Successful entrepreneurs don t always have a clear vision for their businesses

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1 Maximizing the value of your business as an asset or a lifestyle by Roger Fischer and Merrill Rose Successful entrepreneurs don t always have a clear vision for their businesses from the outset. And, what they want from the business may evolve over time. In some cases, the driving force for the business is a desire to support a certain lifestyle. In others, the entrepreneur is seeking to build an asset that can ultimately be monetized. For owners of public relations, public affairs and marketing communications firms, both are viable options and both carry risks and rewards. The key to maximizing the value of any firm and assuring owners can meet their personal objectives is to consciously choose to be principally an asset firm or a lifestyle firm and manage the business accordingly. Option A Advisors, a management consulting and advisory firm, works with independent communications agency owners to help them define and pursue their plans for the future. Over the past year, we have spoken with dozens of agency principals about the distinctions between asset and lifestyle firms and the management strategies that must be employed to enable each type of firm to succeed. This white paper reflects insights gained from these conversations as well as from our own work with dynamic agencies across the country.

2 Distinguishing Characteristics of a Lifestyle and an Asset Business T here are a number of qualities that distinguish each type of firm. Looking first at the perspective of owners of businesses intended primarily to support their lifestyles, these entrepreneurs tend to view their businesses as extensions of themselves. Their names are often on the door. Their business provides them with income to allow them to live the way they want to live. These owners are passionate about the work and emotionally attached to their roles as public relations counselors. They want to stay close to their clients and be actively engaged in client service. As they think about the future, they think about passing the business on to loyal partners or heirs. TABLE 1 A Lifestyle Business Is an extension of the owner and his/her identity Provides income to let the owner live as desired for as long as desired Contributes to the owner s personal/social life Has an informal workstyle Makes decisions to build and protect the owner s personal reputation/brand May live on under the leadership of loyal partners An Asset Business Is an investment the owner actively manages Provides income and savings to support the owner s plans for the future Isn t closely tied to the owner s personal life Has a disciplined workstyle Makes decisions to increase the value of the firm as an investment Will be sustainable without the owner at the helm Those owners who view their business as an asset, on the other hand, treat it like an investment. They want it to provide them income and savings to support their plans for the future. They, too, are passionate, but their passion is running the business; they enjoy being entrepreneurs. They are less involved with clients and spend most of their time managing the business and helping it grow. They d ultimately like the business to be sustainable without their active involvement. While there are certainly many variations on each of these models, and few agencies will see themselves as entirely in one category or the other, the fundamental distinction between a lifestyle business and an asset business serves as a useful framework for agency management. Benefits and Risks of Lifestyle and Asset Businesses Although agency owners often assume that it is better to run a business as an asset than as a lifestyle, we believe that both models are valid. And, both types of agencies offer benefits to their owners and entail some risk. Agency owners who choose to run their businesses as a lifestyle, for example, especially value the freedom they have to manage the business and the financials as they desire. I have more freedom and flexibility to try different things to serve our clients, even if they aren t readily supportable from a financial standpoint, one owner says. We can make a managed decision to over-service clients. Others say a lifestyle business enables them to focus on what they most enjoy. As one owner put it: I like to be close to the work. I don t really like managing lots of people or numbers. A lifestyle business also gives owners the ability to make decisions that are more intuitive and support their personal values and preferences. For one owner, this means involving friends and family members in the business something that may be considered risky by a more dispassionate owner. I like to be close to the work. I don t really like managing lots of people or numbers. 2

3 I tend to rely on my gut, another owner of a lifestyle agency told us. Especially when making new hires, I act in the moment. A lifestyle business also entails some risks, particularly when the personal and professional lives of the owner are closely intertwined. This leaves the owner vulnerable to adverse events which could not only affect their income but could also cause irreparable damage to the business, particularly if the right systems and people are not in place to back up the owner. Business issues or crises could also place strain on personal relationships that are tied to the business. Running the company is the greatest job I ve ever had. I am less involved in client work now. I m a business junkie. For owners of asset businesses, the primary benefit is having the ability to build and monetize the value of the business. They like the business side of the business. Running the company is the greatest job I ve ever had, says one owner. I am less involved in client work now. I m a business junkie. Perhaps anticipating a time when they will no longer be actively involved in leading the business, the owners of asset businesses tend to be less emotionally tied to the business. One owner says: My name is not on the door I want this brand to stand the test of time and mean something after I am gone. The desire to grow the asset over time dictates business practices employed by these owners. I keep as much money in the business as I can and try to invest in areas that will build the brand, one owner says. I don t like to take on debt if I can avoid it. With an asset business, there is a risk that over emphasis on financial management can overshadow other crucial aspects of the business. You don t want people to feel beholden to the numbers everyday, one owner told us. It s important to try and foster an entrepreneurial environment where people can see their opportunities to grow and develop. Owners of asset firms are also taking a risk if they forego investments in the future to meet stringent profit margin standards and thereby restrict their growth potential. The Evolution of An Agency Business Entrepreneurs start communications agency businesses for different reasons. Counselors may go into business for themselves and end up growing a business almost unintentionally without a vision or a plan. Others leave agency businesses for a second career as entrepreneurs to find greater work/life balance and more financial stability. Whatever the origins, owners may change the way they think about their businesses and the businesses may evolve as a result. Among factors that can influence the way owners think about the future and their own plans are: The owner s age and stage of life; The age and stage of life of the owner s business partners; The growth stage and maturity of the business; The economic environment; and The state of the public relations, public affairs and marketing communications industries. Agency owners with whom we spoke described the changes their agencies have gone through. For example, the co-founder of a firm based in the Midwest with just over $10 million in revenue described her journey from an asset to a lifestyle firm and back: 3

