StevensGouldPincus

Counselors Academy Spring Conference

2014-05-08T13:16:00.000-04:00

I enjoyed speaking at the Counselors Academy Spring Conference this week in Key West, Florida. The camaraderie was, as always, terrific and inspiring. The presentation by Aaron Blank, CEO of the Feary Group in Seattle, Washington, in my opinion, was the award winning presentation, about the challenges of adopting a beautiful boy in third world Ethiopia. You could have heard a pin drop and few in the room were able to contain emotion. Check out the amazing non-profit foundation Aaron partnered with

http://www.hopechest.org/community/woliso/sponsor/

My topic “Game On- CEO Success Playbook” was very well received. The handouts were even more valuable than the presentation. Anyone wanting a copy of the handouts, please email me at rgould@stevensgouldpincus.com

Participate in SGP's 2014 Annual Benchmarking Survey

2014-03-18T11:09:00.001-04:00

Want to be the first to receive valuable PR industry benchmarking intel? It's easy: participate in SGP's 2014 Annual Benchmarking Survey today.

The resulting market intelligence benchmarking report will be published this June 2014. Data by firm size, location and specialty will be shown. Even better yet, we'll include an analysis of industry trends. Respond by Friday, April 4, 2014 to gain early access to the data when it gets released. Your proprietary data will be handled with complete confidentiality. A signed NDA will be forwarded upon request. You can click Open the Survey to complete online or open and compete with Excel

Omnicom-Publicis Merger- What’s next in M&A?

2013-08-14T10:44:00.001-04:00

By Rick Gould, CPA, JD

The Global marketing communications industry was forever altered by the news that U.S. based Omnicom and Paris based Publicis Group will be merging in the coming months. The media called this a “merger of equals,” creating a market valuation of $35 billion. Publicis chairman Maurice Levy and Omnicom Chairman John Wren will serve as Co-CEO’s each at the helm for a 30 month period.

I ask if joining two of the largest holding companies increases valuation? This was a merger that will combat the two big competitors, in digital and emerging markets- Google and Facebook, as well as rival WPP. This could be indicative of what’s to come in the industry.

There have been many recent quality deals in the PR M&A space.

· Finn Partners acquiring Widmeyer Communications & M. Silver Associates, both SGP facilitated transactions that we believe will be win-win for buyer and sellers.

· Padilla Spear and CRT/Tanaka merging their firms

· London based Lewis acquiring Davies in Boston

· And now Omnicom and Publicis Group doing the merger

We believe there will be several additional transactions by end of year. I suspect WPP will be reacting to this transaction in the near future with a major acquisition. CEO Martin Sorrell is a master dealmaker and will not like being #2.

What this shows is that even the giant holding companies acknowledge that they are lacking in certain highly specialized areas- such as the digital area, the growing Asian and Latin American markets, like China and Brazil and top talent that can help grow these sectors.

· It will allow pricing power

· It will allow intellectual capital

· It will allow size and growth and cross-referring

So what does this mean for the PR industry and potential buyers and sellers of firms?

· Strategic acquisitions will continue as buyers realize they have a need for certain niche specialties.

· Many one office firms will acquire in locations that will facilitate and improve client service.

· Firms are realizing that “bigger” is usually “better”. That with size there are economies of scale and these economies go straight to the bottom line.

Buyers believe they can improve the operations and profitability of firms they acquire once the inefficiencies of integration no longer exist. Their bottom-line will then improve and down the road they will exponentially increase the value of their firm.

Sellers want to sell to larger, more prestigious firms

· They are losing pitches that they would have won if bigger.

· They are of the age where the timing to sell is right. Many are of the boomer generation in their 50’s, 60’s, 70’s.

· They realize having the financial resources and intellectual capital of the buyer firm is a huge advantage in winning and retaining clients.

The Omnicom- Publicis merger is a signal that the M&A arena in PR is active and will only increase in the future months.

PR Agencies Profitability Flat in 2012

2013-06-17T12:53:00.002-04:00

By Rick Gould, CPA, JD

U.S. PR agency profitability increased to 18.8 percent of Net Revenues from 18.6 percent last year.

A total of 111 prominent agencies based coast to coast and Canada, participating in our annual survey reported that average percent which compares with a 15.6 percent in 2010, 13.5 percent in 2009, 15.6 percent in 2008 and a 19.7 percent margin in pre-recession 2007.

Firms under $3 Million were at 18.7 percent (down from 20.5%). The firms in excess of $3 Million up to $10 Million netted 18.2 percent (up from 17.4%), those in excess of $10 Million up to $25 Million netted 19.2 percent (up from 16.8%) and those in excess of $25 Million netted 21.4 percent (up from 18.6%), very respectable in challenging economic times. So all categories but the less than $3 Mill improved their bottom line. There were other indicators as well that “size” matters.

One of the most significant findings of the survey is that what I call the “Model Firms”, the dozen agencies consistently meeting or exceeding the SGP model performance target criteria, continue to remain far above average during these recessionary times. In 2012, as in previous years, they averaged an operating profit margin well in excess of 20 percent, partly due to their ability to hold professional staff salaries to under 40 percent of net revenues, total labor cost at 50 percent and operating expenses at around 25 percent. This should be the goals for all firms.

Revenue per professional staff was up to $210,539 from $209, 945 last year. Firms in excess of $10 million in net revenues averaged in excess of $230,000, consistent with last year. This benchmark is the most significant indicator of profitability. In addition the nation’s PR agency field did not increase their hourly rates in 2012. I believe this uniform minor decrease in billing rates is indicative of a fairly flat economy and is consistent with little growth of the industry in both net revenues and operating profit.

Productivity, measured by billable time utilization, has been far below optimal levels. “The goal for account executives should be at least 90%, a goal reached by almost all firms achieving 20% profitability.”

Senior PR Pros Need Not be put out to Pasture

2013-05-01T11:14:00.000-04:00

By Art Stevens

There are more pr firms with annual fees of under a million dollars than most people realize. There are two primary categories: small firms that are recent start ups by pr professionals who got the entrepreneurial itch. And those headed by more senior practitioners who have headed their smaller firms for a number of years but never achieved greater critical mass.

Firms headed by senior practitioners make up the greater percentage of small firm ownership. And these pr pros are finding new life in the pr agency world rather than being put out to pasture because of their age.

Larger agencies, and I don’t necessarily mean giant agencies, are striking deals with these senior pros to bring both their long time valuable professional experience as well as their book of business into their organizations.

For the larger agency absorbing a smaller business it’s an opportunity to get into a new niche or a complementary one and generate greater critical mass. If the larger agency is seeking to sell in the near future it’s a means, also, to generate a greater purchase price.

