Cracker Barrel a top outdoor advertiser.

A recent article on the public restaurant chain Cracker Barrel says the company is a huge billboard advertiser.  Cracker Barrel caters to travelers and billboards are great at reaching travelers.  Here's a direct quote from Cracker Barrel's most recent 10-k:

"Outdoor advertising (i.e. billboards and state department transportation signs) is the largest advertising vehicle we use to reach our traveling and local guests.  In 2013 we had over 1,600 billboards and this expenditure accounted for 49% of our tortal advertising spend."

Get in touch with Cracker Barrel if you have signs near their stores.

Outdoor Revenue up 3.5% in third quarter 2013

The Outdoor Advertising Association of America reports that US outdoor revenues rose 3.5% during the third quarter of 2013.  Outdoor revenues grew slightly less than the 4.1% growth in US GDP in the third quarter.  Outdoor revenues have risen for 14 straight quarters and outdoor has performed better than most other US Media sectors since the 2009 recession.

Billboard Loan Fees and Their Impact on Financing Costs

Am amazed how often borrowers begin a conversation with me by saying "what's your interest rate?"  Interest rates are important, but you also need to take into account loan fees and prepayment penalties in computing the total cost of a loan.

I typically charge a 2% loan fee, a 1% transaction fee and an interest rate of prime plus 6% with a floor of 12% for a five year commitment.  There is no prepayment penalty and no success fee or exit fee.  The annual cost of one of my loans is 12.6% computed as follows:

Annual interest rate:                                  12.00%
Annual cost of fees (3%/5)                            0.60%
            Annual Cost of Loan                       12.60%

Here is a loan structure which I have seen several times in the industry from another lender.  The interest rate is 11.5% for a three year commitment.  It appears cheaper but there is a 5% loan fee due in the beginning of the loan and a 3% exit fee due at the end of the loan.  The annual cost of this loan is 14.16% calculated as follows:

Annual interest rate:                                    11.50%
Annual cost of fees (8%/3)                             2.66%
             Annual Cost of Loan                       14.16%

Conclusion: Look at all costs when trying to decide what loan is your best option.

What Businesses Benefit Most From Billboards

Just read a blog post titled Billboards for Small Businesses: 7 Reasons To Think Twice.  The post is skeptical about billboard advertising: billboards are expensive, they created unwanted calls from sales reps, they have a limited run and they can't be personalized.   The article concludes, however, with an excellent summary of the types of companies which benefit from billboard advertising:

Local Businesses. - Restaurants and retailers near the board.  Think "Turn Here" or "Next Exit" candidates.

Businesses Selling High Ticket Items. -  Auto dealers, jewelry stores, appliance dealers.  My highest grossing billboard is sold to a jeweler.

Businesses with mass market products. - Tax accountants, plumbers, doctors, dentists, attorneys.

Creative businesses who want to build a brand.  Brand advertising occurs most often in big cities like LA and New York.  I get little brand advertising at my plant because it is located in a smaller city.  Also, brand advertising is very cyclical and dries up in a recession.

A Digital Sign Home Run

I'm skeptical about digital signs due to the high upfront costs but here's a real life success story from one of my clients.  This one-sided 10X24 digital sign cost $135,000 to construct.  It's on a road leading to costco.

 The sign generates revenue of $4,560/month which works out to $570 per each of 8 flips.

 Monthly expenses are $350 ($100 rent, $150 electricity, $50 insurance, internet $50).

 Cashflow (EBIDTA) is $4,210.

The manufacturer says the sign has a life of approximately 100,000 hours which works out to 11.4 years at 24 hours a day operation.

The IRR on the project is 36%.

Two things make the project a home run.

 First, the sign's owner sells the advertising.    If the owner used a sales rep or agency and paid a 20% sales commission the sign would cashflow $3,298/month for a 27% return on equity.  Second, the sign lease is fixed as opposed to being a % of gross revenue.  If the lease was 20% of gross revenue the sign's cashflow would be $3,398/for a 28% IRR.  If you assume both a 20% sales commission and a 20% of gross sign lease then cashflow on the sign is only $1,722 for a 11% return on equity.

The takeaway: lease and sales costs can have a huge impact on sign economics.

Crowdfunding Rules Hold Promise for Raising Billboard Equity

The SEC just published rules which will allow small businesses to raise money from non-accredited investors (e.g. non-millionaires) using crowdfunding.  A summary of the rules is available on the sec.gov website.  The rules will go into effect in early 2014 after the comment period expires.  The rules will open up a new source of capital to small businesses but there are regulatory drawbacks and the financing costs.

Here are the pros of the proposed rule.

• A small business can raise up to $1 million/year using crowdfunding.
• Investors make their own representation that they meet the act's requirements.  Your small business won't have to verify each investor's net income or net worth.

Here are the cons of the proposed rules.

• Investments are limited to 5-10% or each investors net worth or net income, with a maximum investment of $100,000 in any twelve month period.  I don't think this is a huge drawback because in my experience investors rarely want to put more than $100,000 into a small illiquid investment.
• You can only use one broker/dealer or funding portal at a time so you need to pick the right one.
• You must have reviewed financials if raising up to $500,000 and audited financials if raising more than $500,000.
• You must submit an annual report to the SEC.

