The dating game: In the second part of our special feature on selling your agency, Chris Barnett looks at two very different tales from firms who tied the knot with a major network. And answer to the big question - how much should you charge?

The decision to sell to a global network is going to be one of the hardest of your professional life, as Brian and Erica Swerdlow learned last summer when suitors started banging on their door. Even once the decision was made, the choice of partner was tougher still.

The decision to sell to a global network is going to be one of the hardest of your professional life, as Brian and Erica Swerdlow learned last summer when suitors started banging on their door. Even once the decision was made, the choice of partner was tougher still.

The decision to sell to a global network is going to be one of the hardest of your professional life, as Brian and Erica Swerdlow learned last summer when suitors started banging on their door. Even once the decision was made, the choice of partner was tougher still.

Their agency, EBS Public Relations, which the Swerdlows launched in their basement seven years ago, was growing fast and profitably. Based in Northbrook, IL, with a branch office in Chicago, EBS had 40 employees, a roster of solid clients plus a few dot-coms and dollars 2.9 million a year in fee income.

It also had awesome pretax profit margins of 30%, and was arguably Chicago's only real hi-tech PR shop.

The Swerdlows were 36-years-old and skeptical. EBS was their baby and it was healthy. Did it really need another parent? Or did they simply want to cash out in a hot market, stick around for a three-year earn-out and then, 40 and rich, blow the Windy City?

In fact, they wanted to grow their business. 'We were interested in getting a global presence, not retiring,' says Erica, who logged seven years with S&S PR in Chicago before co-founding EBS with husband Brian 'Our clients wanted international capabilities and we wanted an established network.

We didn't want to establish one ourselves.'

In addition, new hybrid companies - healthcare tech outfits - were emerging in their market and EBS was a pure tech firm with no healthcare PR expertise.

What's more, some clients were asking for investor relations help. Says Erica: 'We had partnerships with IR firms, but they were weird and loose.'

The Swerdlows listened to five pitches from would-be buyers. Two were ad agencies - the Martin Agency in Richmond, VA, and Cramer-Krasselt in Chicago - who wanted a technology PR arm. Citigate Dewe Rogerson in New York came wooing, hoping to merge EBS with another Chicago firm it owned - Deborah Gordon PR.

Fleishman-Hillard also made passionate overtures, but it was another Omnicom sibling, Copithorne & Bellows (C&B) of San Francisco, that got the Swerdlows to the altar.

Explained Erica: 'A co-worker at S&S, Merissa Versson, had sold her company (Interactive PR in San Francisco) to Copithorne and it seemed like she was having a good experience.' Plus C&B was being combined with Porter Novelli, which had a hefty Chicago office with a healthcare practice. Adds Erica: 'It looked like a perfect fit.'

The Swerdlows hired law firm Vedder Price of Chicago and Gould Eisele Crombie, a New York CPA firm. Vedder had never sold a PR agency but came recommended by an EBS client; Rick Gould is a veteran of the PR M&A game.

The Swerdlows negotiated directly with Mike Gehb, now CFO of Porter Novelli.

Brian says Omnicom let them decide what EBS was worth and set their own profit and growth rate goals for the next three years. Then Omnicom assigned a multiple of EBS pretax earnings. The going-rate today is four to seven times profit before taxes with some extremely profitable agencies fetching eight times PBT. Though he won't divulge dollars, Brian says, 'We were on the higher end of the multiplier.'

The Swerdlows negotiated a three-year earn-out, instead of five, and a four-year employment contract. It took six months to seal the deal, which fell apart several times in the process. 'Personally, I think it went pretty smooth,' Erica says.

Ten months later, are the Swerdlows happy they sold? 'Life hasn't changed,' says Brian. 'It's gotten better.' He tells of getting a call from, which sells digital office equipment online.

'I called Dave Copithorne on a Thursday and said, 'Listen, we've got to make a presentation on Monday. We're part of the Porter Novelli Convergence Group and we'd like some assistance.' Brian says Copithorne's California team worked with the EBS staff over the weekend and Steve Jursa, a C&B senior partner who had worked for years on the firm's global Hewlett-Packard account, flew in for the pitch. The Swerdlows scored their largest new-business win to date.

'That showed me they have a real commitment to us,' says Brian Swerdlow. The pair were impressed that Porter Novelli CEO Bob Druckenmiller and a squadron of his senior staffers had flown to Chicago during and after the sale to reassure EBS staff - but that could have just been eye candy during the courtship.

Now, they say, they're still getting back-up brains and muscles from C&B and Porter Novelli. 'We got a significant piece of the HP business because of our expertise with technology analysts,' says Erica.