For the senior owner of the small agency it’s a means to jump starting a career and becoming an important player in a larger firm. The pr agency industry is changing dramatically. There are more mergers and acquisitions taking place this year than at any similar time during the past ten years. Critical mass and consolidation seem to be the order of the day.

Until recently, smaller agencies – those under $1 million in net fee income – were largely ignored by larger buyers. But once the trend of buying pr businesses extended to firms well under $10 million in net fee income, the magnifying glass extended to the smaller agencies.

So if you’ve got an agency that does roughly $500,000 a year and you’re a senior pr professional, there’s a bold new world awaiting you. It’s a world where your knowledge, experience and savvy are more app

How do you improve your bottom line and increase value? Embrace Benchmarking!

2013-03-26T10:46:00.000-04:00

By Rick Gould, CPA, JD

Wouldn’t you agree that knowing the key PR firm benchmarks by size, region & specialty would be a valuable tool in assessing your business? Wouldn’t you agree that having the actual billing rates and utilization/productivity percents of your PR industry peers can assist you in proactively managing your firm? Embrace benchmarking and gain these valuable keys to unlock profitability in your firm.

Our initial deadline for responses to our latest annual benchmarking survey was last Friday, March 22. Dozens of firms requested extensions of 2-3 weeks, and we granted all of them. Why? Because we are told year after year by the most successful PR firms that our benchmarking results guide their profitability throughout the year.

If you haven’t already participated, email me today to request an extension too. We will resend you the survey. Participants are the first to get the full results. Our survey reports help participating firms turn unprofitable businesses into profitable ones, as well as build value to the firm.

I’ve surveyed the industry about benchmarking for over 20 years. Benchmarking data can give you insight into profitable hiring, firing, rent rates, T&E expenditures, benefit offerings, operating costs and minimum monthly retainer levels. The Revenue Per Professional metric has become the most important indicator of profitability.

Take the survey today and participate by clicking on this link. I guarantee it will be worth your time.

http://us4.campaign-archive2.com/?u=b7faeb48cc27f1c53217e9ede&id=43cdeaff96&e=dc8c90a24a

Contact me directly with questions or comments: direct line 212-896-1909, or rgould@stevensgouldpincus.com.

The Million Dollar Milestone: Supporting Growth from One Million, Two Million and Up

2012-11-13T14:05:00.000-05:00

By Rick Gould, CPA, JD

Reaching one million dollars in net revenues is a major milestone in the growth and profitability of a PR firm. What happens, in my observation, is that when a PR firm owner surpasses one million in net revenues their attitude changes. Their confidence builds. Their value builds. It puts them in a different class, a different grouping: The Million Dollar Milestone. But two million is even better, although both milestones come with very similar perceptions and challenges.

What I observed in the past five months at the four conferences I have been a speaker at (Counselors Academy in New Orleans, PR Boutiques International in NYC, Canadian Council of PR Firms in Toronto and, most recently, Worldcom Group in Vancouver) is that the majority of the member firms in these groups are under two million in net revenues. Opportunity exists for these firms to get to two million and beyond.

Getting to two million is a major challenge, though. When a firm is less than one million it typically includes an owner and 4-5 account executives. The owner could be earning good money - as high as 40% - but the “value” of the firm is low because the firm is missing key value-building elements. When you are ready to sell your firm, any buyer will want you to have a #2, a Senior V.P., that can bring in business and manage staff. You will need a second in command to realize increased value. You need a #2 that is highly incentivized, possibly even with actual stock or phantom stock, or with whatever it takes to keep the #2 around for the term of your earn-out/buyout after a sale.

When you make a commitment to grow from one million to the two million dollar revenue milestone you are really building an infrastructure and a brand. Building effective staff at different levels- account coordinators to account execs, to account supervisors, account managers, to VP‘s- create a real pyramid that is powerful and attractive. It creates the foundation for growth and profitability, which boosts the ultimate value of your firm.

Another obstacle to reaching revenue milestones is growth gridlock. You can’t seem to grow beyond where you are. More focused management and administration is likely needed but you probably don’t want to spend the dollars for a top administrator or V.P. or part-time CFO. So you attempt to do it yourself. As a result, your marketing efforts decline, your new business pipeline erodes and your business stagnates. Stuck at the Million Dollar Milestone. And it may stay there for years, which may not be a level that can weather changing market conditions in the future.

At that point, you may decide to bite the bullet and take less salary. Or bring in a junior partner who buys-in for cash. Or give up equity to an investor so you can afford to hire the right people.

If you push through to the two million milestone without well thought-out plans for value-adding business elements, you will most likely get stuck again. Except now you have larger clients who are more demanding and require quicker, better service from higher quality staff. You need to invest again in your infrastructure, and you must keep doing that at each Million Dollar Milestone if you want to achieve continuous growth. It is necessary; it is a must-do. And, logically, it is imperative that you raise your fees and billing rates to keep pace with leading model benchmark firms. This is the ultimate secret to generating the funds to support Million Dollar Milestones.

An Inspiring Worldcom Conference - “The Climb”

2012-10-19T09:27:00.001-04:00

By Rick Gould, CPA, JD

Two weeks ago I was a keynote speaker at the Worldcom North America Conference in Vancouver, British Colombia, Canada. The topic I spoke about was “The Art & Science of Attaining a 25%+ Bottom Line.”

The setting was inspirational - the hotel, the conference meeting room, the stage, the big screen and the sound system. The member firms were sharp and challenging, but cordial, and overall totally receptive to my topic which centered around the theme of “The Climb”…. that starting, building and running a PR firm is like an ascent of Mount Everest. But, if done right, if the process I outlined at the conference is committed to and followed, then the reward will indeed be waiting at the summit and on the other side. I want to thank the Worldcom member firms for supporting this vision of attainable profitability and for inviting me to present my message. The time I spent speaking with and getting to know the members encourages me to continue my quest in inspiring firms to maximize profitability through disciplined benchmarking and build value to their firm.

Vancouver is magnificent! My next trip there will be to spend a week on vacation.

Thank you, Worldcom!

Proactive PR CEOs Keys to Greater Profits

2012-07-12T21:10:00.001-04:00

By Rick Gould, CPA, JD

This is a condensed version of the op-ed that appeared on CommPro.biz on July 1, 2012. To read full article click here.

I stand by my passion and conviction that PR agencies can attain at least a 20% bottom line with proper counsel and guidance, can build ongoing value in the firm, and can ultimately sell the firm for a price beyond their wildest expectations.

The question many of you are asking now is “how”?

The answer requires more than a “business” philosophy. PR executives don’t normally think or act from a “business,” can-do-it philosophy or standpoint. The way the 20%+ profitability is attained is by shifting to a determined, goal-oriented, can-do-it mindset. A 50-55% labor cost and 25% operating expense costs guarantees at least a 20% operating profit. You CAN do it. You SHOULD do it. You NEED to do it to survive, prosper and grow your firm the right way.