Here are the estimated costs of a $1 million crowdfunding issue according to the rulemaking.

Brokers fee $70,000 or 7% of funds raised.
Edgar ID code  $60 at issuance.
Form C filing $6,000 at issuance.
Annual Audit.  My accountant says I should expect $12,000-15,000.  Ask yours.
Annual Report to SEC $4,000.

Are Digital Billboards a Good Investment?

I am making lots of loans for digital billboards.  Digital billboards make sense in markets where there are no new sign permits (you can have up to 8 advertisers on face sign) and in urban markets where high rents are possible.  A regular 14 by 48 billboard, however, will offer a better return on your capital due to the lower upfront costs.

Here is the return on capital for a simple two sided 14 by 48 billboard:

• Construction cost is $40,000.
• Useful life of the board is 20 years.  This is a very conservative assumption.  I've heard of 30-40 year lives of some steel monopoles.
• Revenues are $2,500/month consisting of $1,250/month for each side.
• Expenses include sales commission ($500/month or 20% of revenue), land rent ($500/month or 20% of revenue), electricity ($100/mont) and insurance ($45/month). 

This results in a cashflow of $1,355/month or $16,260/year on an investment of $40,000.  The IRR is 40%/year over the 20 year life of the steel sign.

Here is the return on capital for a digital billboard:

• Construction cost of $270,000 for a one sided digital billboard.
• Useful life of the board is 7 years.  I have heard of some estimates that the useful life of signs is closer to 5 years.  The sign may last longer than that but you will be pressured to replace it within 7 years in order to stay up with the latest technology.  I've seen digital signs which are older than 10 years and they look tawdry compared to new signs.
• Revenues are $8,750/month assuming the sale of 7 of the 8 possible flips at $1,250/month.  I've assumed that one flip is always vacant.
• Expenses include sales commissions ($1,750/month or 20% of revenue), land rent ($1,750/month or 20% of revenue), insurance ($45/month), electricity ($200/month) and internet connection ($45/month).

This results in cashflow of $4,960/month or $59,520/year.  The IRR is only 13%/per year over the 7 year life of the sign due to the high upfront capital cost.  The IRR drops to 4%/per annum if the sign has only a 5 year useful life.  To generate a 40%/year IRR you need to generate at least $20,000/month from the digital sign.

Conclusion:  Use digital only at your best locations where high rents are possible.  A digital sign won't make a bad location good and will probably make a fair location bad when you look at the return on capital.

Proposal to Cut Deductibility of Advertising Rears Ugly Head Again

Congressional efforts to reduce the deductibility of advertising refuse to go away as this story in Adweek shows.  If you own billboards or a radio station you should be concerned and prepared to contact your congressmen if this gets out of congressional committee.

Five Questions for Joe Stephenson

Joe Stephenson is an expert at selling billboard advertising.  He has 24 years experience selling billboard ads for CBS Outdoor, Mobile Ads USA and Penn Advertising.  Joe manages Circle City Outdoor, LLC the billboard company which I own.  I highly recommend Joe from personal experience.  He increased the revenue at a billboard plant I own from $900/month to $21,000/month in six months of selling.  If you would like to find out how Joe can help you increase your billboard plant revenue email Joe or call Joe at 727-560-8500.

1.  What determines billboard rental rates?

Location, competition, DEC or Eyes on Ratings and simple economics: the law of supply and demand. 2014 rates are up from last year with more advertisers gearing their ad budgets to outdoor and internet media.

2.  What's the secret to selling billboards?

There is no easy was to sell a billboard.  If it was easy everybody would do it.  but you can improve your changes by following a few simple rules.

• Does your potential client have a need for your product and can you satisfy that need.

•  Think like you are the client instead of the salesperson.  Put yourself in their shoes and think of objections before you make the call.

•  Slowly earn client trust and always leave the door open for further discussions.

3.  Where do you get prospects?

Prospects are all around you.  What businesses near a billboard can benefit from advertising on the board?  Who is currently spending money to advertise in other media and not on billboards?  What advertisers are spending dollars with your competitor?

4.  How long does it take to convince an advertiser to use a billboard?

Usually by your third visit or major communication with the client you are able to start the contract process.  The client has developed trust in you by then and the contract is a formality.

5.  What is the most frequent objection raised by potential advertisers and how do you counter it?

Billboard ads cost too much or are not in my budget.  This is usually to get rid of you and means you haven't told the client how you can help their business.  I try to defer this objection to later and first ask if there are any other objections that keep the client from doing business.  You need to open a dialogue with probing questions so you can show the client how billboard advertising is a wise investment.

US Outdoor revenues up 5% in second quarter 2013

US outdoor advertising revenue rose 5% in the second quarter of 2013 compared to the same period in 2012 according to a Outdoor Advertising Association of America press release.  Outdoor industry revenue growth is impressive compared to 0% growth for the US radio industry during the second quarter and 2.5% growth for the US GDP during the same time period.  I suspect the growth in outdoor revenues is driven by firming rates as well as the installation of digital signs.

Five Questions For Paul Wright

SignValue, Inc. is the leading valuation and advisory firm in the country located in Mesa, Arizona.  They operate the signvalue.com website listing dozens of billboards for sale around the United States.  Paul Wright is an expert on trends in the billboard industry and a certified appraiser.  His book  Billboard Appraisal: The Valuation of Off-Premise Advertising Signs is a must read for anyone active in the business.  You can learn more about the book here.  He also publishes a free weekly email newsletter on industry trends.

