Vic Root has been involved in billboard acquisition for more than 50 years. After working with an international public accounting firm in the 1950s, he went to work for Naegele Advertising in Minneapolis and has been deeply involved in the industry ever since. His work for Naegele consisted mainly of purchases and sales of outdoor advertising operations around the United States. He was involved in the accounting, tax analysis and financing of more than 36 purchases from Harrisburg to Oakland, California. In 1969, Mr. Root became an independent consultant specializing in the merger and acquisition of billboard companies. In the past 33 years he has been involved in more than 68 transactions spanning the nation. In addition to putting together transactions, Mr. Root has prepared valuations for others and has been called upon many times as an expert witness.
While he has helped the nation’s largest billboard companies make acquisitions, he has been particularly active in working with small and medium-sized companies in cities and towns of all sizes. He has seen the prices for billboards soar to unprecedented heights during the late 1990s and then ease back to more reasonable levels in the past year.
According to Mr. Root, sign companies often sold for a price equal to two-times annual sales revenue in the 1950s and 1960s. A sign plant generating $2 million in yearly advertising revenue would typically be worth $4 million. Buyers often made a down payment of 25% and signed an installment Promissory Note for the balance at 8% or 9% interest. Prices rose irregularly in the 1970s and 1980s before slipping back at the time of the recession in 1991. Prices began rising again and peaked in the late 1990s before leveling off in 2001. Mr. Root reports that there are fewer billboard plants on the market in the first half of 2002, partly because sellers sometimes cannot get their asking price. He has seen prices decline slightly from a rule of thumb at 55 months revenue (4.6X annual sales) in 2000 to a level closer to 48 months (4X annual sales) in early 2002. This softening is partly the result of lower advertising spending that has affected billboard companies throughout the United States.
Mr. Root believes that prices will firm up again as soon as ad spending rebounds from the current recession. With a limited supply of existing signs and permits difficult to obtain in most areas, prices should continue to move higher in the future.
Having been directly involved in many sales of billboard plants, Mr. Root has a clear understanding of the issues that buyers and sellers find most important. He has identified eight elements that are considered carefully in sign acquisitions.
- Population of the market
Advertisers usually pay the highest prices for signs in densely populated areas where the most prospective customers will see a message. Billboard revenue tends to be highest in highly populated areas. The largest billboard companies in the U.S., Viacom and Clear Channel, have concentrated their acquisition efforts on larger markets in recent years. This often leads to high prices for billboards.
- Concentration of structures
A billboard company can minimize its costs of operation per sign if many units are located closely together. Messages can be posted faster and cheaper on 10 signs close together in a metropolitan area than 10 signs scattered along distant stretches of highway.
The concentration of structures by one company also can provide good coverage of the entire market for advertisers.
- Zoning restrictions
Local zoning regulations are very important to the value of billboards, but they can be a two-edged sword. Existing signs are very valuable if new signs are prohibited because competition can be kept out. On the other hand, very restrictive zoning may prevent a billboard company from adding new locations to expand the company. Careful analysis is necessary for buyers to understand and assess the importance of zoning restrictions.
- Cost of operations
In addition to a thorough review of expenses such as personnel, vehicles, and so forth, most buyers examine the land lease portfolio very carefully. High-cost leases that will remain in force well into the future can sap the profitability of a billboard plant. On the other hand, too many locations that are rented only month-to-month can raise the risk that sharp increases in rental rates may be demanded by landowners. Buyers prefer billboards located on land with low lease rates locked in for long terms.
- Condition of the structures, and illumination
Most buyers seek billboard plants that have modern well-built structures illuminated for night viewing. Older billboards, usually made of wood, raise the incidence of repairs and even the possibility that a sign could be lost forever. Many jurisdictions have regulations stating that damage to a sign that exceeds some percentage of cost, say 50%, prevents the sign from being repaired. It must be taken down permanently instead of being repaired. Older wooden signs may also be unsightly and draw more criticism by the public. Illumination allows billboard messages to be seen at night as well as the daytime. This means more exposure time to potential customers, and more demand by advertisers. The condition of structures and illumination are important factors to many buyers.
- Competition for advertisers
Nearly every business owner would like to have as little competition as possible. Billboard companies are no different. A sign plant that dominates a market where new permits are difficult to obtain will have a more dependable occupancy level. Advertisers will need to use existing signs to get their message out.
- Economic conditions in the market
When the economy is weak, advertisers usually pull back ad spending. This happens both nationally and locally. Some communities that are dependent on a particular industry can suffer serious economic declines for extended periods if the main employer in town has financial problems. Communities with strong and well-balanced economies are more attractive to billboard buyers because the risk of losing advertisers is reduced.
- Growth potential
Buyers of billboard plants can achieve growth in two primary ways. First, increased revenue can be achieved by raising rates and increasing occupancy levels if a plant is underutilized. Some billboard companies do not keep their rates up to market levels and they do not maximize their sales efforts. This can cause under utilized plants and can present a growth opportunity for a buyer. Second, growth can be achieved by finding new sites and erecting more signs. While this has become more difficult in recent years as local restrictions have spread, it is still possible to find new sites in many areas. Growth in the number of signs can also come from purchasing small billboard companies or Mom & Pop signs in the same area. Buyers tend to pay higher prices for billboard plants that have growth potential.