know, I might want to sell in, you know, say four or five years, you know, what, how can I get smarter about the process? And what should I be thinking about today with my agency, so that I’m ready when it’s time to actually do a transaction.
RICK: Okay, my best advice to anyone listening to this is, run your firm like a business, don’t run it like a hobby, don’t, you know, run it, just to save as much in taxes, as maybe your accountant is recommending which I never agree with this, because they’re thinking taxes, I’m thinking growth. You, so you run it like a business. And it should be with a bill to sell strategy. I said that before. And I really say this all the time. Run your firm as if you’re going to sell it like in the next couple of months, build it and knowing you might have a few year strategy. Just keep running it, watch the benchmarks, we do the annual benchmarking study for the industry for 30 years now, we’ve been doing that and we we don’t get paid for that we do it just almost as a service to the industry. And we get business from it, which helps. But you know, look at the benchmarks, look at what your labor percent should be in relation to your your net revenues, look at what the overhead should be. And I find that the number one issue when a firm isn’t that profitable, the goal should be at least 20%. 20% recasted bottom line, okay, when it’s not that high, it’s in the labor, the overhead, the operating costs aren’t the issue with almost any firms, unless it’s like high price, New York City, luxury buildings, and you know, then the rent gets off the charts. But for 95% of the PR firms out there, the overhead is in line, it’s the labor, the overservicing, that’s what creates a lower profitability.
CHIP: And so, so I think you know, that you’ve driven home a key point here, which is, you know, that what you are running as an agency owner is really a business. And frequently I see particularly smaller agency owners, folks who, you know, come to the business accidentally, they, they run it almost like their personal finances, where they’re running more out of the checkbook, and they don’t, you know, they don’t really look at, you know, the key financial metrics, they don’t, they don’t have the right processes in place internally, in order to be able to, you know, to report and run properly on the business. And so I think those are key things that that anyone listening to this, who has even half an inkling that they might want to sell or frankly, even if they don’t, because as you say, you’ll have a better business, if you think you might sell it someday.
RICK: Right? You don’t want it to be a lifestyle business, which is what we call that. And if there’s thousands of them in the US today with I mean, there’s really thousands of PR firms, where they’re just really small under a million dollars, and a lot of them are running it that way. So my advice always is Stop, stop now and run it like a business. And it’ll pay for itself; all the extra taxes you pay now, you’ll get back in multiples when you sell the firm.
CHIP: Now, have you seen any any significance of geography changing in recent years, you know, as, as technology has made it easier for firms to compete globally, you know, even if they’re, you know, situated somewhere in the the boondocks of the US or elsewhere, has that has that helped in the the m&a process and made those firms more attractive? Or is it really just the same as it’s always been?
RICK: Definitely has helped. Buyers aren’t as interested in the location as they are in the people, in the management, in the specialties. Again, the world has become smaller, and you know, buyers are buying all over the world now. And it really doesn’t matter where they are. I mean, I found that to the last couple of years for sure.
CHIP: And if I want to get smarter about this process, you know, what’s your advice? Is, is is there a book or I mean, obviously, you guys put out a lot of materials, I’m sure some of that would be beneficial. But you know, what is, what is the best way for an agency owner to get smarter on this process?
RICK: My – what I did, I have one book out, I have a couple of books out but one of them is a book on m&a. And it’s called Doing It the Right Way. It’s about the whole m&a process. A lot of what we’re talking about right here is what I had in the book and I and I was inspired to, to write that book, not for the money. I mean, it really I donated all the proceeds to charity, just so you you know, you know that it wasn’t for the money. It was just for I felt it was my contribution to the PR industry. And the second edition should be out July fourth. The manuscript was actually submitted in January. And now it’s going through the whole publishing, editing and that whole long process. But that’ll be out July 4, and it’s much better than the first edition. We have a chapter in there on human capital that Jack Bergen wrote, Jack is an icon in the PR industry, and a specialist in human capital, he wrote a chapter and we have other additional ones we just added to the first one. But that’s, that’s to me, the best way to get knowledgeable in it is just read and read blogs and read pieces, listen to podcasts like this is how you get knowledgeable. Or you pick up a phone and call, I’m happy to talk to any one anytime about the process.
CHIP: Yeah, and I think, you know, the other piece of advice that I would offer, I think is that, you know, there’s there’s a lot of discussion out there about m&a in other fields as well. And, you know, while it’s not necessarily one for one, but the more aware you are of the general concepts, you know, I think the smarter you’ll be so I you know, I think the you know, the blogs and newsletters are a great route to that. But I think your book, I think it’s great that it’s coming out on Independence Day, because you know, for a book about selling your business, you know that that’s all about independence eventually, at least right?