1.  What made you and Jeff start SignValue?

We worked on a lot of projects involving eminent domain in Arizona and spent years compiling research and data about the value of billboards.  In the late 1990’s there were very few appraisers who would work for billboard companies and government agencies alike.  Appraisers and consultants still tend to cater to one or the other (private or public).  We recognized a need for a completely independent appraisal and consulting firm that would work for sign owners, landowners, banks, government agencies and anyone else who needed appraisals, opinions, consulting and expert witness testimony.  To us, “independent” means we will work for anyone who needs an honest opinion of value or honest advice.

2.  What services can SignValue provide to a billboard operator who wants to sell signs?

We offer Sale Consulting services to clients who are interested in selling some, or all, of their billboards.  We collect all of the documentation that buyers demand through the due diligence process and prepare a customized marketing plan to help owners sell their signs at an optimal price. We can match investors and banks with sign owners to help them keep the signs they have worked so hard to build.  Every billboard seller has a slightly different motivation for selling.  Maybe  they want to retire, consolidate their inventory, raise capital or buyout a partner, but what they all have in common is the need for honest professional service.     

3.  What trends have you seen in sign values?

Digital LED signs are the real popular trend affecting sign values right now, but a lot of the focus is on the advertiser and their flexible use of the technology.  Digital billboards have much higher cash flow margins than Vinyl billboards, so they can have significantly higher values.  We routinely see Digital billboards that generate 75% or 80% cash flow after all of their operating expenses.  We have also seen some inventory consolidation and exchanges in the last few years that make billboard operators more efficient.  For billboard operators, a penny saved truly is a penny earned.  Rates and occupancy suffered in 2008 and 2009 and had a very mediocre rise in 2010, 2011 and 2012 and values have followed closely behind.  Some feel that there was a total “reset” in values after the recession, but we have not seen a significant decline in transaction prices or multiples. 

4.  What trends are you seeing in billboard regulation?

Government agencies have definitely started to allow far more digital signs in the last few years.  Like most things that people fear, the fear of Digital billboard blight or dangerous distractions has turned out to be far greater than the reality.  Technology seems to polarize people, they seem to be excited by it or frightened of it.  Government agencies are quickly realizing that there is nothing to be afraid of with this new technology. 

Government agencies have also been trying to leverage their authority for additional revenue.  Cities and Counties are allowing new off-premise signs in exchange for lucrative development/permit fees.  For example, in Miami Wallscape owners have to pay the city $1.00 per square foot of sign, per month for the right to operate their signs.  The City also has advertising content review fees to check the copy before it is installed.  Other cities charge “development” fees to billboard operators who want to put up new signs.     

5.  What's the single biggest driver in the value of a billboard?

Annual cash flow is the single biggest driver of value in a billboard.  Value starts with revenue and expenses will show all of the good and bad parts of operating a sign, but what is left at the end of the day is cash flow.  We look at cash flows to estimate values based on expected rates of return and lenders look at cash flows to decide if it will cover their loan payments (debt service). 

One of the biggest features of a sign that should be considered when valuing a billboard is probably the circulation that the location delivers for advertisers.  There are always exceptions to this rule like strong demographic areas, unique landmarks and supply/demand issues, but advertisers will always pay more to reach more people.  Billboard operation is still a relatively simple model in that respect.  It’s still location, location, location!

Discussions to Limit Deductibility of Advertising Will Hurt Billboard Companies

There is a move afoot in Congress to limit the tax deductibility of advertising.  Here are articles from Ad Week and CommLawBlog.

If enacted this will raise the cost of buying billboard advertising by 34% because your clients won't be able to expense the purchase on their taxes.

How many of your existing clients would leave if you raised your rates by 34% tomorrow?

What sort of out-of-home advertising deals are hard to finance?

I've made lots of out-of-home advertising loans over the past 15 years but there are several portions of the industry I avoid, including:

Loans to floating billboards.

Loans to finance vehicles with billboards on them.

Loans to finance gigantic advertisements on fields outside airports which are capable of being viewed from the sky.

Loans to finance in-store advertising above checkout stands.

Each of these sectors is a one of a kind business model.  I avoid one of a kind business models for two reasons.

First,  I can't easily value a one-of-a-kind business.  I have a good feel for outdoor billboard values from years of lending.  There is a liquid trading market.  Right now you can go to Sign Value  or Outdoorbillboard.com and find dozens of signs for sale in each state of the country.  No such market exists for floating billboards or gigantic ads on fields outside airports.  If I can't place a value on the collateral I will probably get talked into advancing too much money against the collateral.

Second, it's hard to know how to fix a broken one of a kind business.  If I have a billboard client in trouble and I have to take over the company I know what I have to do to fix things because all billboard companies look alike.  Leasing and sales are the same regardless of where you are located.  I can always find personnel to fix the problem.

New SEC Rules Won't Make It Easier To For Small Billboard Companies To Raise Money

On September 30, 2013 the SEC eliminated an 80 year old rule which prohibited companies from soliciting investments via public advertising.  This is a good thing, right?  Nothing can stop your small billboard company from placing a banner on its website saying "Investors Wanted" or from putting up an "Investors Wanted" sign on a billboard you own in order to obtain capital to grow faster.