For your firm to grow, to retain top talent, and to employ cutting edge technological and digital capabilities, you need to have at least a 20% operating profit. Your task is to get your clients to understand and see the win-win value in this. They should embrace this. If they don’t, then you need to work harder in building your case. I can help you do that here.

Let’s start by discussing key benchmarks.

Rise of the Proactive PR CEO

First, what is happening in the PR industry is the transformation from the “reactive” to the “proactive” CEO. Proactive CEOs of PR agencies are shifting their thinking and priority to the business of their business. They are looking at the benchmarks more than they ever have. They are looking at productivity/utilization. They are focusing on all of the components that are needed to attain at least 20% profitability. Proactive CEOs are those wanting to make change, provide top-line service AND be rewarded for the efforts.

PR Industry Benchmarks: The Survey Results

This year’s Benchmarking Survey/Report results showed signs of significant improvement. Here are some key findings:

Revenue Per Professional crept up from $206,000 to $210,000.
Operating Profit for the <$3 Million group was at 20.5%, mainly due to 22.3% overhead, well below the 25.5% for all firms.
The average for all firms participating regarding Labor was at 53.4%.
Operating Profit was at 19.2%.

These are all positive signs, likely resulting from a more disciplined fiscal approach.

I believe the reason for the spike in operating profit was tight, management-controlled labor and overhead, an increase in billing rates, and a rise in minimum fees… all adding to the bottom line.

Lessons from “Model Firms”

A key indicator in my benchmarking analysis comes from looking at what we call our SGP “Model Firms”: ones that attain 20%+ operating profit no matter what the state of the global, U.S. or PR economy. These firms have the very respectable ability to hold labor costs at 50% and operating expense/overhead costs under 30%.

I have closely tracked this select group of firms over the past 10 years. These firms, while facing the same challenges in a rapidly changing business world, maintain high profit margins. What distinguishes them is they manage “by the numbers” with laser-like precision. They manage by benchmarking.

Selected Stats of “Model Firms”

Here is a quick snapshot of key stats drawn from my analysis of the industry’s model firms:

Revenue Per Professional: $222,882
Account Salaries: 38.7% of Net Revenues
Freelancers: 2.3% of Net Revenues
Administrative Salaries: 5.3% of Net Revenues
Rent & Utilities: 5.1% of Net Revenues
Average Monthly Retainer: $11,000
Operating Profit: 27.7% of Net Revenues
Largest Client: 17.3% of Net Revenues

Key Benchmarking Takeaways

Raise your billable rates each time you give a raise
Lock in your second-tier of management
Control staff turnover
Control over-servicing clients
Keep rent expense at maximum of 7% of net revenues
Retain a full-time or part-time CFO

Bottom line: I have been counseling CEOs of PR agencies for many years to “run your firm, position your firm, and implement the process as if you will sell in the next six months.” Even if you don’t, it is a discipline that will make the firm leaner, better managed and more profitable. The results will be extraordinary. And, equally important, you will improve the vitality of your agency and your own self-satisfaction, pleasure and stature in the industry.

In Defense of Private Equity Firms

2012-03-15T14:52:00.002-04:00

by Rick Gould, CPA, JD

Private equity has become a hot topic this election season. As it will continue to be one well into the general election, I feel compelled to express my personal perspective and insights.

To put my ruminations in context, I should disclose that I have been extensively involved with private equity firms and investment banking during the past year. This first-hand involvement will continue throughout 2012 in relation to a major transaction in the works.

In a nutshell, Private Equity (PE) has transformed business in the U.S. PE firms are a vital and positive force in stimulating our economy. Many PE acquisitions are “investments” in companies that are on the verge of bankruptcy or are consistently unprofitable. Companies in desperate need of capital infusion often find renewed life in this manner.

A PE firm typically invests in struggling or stagnating companies needing financial support, management expertise and creative thinking. This investment strategy includes both high risk and high potential reward.

PE firms reorganize companies with the goal of creating value and profitability. Additionally, jobs are saved that would otherwise be lost if the company went south. Jobs are even ultimately created if PE firms turnaround and/or grow the company. In many cases jobs are trimmed to cut costs, and then the organization is rebuilt with many more jobs in place than when the company was acquired. Human capital is generated with the goal of long-term, sustainable value.

Investors in private equity firms can include college endowment funds and teachers’ pension funds, which, in turn, represent ordinary people. This area is not necessarily as out of reach from the general public as some might think.

Creating value drives our capitalistic free-market economy, which does indeed have far-reaching impact on ordinary people. Many successful mainstream companies - Sports Authority, Staples, Duane Reade, Domino’s Pizza and Seely Mattress (all from Mitt Romney’s Bain Capital) are perfect examples. And what about Target, Macy’s, Federated, Hertz, Dunkin Donuts, Home Depot? All name brands that have been launched and funded by private equity firms.

And in the realm of premier PR firms, the same labor-intensive and expensive process of selecting target firms, performing due diligence, executing audits and negotiating lengthy legal contracts should be followed as in the PE arena. Even in the PR agency industry, this same discipline is imperative if the goal of making the firm profitable for investors is to be achieved. Bain Capital- Blackstone Group, Carlyle Group, KKR, TPG, Apollo, CVC Capital Partners may be in different industries than PR, but they all go through a structured investment analysis process to ensure that risk is mitigated and potential reward is maximized.

PE firms do inevitably have some unprofitable investments…. but isn’t the “L” in P&L reserved for firms “losing” money? Whether private equity is backed or independent, some firms will lose money. That is the truth of capitalism.

PE firms only make money when the firms they have acquired are profitable, unless they are taking out large management fees that are the ultimate cause of losses. Losses due to management fees should not happen if the PE firms do it right. Management fees should be reduced or deferred until a profitable turnaround of the firm occurs.

In thinking this through further, private equity firms should ultimately generate more jobs with higher wages in the long-term. Jobs may need to be cut in the short-term, though. Being in the financial arena I fully grasp the concept of “operational change”.

I am a true believer in the position that any service business should and can realistically have 20%+ of operating profit. PE firms promote this. They monitor results against benchmarks that are realistic and attainable. If certain line items don’t come close to the pre-determined benchmark, then the red flag goes up and the reason for the difference can and should be analyzed, explained and corrected.

As mentioned earlier, a typical private equity investment is in an undermanaged or poorly managed company. The PE firm acquires the company (often financed through substantial debt) for less than calculated value. The hope is to sell the company down the road, when it is healthy, for a substantially higher price than the PE firm paid for it.