4 When we started out, our goal was to build a quality business quickly and sell it. Our mantra was $5 million in 5 years. Then we hit a level where we were doing really well and started thinking: we love this, love the lifestyle, why should we sell? When the recession hit, we then had to be totally focused on the business as an asset. We controlled every cost we could, didn t take any money out, ran a really tight operation. Just as that firm s trajectory was shaped by a combination of internal and external factors, another fast growing firm told us a similar story. The owner of this firm with one office and just under $10 million in revenue began as a lifestyle firm with no intention to be anything else: I started my firm in an inaccessible market. It was a virtual model before there really was such a thing. I worked from home and so did everyone who worked for me. We were all young women with kids. I told them you can be any place, at any time, just so you can get the work done. We built the business working this way, and then there came a point in time when I wanted to change. I realized this business could be worth something someday. I should run it as if I want to sell it tomorrow. Recognizing that owners may change their business objectives over time, choosing a single path becomes more important as business owners begin to focus on their personal goals for the future. Options for The Future Owners of both lifestyle and asset firms have options for the future which may be influenced by the following factors. Geography. It is more challenging for an owner to run an asset firm with the intent of one day monetizing the value of that asset if the firm is based in a location that constrains its growth potential or ability to integrate operations with those of a larger firm. A lifestyle firm, on the other hand, is a good option for someone who chooses to live and work in a tertiary market. Client Mix. A firm with a client roster of blue chip companies and/or brands has more appeal to a prospective buyer than one in which the clients are predominantly local or regional organizations. In the latter case, options may also be more limited because the reputation of the firm and the client relationships are tied to the principal. TABLE 2 Options for Lifestyle Businesses Offering employees a buy-out Merging or forming a strategic alliance Handing down the firm to heirs Winding down the business Options for Asset Businesses Selling the firm to an appropriate buyer Securing an equity investor Offering employees a buy-out Acquiring or building other assets Specialization. Expertise and experience in a highly attractive field can trump limitations such as geography, making it possible for certain kinds of specialist agencies to be appealing to a prospective partner regardless of where they are based. 4

5 Owners of lifestyle businesses typically want to stay active in the business and continue to earn income from it for as long as they desire. To achieve this goal, their options may include offering employees a buyout, merging or forming a strategic alliance with another firm, or handing down the firm to heirs. In some cases, owners have no interest in having the business continue and may choose to wind it down when they are ready to leave. Owners of asset businesses, on the other hand, usually want to transition away from the business at the right time with sufficient funds to pursue other interests. The option most commonly pursued to achieve this goal is to sell the firm to the appropriate buyer. Other options include securing an equity investor or acquiring or building other assets. By acquiring other companies themselves, they may be able to achieve efficiencies with them and allow the firm to be more profitable and therefore more attractive to a prospective buyer. A less common, but emerging strategy for asset firms is to develop their own products that enable them to generate revenue that does not have to be tied to labor. This kind of asset may be licensed or sold on its own or be used to add value to the company. Offering employees a buy-out is also an option, but is less common because this option is not likely to maximize the owner s payout. Agency owners can expand their options and assure they will be able to pursue their desired exits by extending the timeline for achieving their goals. Another strategy for expanding options is for owners to be more asset-minded in the way they manage their firms, even if they have lifestyle businesses. Business Management Strategies Owners of lifestyle and asset firms have similar issues to consider in managing the business to achieve their goals, yet they must approach these issues from different perspectives. Strategies for Lifestyle Firms For owners of lifestyle firms to achieve their goals, they must manage the business to sustain revenue and profitability at levels sufficient to provide an appropriate income stream for a long period of time. Following are strategies they should consider. Invest in the firm for the long term to assure its continued viability. Owners of lifestyle firms have greater flexibility to invest (or not) as they see fit. If they choose to invest in people or programs they can decide when and how much they want to invest. If they have a personal need for additional cash one year, perhaps for an investment, a home purchase or to fund college for a child, they can take more money out of the business that year and reinvest less in the firm. Oversee operations to achieve desired annual income and keep growth manageable. Growing too much, or too fast can put strains on a lifestyle business and demand investments in administrative and other support functions. Owners who prefer not to make such investments should manage operations so that senior managers handle operational responsibilities as well as income-generating client service. Develop a senior management team that values and respects the owner s continued involvement. The senior managers of a lifestyle firm need to have patience that the owner will not be leaving any time soon; if one or more of them want to assume the roles and responsibilities of the owner they are likely to be disappointed. 5