Not so fast.

The new 506(c) rule says you can only accept money only from an "accredited investor", that is, a person with a single income above $200,000, a married income above $300,000, or a net worth (excluding the value of a home) above $1 million.

The accredited investor rule is nothing new.  Any company raising money from private investors had this restriction in the past.  Put here's the kicker.  Under the original rule 506,  accredited investors self-certified. You asked them if they were accredited they filled out a form saying they were and that was that.  You took their word for it and didn't pry.

Under the new rules you must verify that anyone who gives you money is an accredit investors by getting w2's or an income tax return or bank and brokerage statements or a letter from that investor's CPA or attorney.  Welcome to the nanny state.

There have been several articles in the press by angel investors who've said this will have a chilling effect on capital raising.  My company has decided to continue raising money under the old 506 rule and to forego public advertising in order to protect the privacy of my investors.  Here's an article which explains why the new rules will help wall street more than main street.

Five Questions for Frank Rolfe

Franks Rolfe is a successful billboard entrepreneur and educator.  From 1982 to 1996 Frank built the largest privately owned billboard company in Dallas.   Frank sold this company to Universal Outdoor (predecessor to Clear Channel) and subsequently owned a billboard company in Los Angeles which he successfully sold to Heywood Outdoor.  Frank runs the OutdoorBillboard.com  website (www.OutdoorBillboard.com) which is a great forum and news source for small billboard companies.  Frank also operates Outdoor Billboard University (www.OurdoorBillboardUniversity.com) which sells training materials and conducts the outdoor boot camp.  I highly recommend that you bookmark Frank’s websites if you are interested in learning about the industry.    

What made you start OutdoorBillboard.com?

I didn’t start OutdoorBillboard.com, Dave Reynolds did. Dave started that site at a time when the Internet was just starting up, and he thought a listing service of billboards for sale would be of value. I started OutdoorBillboardUniversity.com along with Dave. That’s the website that’s dedicated to teaching people about the billboard industry. We started it because Dave noticed that there are no books or courses in existence on the industry, so he urged me to write one. It was fun thinking back about everything I learned about billboards and putting it down on paper and CDs.

What’s the biggest change you’ve seen in the outdoor business in the past 20 years? 

The invention of printed vinyl. Back in the 1980s and early 1990s, virtually all billboards were painted by hand. This was expensive, slow and dangerous. In addition, we could not paint by hand the amazing graphics that vinyl allows – just painting a human face was hard and seldom photo-quality. Vinyl has allowed for photos as large as the sign face – in 100% accuracy and color – as well as the elimination of having to wait for weather conducive to paint on location to install the ad. When I owned my billboard company, the biggest focus of all was on the paint shop. It didn’t matter what you sold, you could not get paid if the ad was not up, and the painters had you over a barrel. A week of rain or freezing temperatures meant no ads could go up, and no revenue in the door. Times are much better with the invention of vinyl. It’s a win/win for everyone – except the sign painters!

What the best advice you can give someone who’s just starting out?

My advice would be to think small and grow into something big. I started with one billboard and ended up with over 300. The nice thing about billboards is that you can take manageable small steps to hit your goal, as opposed to businesses that require a leap of faith. That’s how WalMart was built – it grew from just one small town store – as did Bass Pro Shops.  It’s a lot easier to take action when you are not gambling your entire life savings.

What’s the biggest mistake people make in the billboard business?

Not being realistic on their numbers. If all the signs on the highway rent for $500 per month, you’re probably not going to get $650. And if the note payment is X, and the rent less expenses is Y, and X is bigger than Y, you’re not going to cash flow positive. I remember doing some due diligence on some billboards in Las Vegas in which the ground rent alone was higher than the gross revenue. Those kind of deals only work in fantasy land, and fantasy land is very expensive and depressing in real life. If the numbers don’t work, then move on to the next deal.

What’s your opinion on the merits of the billboard business versus the 8 sheet business?

The biggest hurdle to being an 8-sheet operator is the sheer volume of units you have to own to have the critical mass to make a full-time job of it anymore.  Back when I was blowing and going in the 1980’s, the 8-sheet operators were my heroes, as they were making a fortune by renting 400 signs at a time to Camel or Colt 45, and had the fanciest offices in Dallas. I went to one 8-sheet operator’s office, and it was filled with auction-quality antique outdoor posters of Coke and Dr. Pepper and leather furniture, looking out over downtown Dallas. Fast-forward to the voluntary withdrawal of tobacco advertising from billboards, and the same owner is dead of a heart attack and his kid offices out of a run-down industrial building.  You can make money with many different types of outdoor billboards, but there’s no question that larger units make significantly more money. You can make a handsome full-time living off 10 full-size signs, but it’s hard with 8-sheets unless you have a bunch of them.

Keeping Track of Your Billboard Company Financials

You used to have to pay an accountant to keep track of your billboard company financials or spend several hundred dollars for accounting software which would only run on a single computer.  If your accountant was on vacation or your computer crashed you had no access to financials.  Those days are no more.

I recommend  Quickbooks by Intuit to keep track of your billboard financials.  I use it for my lending companies as well as my billboard company and highly recommend it.  Here are the benefits.