It is then, at the liquidating event, that the PE firm gets their return-on-investment. Buying low and selling high is the goal, as it should be. PE firms take all the risk. They went through the pain of transforming the acquired company and deserve the reward.

In conclusion of my discourse on the subject, I make a case that capitalism works. Free enterprise works. From my perspective, private equity firms are a positive and permanent part of our free-enterprise system.

Margin Call & The Bankers

2012-01-31T09:53:00.000-05:00

by Rick Gould, CPA, JD

I saw the movie “Margin Call” a couple of weeks back. It hit home for me for two reasons:

1. It took place in the StevensGouldPincus office building in NYC, One Penn Plaza.

2. It was reminiscent of the financial crash of 2008 (the downfall of Lehman, AIG & Merrill Lynch) as well as the recent implosion and bankruptcy of MF Global.

The movie is about 24 hours in the life of a bank modeled after Lehman- fancy offices, great view, young brokers that believed they had the world in the palm of their hands. Fancy sports cars, posh apartments, getaway weekends in Paris. Kevin Spacey, Demi Moore, Stanley Tucci and Jeremy Irons did a great job portraying very successful executives. They saw their careers implode and their firm on the brink of failure as a result of the liquidation of its mortgage backed securities, in an attempt to raise cash to meet its required reserve margins- the “Margin Call”.

We saw the futile attempt to sell off toxic assets, the midnight board meeting, and the mass firing of traders and staff the next morning. What the events in the movie clearly showed, very reminiscent of the Lehman debacle, was that the bankers placed way too much faith in Ivy League MBA’s who functioned using complicated analytics, spreadsheets and mathematics.

Their Board of Directors was comprised of multi-degreed entrepreneurs, attorneys and accountants, all supported by very smart economists. But few of them fully understood the complexities of their business models and the risks these models created. Conservatism was not in their philosophy.

What was needed in the movie, and in the Lehman scandal, was the ability to interpret, to benchmark, and to predict what was in store, as well as how to protect vital assets and make the inevitable “margin call” survivable.

In both the movie and the real-life scenarios, the bankers did not have a clue what was “really” going on. Honest, hard-working people are now paying the price for the ignorance and arrogance of these secure, high salaried bankers.

In my opinion, these “masters of the universe” did not have enough skin in the game to protect investors from losing most, if not all, of their “safe” investments. The bankers did not have enough to lose personally. If they did, they would have hedged against the worst possible result.

American society has always embraced scholars for these positions, especially those from the top biz schools who populate the highest echelons of major investment banks. My preference would be to embrace the down-to-earth, self-made entrepreneurs who run the most successful and profitable PR/communications firms. These executives are smart, savvy and creative. They learn by doing, by trial and error, by rolling up their sleeves and by starting out in the trenches at the bottom.

These successful communications executives learned that keeping the client and all stakeholders in mind when making business decisions is not only smart, but also essential to sustained profitability. Especially for those who have patience and dedication, and who take the time and make the effort to master the business end of their business, the street smarts and communication skills needed to make cautious and correct decisions can be learned.

Is Mediation A Viable Option for Partners Disputes?

2011-12-01T22:04:00.002-05:00

By Rick Gould, CPA, JD

When partners do not agree on major business issues, such as compensation or equity percent, it is emotionally draining and counterproductive to the firms’ health, profitability and success. Any type of dispute can be potentially destructive.

What options exist to move partners from conflict to resolution? This discovery process should start with an honest conversation (ideally an in-person one), or an email or letter. It would then evolve into a negotiation. However, if this doesn’t work what is next?

Ending the business or pursuing litigation as a means to achieve resolution are costly and time-consuming options. I’ve seen these options to be mostly ineffective. All parties end up losing out exponentially more, both from a financial and emotional perspective, than if other resolution options had been pursued. And there is usually an implosion of the brand that results, especially in this day and age where conflict is so easily detailed in social and traditional media outlets. Reputations get undoubtedly tarnished, no matter who is perceived to be right or wrong. In my experiences, litigation should be an absolute last resort and it is to be avoided.

The best option, especially among partners, is honest negotiation through mediation. The partners will control the process, the time-frame and the overall cost. But to be effective, negotiation must lead to a final conclusion that all partners can agree to. This is often not doable, especially when a partner (or partners) allow themselves to be controlled by ego and emotion.

The middle and higher-ground, the better option, is to take the ego and emotion out of the mix and to mediate. Binding arbitration can also be pursued if mediation does not achieve a mutually agreeable outcome.

In mediation, a third party acts as a facilitator in negotiation between the partners. The mediator is trained to take emotion out of the dispute. He/she is tasked to come up with tangible solutions and an overall equitable resolution. The mediator may end up fully agreeing with one partner, or he/she may conclude that a compromise is in order. Either way, a fresh and outside perspective is critical to infusing clarity (and sanity) into the situation. Partners must recognize their managerial and personal limitations, and a mediator is just the one to provide that insight.

The mediator’s recommendation is not binding. However, it will often bring about a resolution, especially if outsiders, or even other partners, are eagerly watching. The mediator attempts to break the impasse to allow all parties and the firm to successfully move forward. Mediation is far less expensive than litigation.

A skilled and experienced mediator uses processes and techniques that lead to a successful outcome. And an ethical mediator will agree up front that, if not successful, he/she may not represent either party in an ensuing litigation. This incentivizes the mediator to resolve the conflict quickly and effectively.

Before you opt for mediation, be sure that all partners are honestly committed to achieving a resolution. Each partner should ultimately want to resolve the dispute from both a business and a personal perspective.

Profitability, Strong Billing Rates & 90% Productivity

2011-08-01T12:53:00.005-04:00

By Rick Gould, CPA, JD

Profitability, Strong Billing Rates & 90% Productivity.... How does your firm compare?

Our 2011 Benchmarking study clearly showed the U.S. PR agency profitability rebounded from a 2009 four year low of 13.5 per cent of revenues back to exactly what it was for 2008, 15.6 percent. This compares to a 13.5 percent in 2009, 15.6 percent in 2008 and a 19.7 percent profit margin in 2007.

The operating profit for the under $3 Million category was 13.1 percent, up from 10.4percent in 2009. The firms in excess of $3 Million up to $10 Million netted 16.2 percent and those in excess of $10 Million up to $25 Million netted a very respectable 17.8 percent and those in excess of $25 Million netted 16.5 percent, also respectable in challenging economic times. All four categories improved from the previous year.

One of the most significant findings of our survey was that the SGP “Model Firms”, the dozen agencies consistently meeting or exceeding the SGP model performance target criteria, continue to remain far above average during these recessionary times. In 2010, they averaged an operating profit margin in excess of 20 percent, partly due to their ability to hold professional staff salaries to under 40 percent of revenues, total labor cost at 50 percent and operating expenses at under 30 percent. This should be the goal for all firms.

