As published in PRSA Public Relations Tactics
Mergers and acquisitions are a constant fact of life for PR agencies. Have you thought about starting your own firm, and wondered about an exit strategy? Or do you manage your own agency and wonder what it would take to sell it?
PRSA member Art Stevens, APR, Fellow PRSA, managing partner of The Stevens Group, a StevensGouldPincus partner firm, has been valuing agencies, brokering mergers and acquisitions, and providing strategic advice for nine years. He is a former owner and CEO of LobsenzStevens, a Top-20 independent PR agency, which Publicis Groupe acquired. His new six- part series, exclusively for PRSA, will share what he’s learned over the years about what it takes make an acquisition.
Let me propose a toast.
Here’s to those of you who took the plunge, who deserted calm waters to dive into the world of PR agency ownership. You could have stayed at your present agency or organization and hoped that proper promotions and salary increases would find their way to you.
But you told yourself that your dream was to own your own business and continue to do something you love — the practice of public relations.
Did you know that people are starting more PR agencies today than ever before? I attended the spring conference of the Counselors Academy this past June and met a number of owners of recently established PR agencies.
My sincere congratulations to those of you who have joined the ranks of PR agency owners. And congratulations are also in order to those of you who have owned your agencies for more than five years. All of you, the newbies as well as the veterans, are now entrepreneurs in addition to being PR pros. And running a business is far different from anything you’ve ever done before.
I know because I headed my own firm, LobsenzStevens, for more than 20 years. It got to be among the top twenty independent PR firms before Publicis acquired it. And for the past nine years, I’ve been facilitating mergers and acquisitions in the PR agency industry. I also consult with PR agencies and can personally attest to the fact that many agency owners don’t know how to run a business.
Am I being unkind? When an agency owner who has been in business for more than five years tells me that she doesn’t know what her bottom line is, then I know immediately that although she services her clients well, she hasn’t made the jump yet to business owner.
The paradox is that most PR pros who start an agency want to sell it someday. What many don’t understand is that if they can’t get their businesses running like a business then an eventual interested buyer will pass.
Principles for Profit
During the course of this series of posts, I’m going to tell you what you need to do to run your business as if you could sell it tomorrow. And even if you never sell your agency, if you follow these principles, then you’re going to make a lot of money anyway.
I’d like to start out by giving you a few basic principles that apply to those on the cusp of starting a business as well as those who have owned their agencies for some time.
Now that you’re a businessperson, you need to understand how to control your costs. In time, you will need to rent office space and hire employees. And you will need to figure out what your profit goal is and what your own compensation should be.
If you’ve never done this before, then know that the planning can be arduous. But you must plan. You’re now wearing two hats: one of a competent PR pro who is valued by clients and one of a business owner who wants to make money in the process.
Trust me. If you can do this for at least three years in a row, then you’re a candidate for acquisition.
The first thing that any agency should do is become familiar with the StevensGouldPincus annual benchmarking survey. This survey polls about 150 PR agencies every year. Its principal goal is to evaluate annual agency profitability. The survey compares overhead costs as a percentage of gross revenue. The prevailing profitability ratio for PR agencies is 20 percent. This means that you need to configure all your costs, including salaries, so that they are 80 percent of your revenue. If you can manage to run your agency this way — regardless of its size — then you can become that much closer to being acquired.
The key question now becomes how can you make your agency profitable? And the answer lies in how you apportion your costs.
Rules of thumb: Do not overstaff, do not over-service clients, and develop metrics to determine the profitability of each account and the billability of your account team. I will get back to this in subsequent blog posts. But let me end this one by offering the following advice: Don’t start an agency if you aren’t committed to running it profitability and doing all that’s required to become profitable.
And begin to think about the next phase in your life, which could be anywhere from next year to the next five years. And that phase would be preparing your firm for an acquisition and working with new people. If you can picture that, then I will help you get there.
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