• The service is cheap ($10-25/month depending on the number of users).  
• You can give your accountant free access to quickbooks at tax time which limits the number of info requests you'll have to field at tax or audit time.
• The service is on Intuit's servers which means you can conveiniently access financials from any internet connection.
• The service is secure and reliable.  I cannot remember a service outage apart from normal maintenance as long as I have been a customer.
• You can set up recurring invoices for long term outdoor clients.
• The system can process credit card as well as cash or check payments.
• The service can also handle payroll accounting issues which frees up your time for more important matters.

Does a Digital Billboard Make Sense?

I have seen strong demand on the part of clients for digital billboard financing.  Digital billboards make sense for good locations.  A digital billboard, however, will not make a bad location good.  Here are the pros and cons of digital billboard.

Digital Billboard Pros

Extra revenue.  Instead of getting $1,500/month in revenue for a 14 by 48 billboard you can get $6,000-8,000/month by renting 6-8 flips at approximately $1,000/month.

Remote management.  You can change copy via the computer instead of having to pay $350 to put up vinyl each time you change an ad.  You can also monitor the boards performance via the computer instead of having to physically inspect the sign.

Public Service Ads.  A digital board can help you create goodwill in your community by running amber alert ads or using unused inventory for public service ads.  You can change copy easily and cheaply.

Digital Billboard Cons

Extra Capital Cost - A digital billboard will cost $200,000-250,000 to purchase and install.  That's approx 6 times the cost of a regular billboard.  The extra cost means you should only convert your best locations to digital.  

Obsolesence - You should assume that a digital billboard will have a 10-15 year useful life.  By the end of that time you will probably need to replace it because it will be technologically out of date.  Think about how poor the digital signs which are 15 years old look versus the current generation of signs.  

Extra electricity - A digital sign will be more expensive to light than a regular billboard.

   

Outdoor Revenue up 4.5% during first quarter 2013.

Outdoor ad revenue rose 4.5% to $1.4 billion in the first quarter of 2012 according to the Outdoor Advertising Association of America.  The outdoor sector's improvement exceeded US radio revenues (flat for the first quarter according to Radio Advertising Bureau).  Outdoor revenues also grew faster than the 1.1% growth in US GDP during the same time period.

Why Do You Like The Billboard Business?

The billboard business is my favorite lending sector.  Here's why.

First, there are barriers to entry in the form of restrictive building codes which keep competitiors out.

Second, the billboard business is less cyclical than other forms of media.  US billboard revenues declined 18% during the 2008-2009 recession versus a 30% decline in radio revenue and a 44% decline in daily newspaper revenue during the same period.  Billboard revenues are location based (McDonalds next exit) rather than brand based (e.g. Nike).  Brand advertising gets cut severely during recessions.

Third, the business has low technology risk.  Radio stations face competition from the internet and ipods.  Newspapers face internet competition.  Signs aren't impacted by the internet.  People still drive to work.

Fourth, the business is simple.  You need someone to pay bills and someone to sell.  Radio stations need on-air personnel and talented technical personnel.  Newpapers need printers and writers.

Proforma financials for a billboard.

I've summarized below the proforma financials for a 14 by 48 billboard which is in a good location.

Revenue of $1,500/month if the billboard is one sided.  Rents can be higher if the billboard is next to a freeway in a big city and lower if it is on a less frequented road.

Land lease expense of $300/month or 20% of gross revenue.

Insurance of $50/month.

Electricity of $100/month.

Sales commissions (if you don't sell the sign yourself) of 20% of revenue or $300/month.

That leaves cashflow of $750-1,050/month depending on whether you sell the ad yourself of pay a sales rep.  It's easy to like a business with a 50-75% cashflow margin.

Outdoor Industry Websites

Here's a list of valuable outdoor industry websites.

Signvalue.com (www.signvalue.com) tracks outdoor sign values.  They show billboards for rent and billboards for sale by state.

Signweb (www.signweb.com) is a news site on outdoor signs.

Digital Signage Today (www.digitalsignagetoday.com) tracks the digital sign industry.

WP Media Lending (www.wpmedialending.com) is my company's website.  It talks about our lending policies and who we are.

Billboard Source (www.billboardsource.com) talks about various kinds of billboards.  It is geared to advertisers who want to buy billboards.

The Outdoor Advertising Association of America (www.oaaa.org) is the trade group for outdoor advertising.  Their web site has into on industry revenue and regulatory trends.

Scenic America (www.scenic.org).  Know the enemy.  This is the website of the organization which wants to eliminate billboards in the United States.

OutdoorBillboard.com (www.outdoorbillboard.com) is the leading site for small outdoor advertising companies.  They have a discussion forum, a list of signs for rent and sale and plenty of how-to articles.

Billboard Loan Collateral

A billboard lender will secure a billboard loan by taking a UCC-1 filing on cash, inventory, equipment and intangibles, an assignment of your material agreements (think ad contracts and leases) and a pledge of stock in your company.  If you own land under your signs a lender will probably also take a deed of trust on the land.  You should have a provision in your land leases which allows your to assign the leases to your lender as collateral without your landlord consent.  Otherwise you will create delays in financing and could give the landlord the right to terminate your lease.