A very noteworthy result was that Revenue per professional staff was up to $205,941 from $197,714 last year. Firms in excess of $10 million in net revenues averaged in excess of $230,000. Total overhead averaged 28.4 percent. Firms in excess of $25 million were at 25.0 percent.

For our full report please email me at rgould@stevensgouldpincus.com

Market Update: Current Factors Affecting a Decision to Sell Now

2011-05-27T13:58:00.004-04:00

By Rick Gould, CPA, JD

1. Capital Gains Taxes are expected to increase.

2. Jeffery Lyons, an operating director of Chicago-based investment bank City Capital, said in INC. Magazine in November: “Economists estimate that as many as 70% of privately held businesses will be put up for sale within the next 10 years, as more baby boomers retire.” (Or maybe just want to monetize their assets and sweat equity.) “That mounting supply could put more downward pressure on valuations for years to come - a sobering message to entrepreneurs nervously waiting for the market to bounce back.”

3. Ten years from now, multiples will go down because the supply of businesses (for sale) will be up and there will be fewer buyers.

4. It is already a factor that sellers far outweigh niche buyers. Buyers are no longer buying to add critical mass or to increase net revenues. Buyers are buying strategically, looking for a specialty firms in the areas of digital, public affairs, consumer and crisis.

5. Buyers are increasingly more edgy when it comes to the age of owners, the presence of strong second-tier management, the mix of clients and the potential for cross-referrals and growth.

6. Tightening SEC regulations on acquisitions will only increase the amount and extent of financial reporting and due diligence required in the future.

7. The future reality is many sellers of PR agencies will have no one to sell to. They will have little choice but to sell their firms to key staff (for multiples less than they can potentially receive from an outside buyer) or to simply close doors and cease operations.

Only with industry-specific counsel can you decide what timing is right for your firm. These factors to consider are just a small part of what needs to be regularly analyzed in packaging your firm for a sale, whether today or in the distant future. Operate your firm as if you were to be sold tomorrow and you will have a better managed, more profitable firm overall.

Baby Boomer Burnout or Just Smart Business

2011-01-01T13:14:00.004-05:00

Reasons to Consider Selling Your PR Agency Now
by Rick Gould, CPA, JD

Jeffrey Lyons, an operating director of Chicago based investment bank City Capital, says in INC. Magazine November 2010 Page 111. “Economists estimate that as many as 70% of privately held businesses will be put up for sale within the next 10 years, as more baby boomers retire” (or maybe just want to monetize their asset, their sweat equity). “That mounting supply could put more downward pressure on valuations for years to come- a sobering message to entrepreneurs nervously waiting for the market to bounce back.”

Lyons adds, “five years from now multiples for small business’ will go down because the supply of businesses (for sale) will be up.”

It is already a factor that sellers far outweigh niche buyers & buyers are no longer buying to add critical mass, to increase net revenues. Buyers are buying strategically, looking for a specialty as digital, public affairs, consumer, crisis etc. And they are certainly much more edgy when it comes to age of owners, strong second tier management, mix of clients and potential for cross referrals and growth. And tightening SEC regulations on acquisitions will only increase the amount and extent of financial reporting and due diligence.

The reality is many sellers of small & mid-size PR agencies will have no one to sell to. They will have NO choice but to sell their firms to key staff for multiples less than they can potentially receive from an outside buyer, a buyer that accumulated a war chest for acquisition during the past couple of years.

Those are reasons to consider selling now or at the minimum begin packaging your firm for a sale. Worst case will be you will have a better managed, more profitable firm, which in itself will add to value.

PR Agency M&A Market Poised For Rebound

2010-09-30T23:25:00.002-04:00

By Rick Gould, CPA, JD

October 1, 2010

After almost two years in the doldrums, PR agencies are aggressively eyeing strategic acquisition opportunities in North America and beyond.

Our firm currently has 33 agencies looking to buy, compared to 21 that are up for sale.

This compares to a situation that was considerably more bleak at the beginning of 2010. We had no buyers at the beginning of this year, Now, it’s extremely active.

Buoyed by a solid first half of this year acquisition intent began to improve at the start of the third quarter. MDC Partners CEO Miles Nadal set the pace with several acquisitions including rapidly growing Allison & Partners and most recently Kwittken & Co. Nadal recently revealed to The Holmes Report Partner and Managing Editor Arum Sudhaman that he is aiming to spend upwards of $50 million on PR agency purchases.

In terms of capabilities, agencies are particularly interested in adding skills in digital, social media, healthcare, public affairs and crisis management. Next Fifteen recently bought two digital agencies within one week, while Huntsworth Group, MDC Partners and Edelman have all snapped up firms in the past few weeks. Edelman just announced this week the acquisition of Texas powerhouse Vollmer Public Relations. Our firm represented Vollmer as strategic advisors and is working with almost all of the major buyers on strategic acquisitions.

In addition, The Holmes Report disclosed that they are aware of a number of firms seeking acquisitions in continental Europe, the UK and key Asian markets such as China and India.

However, while interest is high, continued caution on the part of buyers is being reflected by length of time it is taking for deals to complete. In the past, buyers did not do enough due diligence. Not anymore. The due diligence is extensive and thorough. When a buyer is paying several hundred thousands or millions of dollars for an acquisition they have every right to know about the financial history, the staff and the clients. Buyers are experienced and savvy at the drill. What we do is facilitate the process by getting the seller ready before this lengthy review begins.

The majority of deals that fail are as a result of the seller believing their firm is worth more than it is.

The key to a successful M&A transaction is for both buyers and sellers to be reasonable and fair and let PR industry precedent dictate the model used for the sale.

The Effect of the Post Recession Recovery on the M&A Marketplace

2010-05-14T22:02:00.003-04:00

By Rick Gould, CPA, JD

The effects of the economic downturn & present phase of recovery are numerous & significant.

There have certainly been fewer buyers. Holding-company owned firms are in a “wait and see” pattern. But, we were experiencing many valid inquiries regarding strategic acquisitions for specialties and/or locations and/or intellectual properties.

New buyers have also evolved. Medium-sized firms ($10-25 Million) that have built up a war chest in the 2006-2007 highly profitable years have taken advantage of the scarcity of buyers.

The pool of sellers has increased. There are many quality firms available to be sold. Several profitable firms are in play. Why is this?

• Owners are looking to monetize their years of sweat equity
• Relief from back office distractions is desired
• Regional and/or International reach is being sought
• Expansion of brain trust & depth of staff is needed to grow
• Owners’ preference to once again practice PR vs. build and manage the firm
• Complementary specialties sought to gain additional clients
• Efficiencies of scale by sharing labor and operations expenses
• Cross-selling
• More disciplined financial practices sought
• The expansion of the firm’s capital base and borrowing capacity through consolidation.
• Maximization of profits.