Plus, they have no Omnicom beancounters perched on their shoulders calling the shots. 'They bought the Brian and Erica show,' she adds, 'and we're still running it.'

Not such a happy ending

Alas, it didn't work out so well for Sue Bohle. She sometimes calls her now thriving Los Angeles-based public relations agency The Bohle Co.

II. She sold TBC 1 to Ketchum Communications 15 years ago and the marriage didn't have a happy ending.

'In those days, all the national PR companies - Shandwick, Rowland, Edelman, Ruder Finn, Burson-Marsteller - were buying up the local independents to get a foothold in the LA marketplace,' she remembers. From in the late '70s through the early '80s, the major agencies were all struggling on the West Coast.

Their New York mind-set - suit and tie, wine and dine, monster retainers - were rejected by the smaller, more casual California companies. Only Hill & Knowlton's LA office, fueled by the Mazda account and led by general manager Peter Dowd, was rock solid and growing. The other giants were forced to buy their way into the market.

Bohle, who broke into the business as an account staffer at J. Walter Thompson's then-powerhouse LA public relations department, sold to Ketchum PR in 1985 for a price she will not disclose. In the mid-'80s, however, most of the PR agency buyout deals were roughly the same - a price equal to onetime revenues, a far cry from the fat 5-8% pretax profit multiples of today. Savvy sellers usually got 50% up front, and the rest came over a five-year earn-out (i.e., a staggered payment dependent on agency performance).

Bohle won't divulge her terms.

Don't come on too strong

Ketchum wasn't the first East Coast firm to court her. Harold Burson himself had originally contacted Bohle.

'My heart was about jumping out of my blouse to be sitting across from Harold,' Bohle recalls. 'Then John Graham (CEO of Fleishman Hillard) and Herb Rowland called, but I wasn't really interested because I got the sense they wanted to do LA the New York way. After so many visits with so many CEOs, I was wondering if there was a big opportunity that I wasn't seeing.'

When Ketchum PR rang her up, Bohle says she felt comfortable. She had known Dave Drobis, Ketchum's president at the time, when he ran the agency's San Francisco office. Ketchum's chairman and CEO Paul Alvarez made her a money offer that she felt was fair, and she accepted it.

Lawyers hammered out contract terms over the next two-and-a-half months.

She had to produce financial records for the prior five years as part of the due-diligence process. Bohle's husband, John, a prominent executive search consultant in Los Angeles, was involved in the discussions, along with an attorney specializing in contract law.

'It all went pretty smoothly,' she remembers. But once the deal went through, after a six-month 'honeymoon,' commands started coming down from Ketchum's Pittsburgh headquarters.

'First thing I noticed was that some of the promises made to me were being violated,' says Bohle. 'They asked me to reduce my accounting department because the function was being transferred to Pittsburgh.'

Next, Bohle was told she could keep all her accounts, 'but when Ketchum decided to pitch 7Up, they told me to resign Pepsi's local marketing program, which was a hotly contested account that I had won six months earlier.

I was to resign it just because they were going to pitch. I fought that order and won. Thank goodness because they didn't win the 7Up account.'

In the mid-'80s, computers were fast becoming efficiency tools and Bohle wanted to add more labor- and time-saving technology to her office but couldn't get approvals to purchase the equipment. 'I couldn't get a laptop for six months,' she recalls.

That was frustrating but she swallowed hard. What really bothered her was Ketchum's relentless push for new clients. 'Ketchum told me I was too senior to be working even as a strategist on large accounts,' says Bohle. 'They wanted me to focus strictly on new business. It was always 'Push it down to one of your people, Sue.'' She bristled.'I wasn't comfortable from an ethics standpoint sitting across the table from a company, encouraging them to come to our agency if I wasn't part of the team setting the strategy.'

Ironically, Bohle says she now gets most of her business from companies whose account teams have been bait-and-switched from other PR firms that 'push the strategy and day-to-day work down to employees who don't have the experience to be counselors.'

In fairness, Bohle says Ketchum wasn't the only national agency making demands on the independents they acquired. Ironically, the PR profit-margin targets in the '80s were only 10-12%, about half what the big communications combines expect from their PR subsidiaries today - 20-25% of revenues, says one New York-based broker of mergers and acquisitions.

Back then, Bohle says, geographic expansion was the goal. 'They were less concerned with high profits than making a land grab to have offices in major cities.'

Two years after she sold out, Bohle bolted. Today, she says it just didn't work for her. Within a year, she recalls, virtually every one of her original staffers and clients had walked, too. To keep its foothold in the market, Ketchum bought a second LA agency, Braun and Co., a low-profile firm with an established corporate clientele. Ketchum also gave it more autonomy.