Lenders who are not experts in the billboard industry will sometimes demand other collateral (e.g. a deed of trust on a house or cash or a certificate of deposit).  

The collateral will be governed by a security agreement which allows the lender to take steps to realize on the collateral is you default on your loan and are unable to clear the default.

Good and Bad Billboard Leases

Have seen lots of billboard leases over the past 20 years.  A bad lease can make it difficult to get financing or ruin your business prospects.

What's in a good billboard lease.

1.  A term of at least 20 years with optional extensions.

2.  Assignability to someone else without consent.  This makes it easy to sell your business.  Some landlords will take forever to sign an assignment and can use the assignment process to extract more rent or an assignment payment.

3.  Lease costs of about 10-20% of estimated board revenues.  The means $100-200/month for a typical 14 by 48 billboard.  The worst lease I've ever seen had a true up clause which promised the landlord 40% of gross revenue.

4.  A 20% of gross revenues circuit breaker clause - If your lease has a clause limiting rent to the lesser of a fixed amount or 20% of gross revenue you have protection if rents drop severely during a recession.  Outdoor revenues declined by 20% during the 2009 recession.  It's nice if your lease expense declines when revenue declines.

5.  No automatic lease inflators.  US outdoor revenues grew 4.5%/year from 1992-2011 and from 2%/year from 2002 to 2011.  My experience as a sign owner is that ad clients do not agree to mandatory 5%/year automatic increases.  If you agree to a 5%/year lease inflator you will probably see your sign margins shrink because you won't be able to increase rates as fast as your lease expense.  If you do agree to an inflator use the Consumer price index which can be measured objectively and will drop or remain close to zero during a recession.

Billboard Investment Bankers

A billboard investment bankers will help you buy or sell your company or raise equity or debt in exchange for a fee.

How much will it cost? - Investment banking fees are typically 1-2% to raise debt and 5% to raise equity.    Small deals may have a fixed fee because it takes the same effort to close a small deal as a large deal.  Brokerage fees often involve the Lehman formula: 5% on the first $1 million of sale price, 4% of the second $1 million, 3% of the 3rd $1 million, 2% of the fourth $1 million and 1% of anything after.

What will an investment banker do? - A good investment banker will suggest a transaction price, help you assemble the right information, make initial contact with buyers or financing sources and intercede for your interests.  Most billboard operators are good at billboard operational matters but less educated about financial and banking matters.  An investment banker can help bring them up to speed.

What should I look out for? - Watch out for any investment banker who wants his entire fee up front.  This usually means that he is not confident of getting the transaction done and will waste your time.  I have used investment bankers and brokers at least a dozen times during my investing career to raise capital and to sell companies.  In almost every case I have agreed to pay the investment bankers out of pocket costs during the engagement phase but have agreed to pay the investment banking fee only on success.  They only time I agreed to a fixed fee up front the transaction never closed!

Billboard Loan Fees

Here's a rundown on the kinds of fees your can expect to pay when you borrow money to finance a billboard.

Loan Fee - This is typically 1-2% of the loan amount.  It is paid at closing to compensate a lender for the time spent to underwrite a loan.  Banks may charge 0.25% to 1.0%.  I have seen some private lenders charge as much as 5%.

Legal or Transaction Fees - I charge 1-2% of the loan amount to cover my legal costs associated with drafting a loan agreement and perfecting my security interest in collateral.  Legal and transaction costs include attorney fees, ucc and mortgage filing fees, title insurance for real estate, lien searches and travel expenses to inspect boards.  I ask for the transaction fee when my commitment is accepted in order to know that I will have my legal and out of pocket costs reimbursed if a transaction never closes.

Appraisal Fees - The SBA and many banks will require you to pay for a third party appraisal of your assets in order to provide independent confirmation of the value of your collateral.  I have seen appraisals cost anywhere from $1,000 to $50,000.

Exit Fees - Some lenders charge an exit fee of 2-5% due when you pay off the loan or at the loan's maturity.  Other lenders make the fee due if you prepay your loan early. 

Be skeptical about any lender who wants large loan and transaction fees before they give you a commitment.  They will probably take your money and run.

Billboard Loan Interest Rates

The rate you pay on your billboard loan will vary depending on the funding source.

If you get a bank loan you can expect to pay prime plus 2% with a floor on your rate at 5.25%.  Bank financing is very difficult to get because banks are not comfortable with the industry.

If you get a loan from a private lender like me you can plan to pay prime plus 6%, floating with a floor on the interest rate at 12%.  Private lenders are more comfortable with the outdoor industry than banks but do not have access to cheap bank deposits to fund loans so they are more expensive.

If you get a lease you can expect to pay 8-18% in financing costs.  Most leasing companies make it hard to tell exactly what your financing cost is.  If you ever want to know the true cost of your lease give me a call and I can calculate it by running some simple financial calculations.

Billboard Loan Amortization

I have seen billboard loan amortization rates as short a 5 years and as long as 20 years.

5-7 year amortization is not unusual with bank or lease financing.  It is have for many small billboard companies to completely pay off their debt in 5 years.

10-20 years amortization is the norm for private financing.  I like to set amortization so that my loan has a weighted remaining life which is less than a borrower's land leases.  If a Borrower has land leases with an average weighted remaining life of 16 years then I am comfortable with 15 year amortization.

