With the PR agency business booming, many firm owners are
deciding that the time is right to sell. While buyers often are
looking at a purchase as a way to add new capabilities or snag
management talent, sellers may be looking ahead to retirement, or
simply wanting to take their money and pursue another business
opportunity.
For those looking to buy or sell a firm, the question arises: how
much is a firm worth?
A PR firm cannot be valued like businesses with significant
capital assets, well-defined products, markets and customers. While
firms may have some assets (e.g. computers, office furniture, etc.)
the greater part of a firm's value stems from the ability of its staff
to generate revenue. The result is that putting a market value on a
firm is both a science and an art.
Assessing Agency Value
There are two ways to establish a value based on cash flow, said
Larry Levine, managing director of top-20 accounting firm Altschuler,
Melvoin and Glasser LLP, Chicago.
The first way is to determine an annual "normalized historical
cash flow" based on analysis of the past three or four years, and then
"capitalize that number into perpetuity." In other words, determine
the future value of the normalized cash flow figure.
The second valuation approach is to take a firm's projections for
future cash flow, and "discount that back to today's dollars," he
said.
According to PR firm management consultant Al Croft, another
approach to determine a firm's market value is to start with a firm's
net worth--basically, its physical assets--and add to this 8 to 15
percent of a firm's net income for a three-to-five-year period. As
with Levine's explanation, the income figures could be from past years
or future projections, which are discounted into a current value.
Variables Affecting Value
Several conditions can lead to adjustments of the valuation
figure, said Levine. First of all, private companies, as almost all
PR firms are, typically are worth less than public companies of like
size, because shares and ownership are more difficult to sell than
they are with public companies.
Moreover, firms' financial statements are adjusted to add back a
portion of the owners' salary into the cash flow, because firm owners
often pay themselves more than an employee manager would be paid for
the same work.
In the event of a partial sale or purchase, any sale of less than
a 50 percent stake in a company will be at a discount, said Levine.
This is because the owner of 50 percent or more of the company retains
controlling interest, and has more power over the company and its cash
flow. (Levine, 312/207-2800; Croft, 520/284-9054)