RICK: Yeah, we did. We did that on purpose. And you know, the other thing when you’re talking to people, you know, could be lawyers could be accountants could be m&a people. Ask, get – do research on the firm that you’re talking to, because the education is really important that their background experience, which firms if they sold that maybe got high profile, ask for references, we give references all the time. And we give buyers and seller references, I mean, do your homework, because if you are going to, you know, get advice from anyone, you want to make sure it’s the right advisor and the chemistry is there. And the ability is there of who you’re working with.
CHIP: Yeah, the chemistry with your advisor is absolutely critical, because you’re going to be spending as someone who has, has sold a couple of businesses, you know that the advisors that I used in that process, they had to be people that I fully trusted, that that understood me, that I could enjoy spending two hours on a phone call with as we were walking through a lot of the details. So, you know, it is really important to have that. But just as important too, I think, and this is something that that I think agency owners need to focus on, particularly with the new focus on earnouts, as the majority of the compensation, you really need to do your diligence on the buyer. So, you know, typically, you know, we think about due diligence, as you know, the seller is is investigating the buyer, but really, I’m sorry, the other way around, the buyer is investigating the seller and the business right and understanding it, but you really need to understand, you know, who’s acquiring you and, and and you know, get into those details as well. Because, you know, it’s going to not only impact your day to day, but it’s also going to impact your financial returns, if you’ve, you know, gotten into bed with the wrong acquirer.
RICK: That’s a great point, we call that reverse due diligence. So unless it’s a really established known buyer, you know, if it was Edelman, or Finn partners, but one of the firms that we really know what we wouldn’t worry about that at all, because we know they’re very financially stable, but when we’re selling a firm to another independent firm, that we don’t have a real track record on, we ask the buyer for their financials, I mean, we’ll do due diligence on our own very early on to make sure they can afford to pay the seller.
CHIP: And then that’s absolutely critical, because the last thing you want to have happen is to realize that, you know, perhaps they’ve used the acquisition as sort of a financing strategy, and they’re trying to take your cash flow in order to float their own business. And, you know, that’s certainly not common, but it does happen. And so you want to make sure you’re doing the, you know, the proper, you know, knowledge gathering in advance. So you don’t get surprised, you know, 6-12 months down the road.
RICK: Yep, absolutely critical. I agree with you completely.
CHIP: So what, as we’re, as we’re reaching the end of our time here, do you have other advice that that you’d like to offer to owners? Are there things I should have asked you that I haven’t?
RICK: You know, one recommendation is if you, the owner of the smaller firm, position your firm so it could, it could run without you that I mean, that’s the best position any seller could be in is where we’re at, and it takes some hard work to say, Okay, I’m going to build the firm, I’m going to manage the firm, I’m going to watch the numbers, look of the financials, but I’m not going to be too involved with the client work, other than if it’s a high level crisis project, you know, then the owner always gets involved, but try to try to run the firm without the owner being too involved with the clients, because the buyers love that.
CHIP: Right. I mean, it’s the – what’s the old saying, you you want to be as an owner, you want to be needed, but not necessary? Right? Because that, you know, that allows the the acquisition to go more smoothly, it makes you more attractive, and it’s not really just an acquihire of the owner. It’s actually, you know, a legitimate business acquisition, which, you know, delivers more value to everybody.
RICK: Correct. And, you know, our benchmarking has shown that the average billable time of the owners is around 30%, which I think it’s a it’s a good benchmark to know. But I have clients and know of other firms that the owner has zero percent billable time, all they’re doing is building and managing the business. And those are, those firms are doing well over 20%.
CHIP: Absolutely. I mean it as an owner, you really want to be working on the business, not in it. And that’s that’s how you get the best return on your your own time investment.
RICK: No doubt.
CHIP: So Rick, this has been a great conversation, I think you’ve given the listeners a lot to chew on if they’re interested in learning more about Gould and partners, where would they find you online?
RICK: Our website is the first place just Gould-partners. com. But any any of these listeners, if you want to have a talk with me, I’m more than happy, no charge whatsoever. Just for an introduction, feel if there’s the right chemistry. And I – as Chip said, he spent two hours just talking to people I do the same thing. Because and I probably recommend more often than not, when a firm comes to me and says, I’m really seriously considering selling after I do some no charge due diligence, my recommendation, at least half the time is no, you’re not ready. Here’s what you have to do do to be ready. That’s critical. Because doing it too soon could backfire.
CHIP: Well, hopefully this by listening to this, they – these owners have had a chance to start thinking about it even perhaps before they were thinking about pulling the trigger. So if we’ve done anything over the course of this conversation, hopefully we’ve helped to prepare more agency owners to be ready to sell when the time is right. So, Rick, I really appreciate your time again, this has been a great conversation again, my guest today has been Rick Gould of Gould and Partners.
RICK: Thank you very much. It’s been fun.