Regardless of the amortization (5 years, 10 years, 15 years or 20 years), I put a balloon maturity on loans at the end of five years.  This allows me to revisit terms and pricing if business risks change or if debt markets tighten and my financing gets more expensive.

Must I Personally Guarantee A Billboard Loan?

I take a personal guarantee from the controlling shareholder/manager of any borrower.

A personal guarantee has two functions.

First, a personal guarantee tells a lender that  you are so confident in your business's prospects that you will be personally liable for the business loan if there are difficulties and there is a collateral shortfall.  If a personal guarantee keeps you awake at night don't borrow the money.  I don't have much sympathy with people who won't guarantee a billboard loan because I have to guarantee every bank loan which I use to help finance my lending businesses.

Second, a personal guarantee means that you will be working on behalf of the lender to maximize loan recovery if there are problems.  In the rare cases where I've made business loans without a guarantee and the loan goes bad, the business owner is my adversary and is fighting me at every turn.  If someone has a personal guarantee they are willing to cooperate with me in maximizing my loan recovery in hopes that I will let them off their personal guarantee.

The exception to the personal guarantee requirement occurs when there is a widely disbursed shareholder group in which no sign shareholder is controlling and no single manager is in charge or when the controlling shareholder is a professional equity fund.  This is rarely the case with small billboard loans.

Can I Get 100% Debt Financing?

I wish I had a dollar for every request I get for 100% debt financing for a billboard.  Lenders don't make 100% loans against anything.  They want to know there's cushion in the collateral in case something goes wrong.

Next time you decide you need to do 100% financing for a billboard ask youself how many lenders are still making mortgages of 100% of a home's value.

When someone comes to me and askes for 100% debt financing to put up a billboard I tell them to build the first billboard with their own money and to lease it out and then to borrow against that billboard to put up the second billboard and to borrow against those two billboards to put up a third.  That way there's always a collateral cushion.

You should expect to put at 20-35% down on the acquisition of a billboard company.  You should expect a billboard lender to limit the debt your billboard company takes on to no more than 70-80% of your company's value.

What are my billboards worth?

Borrowers are constantly asking me what their signs are worth.  My rule of thumb is that billboards are worth 4-6 times annualized gross revenues.  The transactions which I have financed over the last 10 years have occurred at multiples ranging from 3 to 6 times gross revenue with a median of 4.8 times gross revenue.

Your your billboards will sell on the high end of the range if:

• They are at least 14 by 48.
• The economy is strong.
• They have 20 year leases with lease costs less than 20% of revenues.
• They are in good condition.

Your billboards will sell on the low end of the range if:

• They are 8 sheet or 12 by 24.
• The economy is in recession.
• You have short term leases with lease costs in excess of 20% of revenue.
• They are in poor condition.
• They are unoccupied.

How Much Should I Borrow?

3 times annualized revenues is a reasonable debt limit for most small billboard companies.  Here's why.

I tell borrowers to limit debt to at a level where their plant will be worth more than debt even if revenues drop and multiples contract during a recession.  Industry revenues declined 20% during the 2008-2009 recession.  Billboard values have averaged 5 times revenues but can be expected to drop to 4 times gross revenue during a recession.

If you borrow no more than 3 times annualized revenue against your boards you will be able to sustain a 20% drop in revenues during a recession and still have enough value in your plant at a 4 times revenue sale multiple to cover your debt.

Let's assume your plant is generating $20,000/month in gross revenue or $240,000/year.  At a 5 times revenue multiple your plant is worth $1.2 million.  You take a loan for $720,000 or three times gross revenue.  A recession hits.  Your revenues drop 20% to $192,000.  Valuation multiples contract from 5 times revenues to 4 times revenues.  Your plant is now worth $768,000.  This is not a fun state of affairs but you still have enough value in your plant to be able to cover your debt and have a little left over. 

3 times annualized revenue is too high if you are in the 8 sheet business (valuations are lower), if you have short term land leases or if you are in the out-of-home business where you rely on short term contracts with transit agencies or municipalities. 1-2 times annual revenue is a better debt limit.

The Due Diligence Visit

Here's a short list of information your billboard lender will want to review during a due diligence visit.:

Bank statements - I like to verify financial statement revenues and expenses against bank statements.

Copies of sign permits and operating leases.

Copies of customer ad contracts.

Evidence that state and property taxes are paid current.

A copy of the insurance policy.

An onsite inspection of each of the signs.

The Initial Billboard Loan Package

 Here's a list of information which your lender will find helpful in reviewing your initial billboard loan request.  I've listed things in order of importance to the lender.

1.  Monthly company balance sheet and income statement for the last two years.  I find monthly statements helpful because many billboard companies are seasonal.  I usually underwrite the loan based on the trailing twelve month's financials to adjust for seasonality.  If you are acquiring a billboard company I will want to see financials for both your company and the company you are acquiring.

2.  Company income tax return for the past three years.

3.  Billboard inventory spreadsheet summarizing billboard locations, type (e.g. 14 by 48, 12 by 24, 8 sheet),  tenant, tenant revenues, lease term, lease cost, landlord and lease expiry.  This allows me to make a quick assessment about how expensive your leases are and whether you are generating the revenues you should.  As a rule of thumb I expect lease expense to be no more than 20% of revenues.  I also expect your billboards to generate approximately $1,500/month per face near a freeway and $1000/face if they are not.  These numbers will be higher in a big city.  I own a billboard in a big city which generates $4,000/month per face.  8 sheets generate much lower rent. 