Recessions are historically followed by periods of economic growth. The latest recession is deeper than anything in recent memory. But eventually, we believe in 2010, the economy will revive.

If history repeats itself, then a new cycle of consolidation will be off and running. Firms that have already begun the advanced preparation of being acquired in early 2010 will net the best deals. All current indicators we’ve encountered and interpreted indicate that 2010 will signify the rebound of PR agency M&A.

2010 Poised to Signify the Rebound of PR

2010-03-03T10:18:00.003-05:00

2010 Poised to Signify the Rebound of PR: Agency Revenues, Margins and M&A Activity

By Rick Gould, CPA, JD

Warren Buffett labeled the 2008 meltdown as the “economy’s biggest flop since the crash of 1929.” The flop he is referring to has indeed had a huge impact on the PR M&A marketplace. The first half of 2009 was relatively flat. The second half only somewhat improved.

The message for 2009: “flat” is the new “up”.

Holding company CEO’s attribute the decline to clients resorting to extreme cost-cutting. Accounts want more service for less cost. Pricing pressure is now the norm. Procurement departments are relentless in their pursuit of driving fees down. Overly aggressive agency spreadheets, screaming out the reality of increasing labor & operating costs, are received with deaf ears and are not drawing much client sympathy.

We can draw conclusions about what 2010 holds for agency revenues, margins, and the M&A landscape by analyzing a couple of key questions.

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How have the major holding companies reacted?

IPG is trying to rebuild its balance sheet. Omnicom and Publicis have made it clear that acquisitions are on hold unless something extraordinary surfaced. WPP’s CEO Martin Sorrel predicts flat revenues right through 2010. He recently classified the present conditions as “less worse than they were.” Huntsworth’s Lord Peter Chadlington agrees with this assessment and is mapping an aggressive strategy for growth in 2010 via acquisition. Miles Nadal, Chairman of MDC Partners, has said “more dollars will go to social media and special events”.

Are there good times ahead?

2009 experienced the most challenging conditions for agencies since the early 1990’s recession. In 2010, most of the marketing service holding companies are looking to drive growth via strategic acquisitions. Based on our 2009 Economic Uncertainty Report, a vast majority of the 157 responding agencies of all sizes believe that revenues and profitability will improve in 2010. But the mood is one of cautious optimism.

For further insight, please participate in our 2010 Best Practices Benchmarking Survey being distributed on Monday, March 1. Participants will have first access to the full survey results once released.

StevensGouldPincus 2010 Benchmarking Survey

10 Predictions For 2010

2009-12-28T22:05:00.002-05:00

By Rick Gould, CPA, JD

1. The PR agency business will not only survive but also prosper.
Our recently completed Economic Uncertainty Survey reported two-thirds of the 157 firms polled believed their revenues would increase in 2010. Only 14% believed they would decrease. Our report will be available to the public on January 11. Participants will receive it on December 29.

2. Profitability will increase for firms who cut back operating costs in 2009. The labor force, trimmed significantly during the recession, will be able to handle more work at increased efficiency. Additionally, firms increasing their billing rates will improve their bottom line. The dismal 11.6% average operating profit of 2009 will slowly creep up to the 20% level that was attained in 2007.

3. The M&A marketplace in PR will become robust once again.
Many firms contemplating a sale in the past couple of years will now be ready to actively pursue opportunities. Holding company firms, historically the most active buyers, will be strategically acquiring firms. Many prospective sellers have realized that their growth potential is limited without the resources, staff and brain trust of a larger regional and/or global firm.

4. Firms will increase their commitment to and budget for training.
Training second tier staff to be more entrepreneurial will be seen as a necessary investment. With today’s financial challenges, senior account staff can no longer solely manage accounts. They need to also manage the “profitability” of those accounts.

5. Finding quality, experienced staff will remain a major challenge in 2010. Recruiters, experiencing a very flat 2009, are already collecting resumes for aggressive distribution in the coming months. You should be doing everything possible to retain quality staff and keep recruiters from luring them away to other competitors. Creative incentive plans are available and should be utilized.

6. Firms will be more aggressive in marking-up rebillable costs to clients. The past two years have witnessed a decrease in this practice. However, for many years it was commonly accepted that rebillables were marked-up 17.65% over cost. The cost of tracking rebillables is cumbersome and should absolutely be recouped, either through a mark-up policy or through the assessment of an administrative fee.

7. There will be an increasing need for new media/interactive divisions. Firms that grow in this area will stay ahead of the competition. Funds should be budgeted to invest in highly skilled staff and advanced equipment to support these areas.

8. Return on Investment (ROI) will remain an issue with clients. PR ROI needs to be discussed and promoted on the same value level as ROI of ad agencies and other marketing service specialties.

9. Brand-building will continue to be a high priority. For both the PR agency internally and for their external clients, brand building online and through new media outlets will take priority over many other projects.

10. Trust and ethics will remain a major necessity for agencies and their clients.

A Healthy and Prosperous New Years to All!!

PR Agency Owners Must Become Better Business People

2009-10-05T11:03:00.003-04:00

By Art Stevens

Why is it that owners of independent PR agencies take more satisfaction in generating great ideas for clients than in making more money for themselves? Where is it written in the PR scriptures that making money is gauche? That you're more obligated to your clients and employees than to yourself?

Let me shatter a prevailing myth among PR agency owners: It is perfectly permissible to satisfy your clients and make a lot of money at the same time. How? By learning how to be a better business person—not just a PR professional.

As PR professionals, we've been trained to do the work—for our clients or for our organizations. We routinely immerse ourselves in providing services and our talents to clients. What gets lost in the shuffle is the management of a business. The shift from being a PR professional to running a business can be very difficult. Many professionals who have made the choice to start and run a business have done so to practice their particular brand of public relations. They haven't initially thought of themselves as business owners, entrepreneurs and capitalists. And if truth were told, many of them don't want to be any of those things.

To run your PR Agency as a business first you must learn how to manage your business profitably and satisfy clients and employees in the process. To that end, here are some basic rules you must learn if you want to run your business like a business:

1. Don't allow your total payroll to exceed 50% of your revenues. If your agency has net fee income of $1,000,000, your payroll shouldn't exceed $500,000. If it's at $600,000, then that extra $100,000 comes right out of your pocket—and your family's.

2. Don't over-service your clients. Using the previous example, if you allow your agency an additional $100,000 of payroll, then you're indeed over-servicing your clients. All clients are perfectly happy to allow you to do more for them than they're paying for. They're no dummies. On the other hand, I've met very few clients who didn't feel that their PR agencies were entitled to make a fair profit.

