[Editor’s Note: What is PR’s financial future? In late June, we asked Rick Gould, managing partner of Gould + Partners, for his views on M&As and weathering the economic morass of the pandemic.]
PRNEWS: Rick, what do your phone calls sound like these days? What challenges are PR firms asking you about?
Rick Gould: The number-one concern is fear of a second wave of the pandemic. Most consider the uptick in several states as part of the first wave. The uncertainty about a second wave makes many C-suite executives cautious with major investments such as acquisitions, executive compensation increases, hiring and new offices.
A second major concern is whether or not we will get another stimulus, such as the Payroll Protection Plan (PPP) and Economic Injury Disaster Loan Program.
PPP was a savior for a majority of PR firms but, as could have been predicted, firms used up the PPP funding in the eight weeks of the program on retaining employees...they still lack the revenue to continue keeping staff on the payroll.
PRNEWS: One of your specialties is M&As. Has there been much activity during the pandemic? Should firms be considering M&As now?
Gould: There is activity, but mainly transactions that were in discussion prior to March 16, the date that all transactions came to a grinding halt.
There is new activity, but not at the aggressive pace that we were seeing prior to the pandemic. And that makes total sense because of the uncertainty with a possible second wave, the economy and the November election.
On the other hand, owners who want to sell are lowering their expectations on valuation, especially if they lost substantial revenue. So, buyers with a decent war chest can acquire firms at a discounted price. It is definitely a buyer’s market and, I believe, will be for the foreseeable future.
Buyers can also be more selective since there will be more available sellers as a result of the boomer generation, who are ready to sell, and [there will be] financial pressures on many smaller firms.
PRNEWS: You’ve written about recession-proofing a PR firm. You suggest managing by the numbers, keeping labor costs at 50 percent of net revenue, operating/rent at 25 percent and adding specialties, among other things. We’re five months into the pandemic. What are you recommending now?
Gould: My recommendation is to continue to have the above as goals. For the first six months of 2020, most firms had labor costs in excess of 50 percent of net revenue because of a loss of net revenue as a result of the pandemic. But I would not change goals.
PRNEWS: Let’s say I’m running a small or medium-size firm and I’ve not done what you recommended above. What are the first things you’d tell me to do now?
Gould: I would advise you to regroup, get your infrastructure and organization chart in place and very carefully watch labor costs. If there is not a second round of payroll protection stimulus, then layoffs will need to be the answer so the labor cost can support the revised revenue forecasts.
PRNEWS: When you issue data, you divide firms into large, medium and small based on net revenue. Is any category of firm surviving the pandemic better than the others?
Gould: Consistently, firms of $10-$25 million have been the sweet spot in both net revenue growth, profitability and billing rates, as well as maximum valuation. That seems to be the point where firms have infrastructure in place and their labor costs do not rise at the same rate with increased revenue.
When firms are larger than $25 million, we find the profitability percents decreasing, due to increased numbers of offices and the need for higher level, more expensive executive leadership.
We are presently tabulating our 2020 survey. I believe that will still be the case, based on data submitted to date.
PRNEWS: Some PR pros see a small silver lining in that the pandemic has demonstrated the need for communicators. How are firm owners thinking about the future? Are they optimistic or pessimistic?
Gould: I would say cautious optimism is the best description of the mood of the industry. PR owners are inherently optimistic, but they received a reality check with the pandemic. They need to plan for the worst but hope for the best. They need to manage for growth and profitability. They need to run their firm as if they plan on selling it to receive maximum valuation.
They also need to be laser-focused on the issue of diversity and inclusion, which has become an increasing concern for the PR firm C-suite. This has been a hot issue for the past 20 years but, unfortunately, little has been done. I believe this will be the year that all firms will finally focus on making the industry more diverse and inclusive.
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