6 Plan succession so that the owner s role and those of the other members of the senior team can continuously evolve. Ideally, the senior management team of this type of firm is comprised of a fairly equal group of practitioners. They should be people who work well together and can envision being in business together for a long time. As the owner phases out, a cohesive team can divide his/her responsibilities to take the helm. Strategies for Asset Firms Owners of asset firms need to manage the business so that they can ultimately get a large sum payout over a short period of time through an event that allows them to realize the full value of this asset. Following are strategies they should consider. Seek to maximize value as it would be perceived by a prospective buyer. A buyer will be looking for a firm that can sustain success as part of a larger organization. They will take into account not only the tangible financial drivers of agency value, but also the intangible drivers such as agency culture, brand proposition, leadership depth and talent, organizational structure and the firm s sales and marketing process. Owners who want to sell should assess their performance in each of these areas and make appropriate improvements prior to seeking a partner. Drive towards consistent performance at or above industry standard. For asset firms, predictability and stability are important. Within the communications industry, one proven path to profitability is a financial model that allocates revenue into three categories: people costs (50%), overhead (25%) and operating profits (25%). Asset firms should seek to conform to these ratios year in and year out. Develop a senior management team capable of leading the business after the owner leaves. A potential buyer will seek to assess whether a senior team can carry on the mantle without the owner and if they can function well within a larger organization. Since there will be no opportunity for equity ownership after a transaction, owners should determine whether offering equity before that time is necessary to retain and motivate key staff. Plan succession so that the owner will be followed by a member of the firm s senior team who can inspire confidence in the leadership of the firm after the owner departs. Assuming the firm is sold to a third party, the owner should have a designated successor who can step in and replace him/her at the conclusion of the owner s earn-out or contract period. Strategies for All Firms The following strategies are important for the success of both lifestyle and asset businesses. Nurture a culture that recognizes and values the way the owner runs the business and the benefits that offers to staff. A vital culture is critical for any successful business. Both lifestyle and asset firms need to assure that staff can embrace the work style of the firm and feel that they have a role in its success. Lifestyle firms that seek to become more asset-minded should keep in mind that it will be difficult to impose more financial discipline in a culture that has not previously valued it. It is very easy for staff to get used to over-servicing clients, writing off overruns and otherwise avoiding the conflicts that can arise in client budget discussions. Asset firms need to balance financial discipline with a workplace that keeps employees happy. Have a clear vision for the business and strategic plan for achieving it. Planning is important to assure owners have the time and ability to make essential changes in the business before they are ready 6

7 to effect a transition. In addition, other key leaders need to understand where the owner is headed and the implications for them. Absent a clearly articulated plan, other senior leaders could make ill-informed decisions based on their own assumptions that would put the owner in a difficult position. Owners who know they will ultimately seek a partner should make sure their plans specify the role they want the partner to play. Owners of both lifestyle and asset firms also stress the importance of having access to professional legal, financial and management counsel and to a network of peer organizations. It s important to surround yourself with people who have been through what you ve been through and can help you learn, said one owner. Membership in the Council of Public Relations Firms and participation in international agency networks are two examples of resources owners have found valuable. About the Authors Option A Advisors is a management consulting and advisory firm that enables communications agency leaders to achieve their ambitions by identifying and pursuing their best options for realizing the full value of their agencies. Its principals have shepherded the growth and evolution of firms ranging from specialized agencies to some of the world s largest and most diversified public relations firms. Option A Advisors is a Premier Partner of the Council of Public Relations Firms. optionaadvisors.com Roger Fischer Principal Roger draws upon more than three decades as a public relations business owner to advise agency principals. He started his own public relations agency business in 1983, making the conscious decision to focus the firm exclusively on healthcare in Under his leadership, FischerHealth grew into one of the most successful public relations firms in the category, being named Healthcare PR Firm of the Year and Creative Agency of the Year by the distinguished Holmes Report. In 2003, Roger orchestrated the sale of FischerHealth to Omnicom in order to provide the agency s clients greater depth of services and international reach. Roger left the firm when the full integration with Omnicom s Porter Novelli business unit was completed in Roger has served as a faculty member for the Sedona Roundtable, an exclusive annual event for agency principals and owners hosted by Management Strategies. Contact: roger@optionaadvisors.com Merrill Rose Principal Merrill brings more than 20 years experience as a global public relations agency executive to her consulting. During her 18-year career with Porter Novelli, Merrill played a central role in fueling its growth. At the time she left the firm in 2000, she was an Executive Vice President and member of the company s Executive Committee, responsible for strategic planning and development of specialized practice areas and major accounts. Merrill conceptualized and led new agency functions at Porter Novelli that became core to its success as it evolved from an independent firm to a top-ranked global agency owned by Omnicom. She created and lead its first companywide practice, was based in Europe for two years where she created the agency s first guidelines for managing business across borders, and served as General Manager of the company s Chicago office, leading the integration of an agency that had been acquired by the firm. Contact: merrill@optionaadvisors.com