Bohle didn't sit on the sidelines for long. In fall 1987, she reopened The Bohle Co. and has built it into a 52-person mostly high-tech PR and marketing company with dollars 5 million a year in fees. Would she sell again, now that the new breed of buyer is more hands-off and paying hefty prices for technology agencies?

'My first preference would be to sell the firm to my employees,' she says. 'However, if an offer came along I couldn't refuse, I'd make sure I was two to three years away from retirement, that I'd be left alone to operate independently and I'd have to feel my staff gets a good deal, too.'

As for Ketchum, it is now part of the Omnicom Group, has 36 offices worldwide and its Los Angeles office is now 50 strong and booming. Says David Drobis, Ketchum's no-nonsense chairman and a major PR industry player for three decades: 'The most difficult thing for an entrepreneur to accept is that once you've been acquired, you've been acquired and you have a boss. At Ketchum, you're part of new collaborative environment and you're not operating on your own.'


Negotiating the best price for their agency isn't always the best deal for independent PR chiefs with the urge to merge. A generous total dollar payout may look tantalizing on paper, but if sellers are prevented from hitting pretax profit and growth targets because they are handcuffed by onerous rules and restrictions, their earn-out payments and bonuses will suffer.

Is this a good time to sell or have all the best deals been done? Rick Gould, CEO with Gould Eisele Crombie in New York, has been involved in more than 25 transactions in the last year and says, 'Fees, profits, productivity (billings per staffer) and valuations are all going up, and hence so are prices. Sellers are afraid if they wait a couple years, the market may not be as strong.' True? Gould's got a gut feeling: 'It's on such a hot roll right now, it's going to be hard to slow it down.'

As a guide to getting - or giving - the best package, PRWeek talked with the lawyers, CPAs and M&A brokers representing the buyers and sellers on deals. Here's what's being negotiated:

Selling price

Determined by a multiple of an agency's profit margins or its profits before taxes (PBT). Multiples, no longer based on fee income or total revenues, range from four to eight times PBT, depending on an agency's total valuation by the buyer. Agencies with profit margins of 30% and above - usually public affairs/lobbying, investor relations and technology firms - can command a multiple of nine. A few deals have been reportedly done at 10.

Factors affecting your multiple

- Number and size of accounts, including a diversified client base.

- Account profitability/productivity.

- Account turnover rates (stability is prized and paid for).

- Geographic location (metro markets are preferred over small towns unless a national account is located there and buyer can upsell).

- Strong second-tier management.

- Current receivables (aged receivables and write-offs indicate poor management), financially organized with detailed statements.

- Strong niche practice or a multinational presence.

- The age of the owners, and how long they plan to stick around.


- Average 20-25% with some getting as high as 50%. Most are in cash, though the Interpublic Group require sellers to take some of its shares to 'show commitment.'


- Sellers want three years, buyers want five years - and five is deemed the norm for a younger seller who wants to grow his or her company. The balance of the total price is paid out annually during the earn-out but only if sellers hit preset profit and revenue or growth benchmarks.

Sellers want a check for 100% of the agency's net worth at closing. Buyers often ask for two months of working capital left in the bank.


- Employment contract with a noncompete clause extending one to two years past the earn-out period. Deemed fair.

- A cap on total compensation regardless of performance. Deemed a disincentive.

- Purchase price contingent on seller retaining specific accounts during earn-out. Usually requested where there is a large dominant account.

- For the seller to establish a 10% bonus pool for key staff members, which is charged against the agency's profitability. Deemed fair.

- For sellers to pay their own legal, accounting, moving and other transactional expenses. Deemed fair.


- Either their current salary or, if they don't need that level, a lower salary that could generate more profits, hence a higher multiple, which fattens their earn-out and total price.

- A stock sale versus asset sale to get a more favorable tax treatment on the transactions. Most buyers refuse because their tax treatment is more favorable with an asset purchase.

- Contractual safeguards that protect the seller from having the buyer's extraordinary expenses charged against the seller's profit and its earn-out. Example: the parent allocates new-business expenses to its subsidiaries or it will try to charge back the seller 2-3% of fee billing for accounting, legal, and other agency operating expense. Some buyers will not negotiate on this.


- Health and business club memberships.

- A flat travel allowance that includes leisure travel.

- Financial counseling assistance or a monthly 'perk allowance' covering commuting or other expenses. Buyers seem to be agreeable to about dollars 3,000 a month for an agency head.

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