Four ways a PR agency can suddenly shut down

agency shutdown

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. 

Fraud

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.  The negative economic after-effects of the Coronavirus Pandemic is resulting in huge financial struggles, that could potentially be worse than the Great Depression of 1929. Covid-19 is wreaking absolute havoc on a global scale with millions of people under forced lockdown, and businesses going bankrupt. Multiple laws have recently been passed to form the COVID-19 pandemic easier for little businesses to survive. Back in August 2019, the Bankruptcy Code was modified to incorporate the tiny Business Reorganization Act (SBRA). In February 2020, the SBRA went into effect. It gives small business owners longer to pay off their debts when filing for Chapter 11 Bankruptcy. While the protection program won’t usher in any revenue, it does allow you to restructure your debts.  The SBA COVID-19 help for providing bankruptcy solutions. 

The following scenarios highlight the extent of the problems and challenges we are being faced with.

  • Record unemployment, and as a direct result, a significant boost in crime, bankruptcies, and homelessness.
  • A money-starved population that has not conserved their financial assets during the previous periods of growth, will anticipate being covered by their Federal Governments throughout the hard times. Some nations will of course be much better able to do this than others.
  • Banks failing and restrictions on holding or withdrawing of cash. Federal Governments will have a very hard time to cover their insurance of bank deposits, and some people could even lose their savings. This could be a repeat of the 2008 Banking Crisis, but just somewhat bigger.
  • Massive bailouts from Government, but which will fail to alter the trend until it has run its course.
  • Deflation will happen, and this inevitably implies lower rates of acquiring certain items, but with accompanying lower wages too. It means that the value of cash increases relative to things you can purchase like stocks, houses and groceries. Their will however be less money to go around.Oklahoma City bankruptcy attorney will definitely help to the peoples or firm having economical crisis.They can make strategies to get back your economic statement in a profit.
  • Major debts written off and lots of insolvencies. Deflation occurs because the masses of financial obligation built up during the past years of growth ended up being crossed out, and so the real quantity of money in the system is less. Central banks will not have the ability to avoid this by printing cash since to grow the supply of money, the commercial banks need to be lending a lot of money. As a consequence, people and businesses will stop borrowing due to fears about the future.
  • Possible long-term and duplicated quarantines and disturbances to regular company procedures for anywhere from 3-24 months. While longer terms than is less likely, it is still a possibility. Fear, instead of science can sustain lockdowns, especially with federal governments motivated to be as stringent as the next nation to prevent looking bad. There are presently lots of scientific unknowns, with leading scientists tend to talk about how much they don’t understand, thus exercise caution.
  • More insecure feelings among society and a less inclusive state of mind. People will relate to smaller sized groups that are more like themselves and have an increasing distaste for individuals not in those groups, whether it be political, ideological, race and even food options.
  • An increase in distrust and blame between nations, with restrictions. Damaged relationships between countries are expected to increase. There will be an increase in national self-preservation as opposed to working together like a global community. Aid from other countries will be regarded as having ulterior motives.
  • Governmental control. Numerous nations will have developed precedence and laws to increasingly control and screen residents, which will be supported by more draconian measures. This will be an attempt to keep society healthy, but likewise anticipated to be aggressively opposed by those not favouring authoritarian control.
  • A reaction against big businesses and the wealthy, particularly the previous big winners who had doubtful ethics. The role of conglomerate platforms like Google and Facebook could come under significant scrutiny, as well as the banking sector who are perceived to work under a cloth of secrecy.

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.

Cashflow problems

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, at the end, all of this could have been avoided by having a free invoice generator. 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.