12 Dec Four ways a PR agency can suddenly shut down
Commercially PR firms are pretty simple. Revenues tend to be predictable since most clients are on a monthly retainer. Costs are relatively flexible since payroll and staff costs are the majority. As you win more clients, you can hire people. Beyond M&A, there isn’t much need for debt, there’s no R&D, not much capital required for plant or machinery, and no inventory. Which is why the news of a sudden agency shutdown is a surprise. This happened today with a firm in the UK called Otto. I’m not familiar with this firm personally but it had been going four years, had a few brand-name clients, an established leader and eight staffers. Then boom – closed. Of course, that’s the shareholder’s right but it’s uncommon. It got me thinking about why agencies suddenly fail. Knowing might help us avoid it happening, so here’s a watchlist:
Overconcentration on one client
It’s possible to be loved to death by a single client. I’ve seen agencies with revenues over $20m and client concentration above 75% of revenues. Great business, well run but if that client goes or is acquired, the agency is in serious trouble. More frequently you see this at about 40% of revenues (and perhaps more of profits). It’s hard to dilute these mega clients, since they have so much project potential, and the agency is obliged to take those on to prevent another getting a foot in the door.
Many agency leaders are creative practitioners. They love what they do and are great at it, which is why their agencies grow. But they don’t as a rule enjoy the commercial aspect, so delegate that to a financial head. It’s rare but you do see fraud in our sector. If this can happen to sophisticated agencies, it can happen to any – and some might not survive.
Over-extended on property
The one fixed cost in a PR firm is property since it’s tied to a lease. While it’s usually in the 7-10% of costs, that can escalate if there’s a sudden downturn in the business. Even after a RIF, you can be left with a large space at a time when it’s hard to sublease it. This is what seems to have happened to one of the hottest agencies in 2002. Neihaus Ryan Wong counted Yahoo! and Apple among its clients. The dot-coms crashed, the agency downsized but there wasn’t the runway to sell due to costs associated with property. This took everyone by surprise since NRW had some fine staff and was an excellent shop.
This is probably the most common. There just isn’t enough oil in the engine. Counterintuitively this can happen when the agency is firing on all cylinders and growing quickly. The agency hires ahead of revenues, some major clients come on board with ‘60 day payment in arrear’ terms, the finance team are short-staffed and issue invoices a couple of weeks late, perhaps there’s an office move in the works which is distracting and a cash/time suck, and suddenly there’s a cash squeeze. There are warning signs, and also for well-run firms often sources of short-term liquidity but if the owners have a habit of drawing down too much profit share, this can leave a firm exposed.
Of course, there are many other ways that companies can fail – perhaps the owners fall out, or the principal is no longer able to work. Those are often resolvable issues or lead to an orderly disposal of the business, even if at a discount. It’s rare to seem firms implode. And while we’re always peering through the darkened windows of these firms trying to piece it together – client concentration, fraud, property costs and cashflow often seem to be the primary causes.