3. Do not automatically hire new employees when you generate more business. This is one of the major mistakes PR agency owners make.

4. Focus all your efforts on making a pre-tax profit of 25%—regardless of the size of your agency. Your benchmarking parameters must be as follows: 50% of your gross net fee income in payroll, 25% in overhead and 25% in profits. If you hold to these benchmarking parameters, you will provide the appropriate level of service to your clients, hold your payroll to the correct proportion—and take home considerably more money.

5. Begin to think about increasing that 25% pre-tax profit to 30%. Heresy, you say? Can't be done? Sacrificing client service? Absolutely not. What this means is that you will place greater value on the services you provide. You will sacrifice less meaningful services to your client and emphasize the most meaningful ones. Remember, PR agencies aren't assembly lines. We must learn to get paid for value added, not for how many news releases we can crank out.

6. Raise your hourly rates. Go ahead. Take a deep breath and do it going forward. I can assure you that if your clients are thrilled with the work you're doing for them, they will not balk.

These six suggestions are a beginning. They are a means to allow you to rethink your role as an agency owner, to re-engineer your business and to help put you on the road to generating greater profits. If you're frustrated that you have nothing to show financially for all your hard work, dedication to clients and employees, and commitment to quality … take heart.

By changing your mindset from that of a PR professional to that of a business person, you can allow yourself to have the best of all worlds.

The PR Industry Will Rebound Faster Than The Communications Field

2009-08-23T11:24:00.006-04:00

By Ted Pincus

Is the public relations profession overreacting to the global economic meltdown?

Have the massive layoffs and contractions at many agencies and corporate PR departments been ill-conceived?

I contend that they are, and that many bright opportunities will be deferred or squandered in the name of temporary economy measures. We should consider a call for reason, and for the avoidance of panic in the face of bearish headlines. Doomsday delusions should not be allowed to ignite compulsive, irrational cost slashing.

According to one of the world’s foremost authorities on the media/communications industry, PR will not only see an early resurgence of demand but—remarkably—emerge from the recession’s wreckage as one of the nation’s fastest growing industries. Moreover, among the communications field, it is projected to be the number one growth segment during these next five years.

These are the views of Veronis Suhler Stevenson, NYC, arguably the leading economic research and private equity investment firm focused on the communications, media and education fields in North America and Europe. It invests buyout and mezzanine funds for recapitalizations, growth financings and strategic acquisitions. To date it has invested in companies that today have realized and unrealized enterprise values of over $14 billion. For 22 years, it has published the annual Communications Industry Forecast.

Its latest forecast report recently disclosed that PR and viral marketing is not contracting at all but actually growing slightly from $5.195 billion in 2008 to $5.448 billion in 2009, although its growth rate is slowing from 7.1% in 2008 to 4.9% in 2009. But the surprising news is that VSS projects this growth rate to sharply accelerate in the coming four years, showing an annual average of 12.5%. By 2013, our field should have volume of $8.069 billion the report says.

That 12.5% growth rate significantly exceeds the 8.0% forecast for Direct Marketing; 5.2% for Advertising; 7.4% for Marketing Services; and 3.9% for Business-to-Business Promotion, over the same time period, VSS says.

What these forecasts portend for PR agencies is that patience and temporary sacrifice—by agency owners—can pay enormous dividends in terms of maintaining momentum to tap opportunities offered by an economic upturn. This means having the fortitude to swallow major cuts in top management compensation and the bottom line, in order to resist layoffs of valuable talent and contraction of facilities. (I can still remember vividly the values learned when I owned my agency over a half century of periodic recessions, during which I took no salary and no profits in order to sustain client relationships and organizational momentum.)

According to our latest StevensGouldPincus survey of 106 leading agencies, those firms that maintain low staff turnover, low client turnover and realistic operating cost structures should be in the forefront of those benefitting from the coming rebound. Those that remain strong and sustain momentum at a short-term sacrifice of owner comp and profits will be the agencies best able to capitalize on the post-recessionary era.

And is one sure to come? As a Great Depression baby and a guy antique enough to have weathered seven recessions and recoveries, I can sense the historic pattern repeating itself once again. Count on it, and be ready.

“OK, the cheese moved…. why am I surprised?”

2009-07-30T10:36:00.002-04:00

By Jennifer A.K. Schafer Cassani

While muddling through the process of reorganizing my office one night last week, I ran through the management section of books up on the shelf. With my mind occupied by topics and undercurrents of today’s economic tide, a snarky grin broke out on my face as I reached for an oldie: “Who Moved My Cheese?” by Dr. Spencer Johnson.

This book has received both praise and criticism for its simple parable about changes in life. My snarkiness waned, however, as I scanned through the pages first read years ago. It was replaced by a nod of recognition and an eyebrow rose in the realization that the same simple wisdom still applies today.

Who Moved My Cheese?, by Dr. Spencer Johnson
In summary:

1. Change Happens: They keep moving the cheese
2. Anticipate Change: Get ready for the cheese to move
3. Monitor Change: Smell the cheese often so you know when it is getting old
4. Adapt To Change Quickly: The quicker you let go of old cheese, the sooner you can enjoy new cheese
5. Change: Move with the cheese
6. Enjoy Change: Savor the adventure and enjoy the taste of new cheese
7. Be Ready To Change Quickly and Enjoy It Again and Again: The cheese will keep moving

Regardless of whether or not you are a fan of the book, hate cheese, hate mice, or both… its message endures. May this brief rumination, at the very least, give you a fresh outlook and motivation to analyze where you are and where you want to go as a business owner. And may it also serve as a catalyst for undertaking a more productive path toward your goals.

Being a big fan of cheese myself, and armed with a hearty aged-gouda and appropriate vino pairing, I sat back and mused over the concept of change in the business landscape and economy. If the only constant in life is change… then why be so surprised when it happens?

Lamenting the reasons and rationale regarding this current meltdown seems futile, because history and cyclical analysis has shown it has – and will – happen again to some extent. Should we not focus instead on preparing our businesses for future insulation from such events?

Like the surge in sales of bottled water, canned food, flashlights and other essentials when forewarned of an oncoming natural disaster, are we surging to obtain essential things to plan and ensure the longevity of our businesses? Unlike an oncoming hurricane or tsunami, we know all too well that forewarning of an economic disaster rarely comes soon enough. Developing a proactive stance, versus reactive, is the key here.

How are you finding sources of renewed inspiration and motivation to help your business weather this economic storm? Have any recent readings given you reason to pause and ponder?

Benchmarking Study Supports Profitability Theory

2009-06-18T15:46:00.009-04:00

By Rick Gould, CPA, J.D.

