THE AGENCY BUSINESS: Financial repairs make agencies more appealing at sale time

Just as homeowners must fix up their houses before putting them out on the market, so must PR firms repair financial problems before presenting the agencies to prospective buyers.

Just as homeowners must fix up their houses before putting them out on the market, so must PR firms repair financial problems before presenting the agencies to prospective buyers.

When it's time to sell, homeowners often become more cognizant of the little maintenance issues around the house. Suddenly, that leaky faucet in the bathroom that's been dripping for months gets fixed, as does the windowpane on the garage door that cracked last summer. In essence, presentation becomes a major concern for the seller in anticipation of close inspection by prospective buyers. And it's only natural to try to display your best face when you've decided to cash in an asset. But how do you prepare when that asset is a PR firm? "There are several things you should do when you believe you might be ready to sell," says Rick Gould, partner in StevensGould Partners, a New York-based management consultant firm that brokers deals and advises clients on PR firm M&A. "And the end result should be that you have the prospective buyer's trust and confidence." Gould says that akin to that broken window on the garage door, PR firm principals should first and foremost be aware of any gaps in their financial statements. "The accounting records need to be in perfect shape before you start talking to a buyer," says Gould. "You should have CPA financials. Many firms, unfortunately, don't have strong financial statements, and that immediately makes them lose credibility in the eyes of buyers." His partner says that shabby financial records are the first thing that will scare off buyers. "You've got to have professional financial statements," says Art Stevens. "If you don't, it makes your firm look amateurish and sloppy." Gould and Stevens say much of their time is spent helping clients clean up messy and incomplete financial statements. Yet, much like household repairs, they say that staying on top of record keeping throughout the life of an agency can make a big difference in the long run. Gould breaks financial statements into three categories. The first type is "certified financials." These are statements that have been combed over by an accounting firm, often one of the bigger, well-known firms. This highest level of financial statement is a must for the really large firms - those with more than $10 million in revenues. However, for smaller firms (with revenues under $10 million), Gould recommends a "review report." Such a report demonstrates that a CPA firm has signed off on the financial statement and has assumed a greater level of accountability for their veracity. A review report would generally be affordable to most PR agencies and can be compiled by most CPA firms. "A review report has a lot of credibility with buyers, bankers, and other third parties," explains Gould. The last level of financial statement is a basic compilation, which is generated by the firm itself. Gould contends that 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. For instance, a firm that plans to sell itself in April of this year would be asked to provide records for 2001 to 2003, as well as for January through March 2004. Buyers will also regularly ask for an analysis of the firm's revenue stream. They'll want to know which clients are responsible for what amount of revenue. Additionally, buyers will want a projected revenue stream for the coming year. They'll want to know how much spending clients have committed for the current year, as well as how much each client is likely to spend over the next several months. Buyers will also want a peek at the new business pipeline. Gould also recommends shedding your debt. "You want to minimize and even eliminate all of your debt leading up to the period when you want to sell your firm," says Gould. "This will bolster your appeal as a very liquid firm and a cash-rich business with consistent positive cash flow." Beyond financials, buyers are interested in the strength of the relationships you've assembled. "You'll also want to show that you have some established long-term relationships with both clients and senior level staff," says Stevens. "No one is interested in buying a shop with a revolving door attached to it." Yet perhaps the most sage advice is just plain common sense. "In the end, I'd recommend that firms run their business like they were selling it tomorrow," Gould says. "That will put you in the right frame of mind for running a tight and efficient firm." ----- Preparing to sell
  • Keep updated financial statements that are compiled by an outside CPA, who will be willing to vouch for them
  • Try to reduce or eliminate any debt on your balance sheet
  • Be ready to demonstrate the strength of your leadership team and client roster
  • Run your business as if a potential buyer is always looking over your shoulder

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