Ask the PR M&A expert: Is buying another firm the most strategic way to grow?

by | Jun 28, 2018 | Analysis, Public Relations

For most PR agencies, the answer is an unqualified yes. This is not a new idea for me. I have been saying it throughout my career. The theme, as presented in my blogs, articles, speeches, and books has always been: Bigger is better. The key is making sure that in making the purchase, there is no dilution in the operating profit percent (operating profit divided by net revenues).

Buying another PR, marketing or digital firm is an especially smart idea these days because organic consulting growth has remained flat for the past several years. Flat growth has also been spurred by client turnover. Of late, more firms have been complaining that they pitch and win a major new client, but the win gets offset by the loss of an existing client. To jump ahead, they need to multiply their capabilities.

Besides new clients, increased net revenues and a strong bottom line, a new firm can bring additional service offerings, offices, staff, expertise, and digital/social capabilities. But the Number One reason for buying another firm is to obtain its talent. Thus, the selling firm should have a strong second and third tier of talent on its organization chart.

What factors besides talent should a buyer look for in considering what to buy?

A buyer should hope to see at least 10% average annual growth and a 20% operating profit. The buyer hopes this 10%/20% minimum will return its investment within three to five years.  One action post-sale is to eliminate duplicate operational costs, which go right to the bottom line.

A buyer also wants to see whether the prospect’s culture, vision and philosophy is a good fit. Will its executives and staff work well in the buyer’s culture? If the prospect doesn’t pass this test, the discussions are pretty much doomed. This preliminary due diligence is even more important in the initial discussion phases than financial and legal due diligence. If the leadership and staff of both firms can’t get along from the start, why pursue a “marriage?”

Is there a specific process to consummate a successful acquisition?

There is a standard process that we use for M&A Acquisitions, although there can be exceptions that can shift a timetable forward or backward depending on the stage of a given transaction.

As a PR firm owner interested in buying another firm, your first step is to retain an M&A advisory firm. You wouldn’t buy a home without expert legal and financial oversight. You shouldn’t buy a firm without having someone representing you who has specialized experience and education. My firm of senior counselors is made up of former agency owners and principals. My expertise is financial, legal and as a negotiator. We all know what M&A is all about.

The other critical steps

In broad brush, here are the actions that lead to a successful M&A – a lasting, profitable, people-centered business transaction that minimizes resistance and maximizes results.

  • Request CPA-prepared financials that are recasted for non-recurring costs and expenses, and with owner salaries normalized.
  • Get a mutual NDA and meet the prospect’s owners and top executives for the all-important culture check.
  • Learn about the clients.
  • Review the fees and net revenues (fees + mark-ups) for the past three years and any interim year to date. What % does each client represent of total fees?
  • Review the lease terms. Are there escape clauses? Does the seller have the right to sublet? Are there multi-offices?
  • Review if there is a competitive advantage in the prospect’s services.
  • Review how involved the owner is with the key clients. Is it a hub and spoke structure in which the firm would be at high risk of losing clients without the owner(s)?
  • Review the structure of account teams with every major client. Look at the labor cost/time charges of every major client. Does total labor cost exceed 55%? It should not.

Once you have done the required reviews and found everything in good shape, you take the final steps to the actual purchase, with due diligence being handled by your CPA firm, attorneys, HR staff, and M&A consultant:

  • Prepare a Term Sheet, outlining proposed terms and timing of acquisition.
  • When terms are accepted, prepare a formal Letter of Intent (LOI).
  • Integrate the team of buyer and seller to assure the merger’s success.
  • Prepare for and execute the Closing.
  • Go to dinner, toast your wisdom and have a great night’s sleep,

Acquiring a firm can be an excellent growth strategy, especially if you’re interested in moving to the next level at a time when the overall market is flat. But the transaction must be handled carefully, efficiently and strategically. As the buyer, you want to attain a strong advantage for both your firm as well as for the seller’s. When both parties gain, the result is always positive.

Rick Gould

Rick Gould is author of “Doing It The Right Way: 13 Crucial Steps For A Successful PR Agency Merger or Acquisition,” and “The Ultimate PR Agency Financial Management Handbook: How To Manage By The Numbers For Breakthrough Profitability Of 20% Or Greater” (4th Edition)

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