“Firms that implement changes based on current benchmarks ultimately realize increased profitability and success.”

The above statement has been our mantra since the last major PR economic downturn in the years following September 11, 2001. That recession, coupled with the Tech boom/implosion, inspired us to become scientific in an industry that is the furthest from an exact science.

The 2009 Best Practices Benchmarking Study, based on 2008 results, with 21 critical categories illustrates a glaring distinction between firms of all sizes, regions and specialties and what we call the “Model Firms.”

The study consists of four revenue categories, nine regions plus Canada and thirteen specialties. A total of 106 leading firms across 27 categories participated, a noteworthy sample.

A significant decrease in Operating Profit was consistent in all categories.

[Please click photo to enlarge image]

So… are the days of 25-30% profitability over? Are the days of CEO’s and Executives earning substantial salaries and still having reserves to invest in quality staff, space and technology over?

We say the answer is “NO”.

In contrast, the twelve "Model Firms” firms that diligently manage by benchmarks averaged operating profit of 24.4%. Five of the firms generated operating profit in excess of 25%.

How do they do this, you ask?

They do it by averaging 49.3% in Total Labor Cost, Base Account Salaries of 37.5% and total Operating Expenses of 26.2%. Their Total Costs are 75.5% of Net Revenues.

We have followed these Model Firms for many years.

• They all monitor their stats monthly
• They carefully control their labor costs, keeping it under 50%
• They closely watch all components of operating expenses, totaling no more than 27%
• They create accountabilities and goals that tied to the benchmarks in our studies

Our Benchmark Report has been sent to all 106 firms that participated in the survey. It will be released to non-participating firms and the public July 1st. Feel free to e-mail if you would like us to send a copy directly to you at that time. rgould@stevensgouldpincus.com

New Opportunities for Lobbying Firms

2009-05-26T13:30:00.000-04:00

by Colburn Aker, J.D.

The power of lobbying is still robust in the nation’s capital. Yet, firms face tougher competition. Acquisition or merger could be their best strategy.

Growing corporation are rushing to hire lobbying and public affairs firms. Why? It pays.

A just-released study shows that clients saved $220 for every dollar they spent in lobbying. More than 800 companies received a tax saving of more than $100 billion because of the new law.

“That’s why corporation are pouring more and more money into lobbying every year,” said Craig Holman, a lobbyist for Public Citizen.

There is plenty of business. In three quarters in 2008, more than 40,000 firms filed Senate lobbying reports, with more than 4,000 new firms included.

The Obama Administration has made lobbying a key target of his ethics policies. These moves have angered many lobbying firms, but have had little apparent impact on the ongoing boom in K Street business.

Corporations want the best lobbyists. They naturally go to the best firms. They also may hire the best public affairs firms, which can promote their issues, but have fewer hours (less than 20 %) meeting with Congress to require a report.

I know that a confidential counselor is valuable. Professionals today will evaluate your staff, compare your costs to others, develop an excellent marketing program, and consider the advantages of acquisition or merger.

The issue business is here to stay. Isn’t it time for firms to come together?

Minimizing Exposure to Client Bankruptcy

2009-05-01T09:00:00.002-04:00

by Rick Gould, CPA, J.D.

Visualize this hypothetical:

• You won your largest account against several top PR firms. You have invested time and key staff in servicing this Fortune 500 client.

• The high-profile client instantly elevated your brand recognition. Their fee is $125,000 per month, representing 41% of your net revenue and generating 25% profitability.

• You are very liberal in allowing your bills to be paid in 75-90 days. You’re sure they are good for it.

• You maxed out your line of credit to cover the receivable. You have no access to additional credit lines or capital.

• You then receive an email informing you that your largest client is filing for Chapter 11 protection and you are just one of several hundred creditors waiting in line.

We read daily about the rise in bankruptcies. Numerous solid companies, previously profitable, have filed for Chapter 11. As their credit lines dry up, as suppliers press hard for payment, as professional costs increase in restructuring debt, as operating costs increase and as retaining expensive turnaround firms add to the bleak mix, bankruptcy protection will continue to be used as a tool in this economic downturn.

Additionally, you may have exposure to outside vendors and suppliers with whom you have entered into agreements on behalf of clients. The vendors/suppliers/freelancers have the agreement with “you”. They perform the service or provide materials for an event. They bill your agency; you bill your client. Your client ends up in financial distress or files for Chapter 11. The vendor/supplier/freelancer is entitled to get paid. You now are on the hook for both the amount due to the third party, as well as for your fees for PR services rendered to your client.

How do you ultimately protect yourself from this kind of situation?

Our distinguished colleagues at PR specialist law firm Davis & Gilbert published a February 3 report in their “Insolvency & Bankruptcy Alert” titled “A Guide for Dealing with Advertisers and Vendors in Bankruptcy.” Although mainly geared to the Ad Agency industry, the advice is equally valuable to PR firms.

Following the advice of Davis & Gilbert could save you substantial dollars and stress if you get caught as a creditor in a bankruptcy filing.

Davis & Gilbert outline the following critical legal protection points:

• Review forms of client-agency agreements and other contracts.
• Consider including provisions that would give your agency more flexibility to terminate the contract or change the terms in the event certain early warning triggers are tripped, i.e. consider inserting a provision that allows you to modify payment terms if your client’s financial condition deteriorates.
• Minimize the risk of a preference action by requiring advance payment from any client in financial distress. Advance payments fall outside the definition of a preference and are less vulnerable to attack. A preference is a payment made by your client to you on a “past due” account or within 90 days prior to the bankruptcy filings. If any payment to you by your client is considered a preferential transfer (preference) you may have to pay it back to the trustee in bankruptcy.
• Formalize agreements with vendors and subcontractors to limit any authority of such entities to legally bind your agency.
• Once a bankruptcy petition is filed, your client is bound by the automatic stay which stops all actions of creditors against the debtor. Violators are held in contempt of court.
• Your client may, at their discretion, elect to assume or reject your contract. If your client assumes the contract, it must make good on all past due balances. The choice, however, is the debtors and the client may not be able to terminate the underlying contract
• As a reward for providing your continued services to your client in Chapter 11, you may be considered an administrative expense for the services provided after the bankruptcy filing. This will put you higher up in the payment priority ranking, but is not a total guarantee for payment. If ultimately a full liquidation (Chapter 7) ensues, even administrative expenses may be foregone.

Conclusion

Legal analysis is required to assess your exposure and resolve any preference attack. It is imperative to have this conversation with your attorney to mitigate the risk of getting caught up in a client’s bankruptcy filing.

For additional information, please contact:
Michael Lasky, Partner at Davis & Gilbert - 212-468-4849 or mlasky@dglaw.com