There’s lots of private equity interest in out of home to judge from the calls Billboard Insider gets. This is the first column in a series on private equity and out of home, based on our experiences raising equity for our own companies and as a private equity investor in other out of home companies. Today we will discuss why you may want to add an outside partner to your out of home company.
Many Billboard Insider’s readers own sole proprietorships or single member LLC’s. By avoiding partners you stay nimble and avoid ownership dilution. Billboard Insider can think of 4 reasons to add an outside equity partner:
- to execute a succession plan
- to diversify risk
- to grow faster
- and to access money and administrative resources.
Succession
We want to live forever, but we don’t. Some out of home execs who have died recently include Thomas Young, Mitchell Matson, Gene Wingate, Barry Cramer, and Don Davidson. Adding an outside partner can be a key piece of an out of home company succession plan. It provides your company with someone to continue the business or maximize value in a sale if something happens to you.
Diversification
It doesn’t make sense to keep all your eggs in the same basket, especially as you age. One way to diversify risk is to sell off a share of your out of home company to an outside investor, while retaining control. This allows you to begin to diversify your assets outside of your company. Adding members also reduces risk relating to bank guarantees. Most banks insist on an unlimited guarantee for the owner or majority shareholder of a company. If there are multiple owners of a company a bank may accept limited guarantees from each owner in place of unlimited guarantees. And you may not need to guarantee at all if you are a non-controlling shareholder.
Growth
As a sole proprietorship you can grow only as fast as your personal checkbooks permits. Let’s say your own a small market plant of three static structures having 6 faces. You rent each face for $1,000/month. Sales commissions are 20%. Lease costs are 20%, Utilities are $50/face. Other costs are $50/face. Your three signs will generate approximately $14,400/year or enough money to internally finance one new sign every three years. In a medium sized market with monthly revenue/face of $1,000 and a build cost of $60,000 your plant will generate enough money to internally finance one new sign every two years.
If you want to grow faster than that you need to add an outside partner and an outside checkbook.
Access to money and resources
A good outside equity partner can provide management help and industry expertise. Enjoy developing locations but don’t enjoy hiring and firing employees and handling the books? Take on an outside partner who is willing to handle the accounting or assist with personnel matters. I’m one of several equity investors in a small out of home company. One partner handles the company’s accounting. I manage the company’s banking relationship and website. A third partner handles our legal matters. We have a 30 minute all hands phone conference once a week to review what’s happening and discuss key decisions. Our manager can spend the rest of the week developing locations and selling ads.
Our next column will talk about what to look for in an equity partner. If you have any questions about private equity, contact Dave Westburg, davewestburg@billboardnsider.com, 206-910-1283.
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