ADVERTISING

Big Billings for a Small Payroll

Business for sale: An Illinois ad agency for $3.5 million.
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When they launched this advertising agency in 1996, the two founding partners wanted to be free to do what they did best, which was coming up with creative advertising campaigns. So they set up a series of informal strategic alliances with other small marketing agencies to fulfill client needs such as media planning and media buying. Though the owners limited themselves to creative work--and hired only four full-time employees--the agency gained a toehold in a highly competitive market.

Today the agency has about 25 clients. The accounts cover a range of industries, but most of them are franchised chains that serve consumers at the regional or national level. The agency's gross billings (the standard financial measurement for the ad industry) stood at $5.1 million in 2006, down $600,000 from 2004 because of the loss of a major account. By persuading clients to pay by annual retainer on top of commissions, however, the agency enjoys higher gross profits and earnings today.

The founders have set aside $150,000 to help a buyer cover the cost of hiring an executive to replace them. But even though one of the partners is nearing retirement, they hope to stay on at the business working for a new owner.

The Asking Price: $3.5 million. Though the partners would prefer to continue to manage the business under a new owner, they will consider a deal wherein they exit the agency after a short period of transitional assistance. Seller financing for a portion of the deal is possible, and the owners will rent their offices to a buyer.

Price Rationale: Standard ad agencies have been selling for an average multiple of five times earnings, says AdMedia Partners, a New York City investment bank. The asking price here is just shy of five times 2006 earnings. (The agency handles digital work but not enough to fetch a premium price.)

Pros: AdMedia says that for an agency of this size to be healthy, its revenue per employee should fall between $150,000 and $200,000. With nearly $200,000 in revenue per employee, this agency is right on target. Plus, several clients are growing fast, which could translate into higher billings down the road.

Cons: The co-owners handle a hefty share of account services themselves, so a buyer either will have to learn to live with them or replace them very carefully. To make this deal pay off, a buyer will want billings to rise above $5 million. That may mean hiring more staff, which could temporarily cut into profits.

The Bottom Line: This is a small but solid agency facing a classic Catch-22: To improve billings, it needs to add staff, but that will make it harder to preserve higher profits. The ideal acquirer is probably another agency that wants to expand into the Midwest market or would like to add a set of consumer accounts to its client mix.

Company
Financials
2004 2005 2006
Gross
Billings
$5.7 million $5 million $5.1 million
Gross
Profit/
Revenue
$879,831 $956,911 $1.1 million
Gross profit
as % of
billings
15.4% 19.2% 21.2%
Earnings
(EBIT*)
$524,910 $748,500 $730,793

*Earnings before interest and taxes. (The advertising industry uses EBIT as a financial measure instead of the more familiar EBITDA because agencies do not have significant capital expenses to depreciate or amortize.)

Inc. has no stake in the sale of the business featured. The magazine does not certify the accuracy of financial or other information provided by the seller. Inquiries should be directed to Rex Slagel of Vercor (815-609-5019 or rexs@vercoradvisor.com).

Inc. also published paid business listings in the back of the print edition of the magazine.

Last updated: Jun 1, 2007




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