4.  Personal financial statement for you.

5.  1-2 paragraphs about how much money is wanted and for what.

6.  Projections for the next year.  Banks love to see 5-7 year projections.  I focus on projections for the next year because if I know the next year I can pretty accurately forecast what will happen in the following year.  Most billboard companies show a large one time increase in revenue following the construction of new boards or an acquisition with small revenue increased thereafter.

7.  Information on collateral values together with the source.  An industry rule of thumb is that your signs are worth 4-6 times annualized gross revenues.  You can also point to comparable sales for signs listed at signvalue.com www.signvalue.com or www.outdoorbillboard.com.  Your lender will want you to cite an objective third party source for value.

The Lending Process

Here's how the billboard lending process works.  I tell clients to expect the process to take approximately one month for the introductory phone call to funding.  It can take as short as two weeks when the borrower is extremely organized and the credit is clean and as long as several months when the borrower isn't organized or the credit is more difficult.

Introductory Phone Call or Email - When you approach a lender be concise and direct.  Say your name, your company's name and what you want.  It helps if you can say that you've been referred by someone the lender knows.  I'm surprised how many people call me without introducing themselves or saying who they are.  It is unprofessional.    Here is a short script of an effective introductory phone call or email.  " Hello, I'm ____ and my company is _____.  I own __________ billboards with monthly gross revenue of $________ in and around ____________.  I want to borrow $____________ to ______________.  Is this a loan which might interest you?" When you are asked how much money you want to borrow don't say "I don't know" or "As much as you can lend me." You will sound like an unfocused bad credit risk.

Initial Due Diligence - The lender will respond with a request for information and will take a few weeks to review the information.  The info will include business financials, a personal financial statement, a billboard inventory spreadsheet, a management bio and a description of how much money you want to borrow and for what.

 Discussion Term Sheet - The lender will send you a summary of loan terms.  Amount, interest rate, fees, amortization, collateral and loan covenants.  The discussion term sheet is not a commitment.  It is a document designed for more discussion.  I send someone a discussion term sheet within a day or two of an original phone conversation.  Banks often delay their discussion term sheet until after a few weeks due diligence.

Loan Approval - Once you reach agreement on terms, the lender will prepare a loan application to submit for approval.  You should ask about the loan approval process.  Is it based on individual signatures or is there a loan committee?  It usually takes about a week to write a loan application and to get approvals.

Commitment Letter - This is a term sheet along with legal language which makes the agreement a commitment.  It puts a placeholder on the loan until legal documents get signs and the loan is funded.  I ask borrowers to send me a transaction fee along with the commitment letter because I'm going to have to start paying expenses (legal fees and travel) from this point on and I want them reimbursed if the loan never closes).

Site Visit -  During a site visit and a lender will view your signs, verify permits and leases and verify your financial statements against bank statements.  The site visit allows the lender to make a personal evaluation of your business skills.

Documents - The lender will send loan documents for you to sign.

Funding - Occurs after the documents are back in the lender's hands and the closing conditions of the Borrowing Agreement are met.

Billboard Loan Sources

There are three sources of money for billboard loans: private finance companies, vendors, and banks.  I will discuss the pros and cons of each source.

Private finance companies consist of specialized private lenders like WP Media Lending (www.wpmedialending.com) or Stark Capital (www.www.starkcapitalsolutions.com.  Private Lender advantages: These lenders know the business (I own signs in addition to lending) so you won't face stupid questions.  They also have a track record of not abandoning the business during a recession.  And they are small and fast and nimble.  Private Lender disadvantages: Funding is a matter of weeks, not months.  DisadvantagesPrivate lender funding is dependent on healthy equity and debt markets and may be scarce when financial markets tighten (e.g. 2009-2012).  Also private lenders are more expensive than banks (10-15% interest rate versus 5-8% for banks).

Sign Manufacturers.  Yesco (www.yesco.com) finances signs.  Daktronics (www.daktronics.com) have a vendor finance relationship with PNE.  Vendor financing advantages: The sign manufacturers may be willing to do 100% financing and they can be cheaper than a specialty lender (the sign companies make money both on the loan and on selling the sign).  Vendor financing disadvantages: Large prepayment penalties (especially with lease finacing).  An unwillingness to finance another vendors sign.

Banks - Small banks are sometimes willing to make outdoor loans.  I have two outdoor clients who are in the process of refinancing their loans with bank financing.  Bank loan advantages: Cheap costs (5-8% interest rate) because they fund loans with low cost deposits.  Bank loan disadvantages: Fickle underwriting.  Banks tend to abandon industries they are not familiar with during a recession.  I saw banks abandon the billboard market during 9/11 and again during the 2009-2011 recession.  In addition banks don't understand the business.  You will have to spend lots of time educating your lender.  Finally, banks are bureaucratic and a lengthy credit approval and documentation process.  A new loan will take months, not weeks.

Welcome to the billboard loans blog

Welcome to my billboard loans blog.  I've created this blog to provide information to billboard operators about how to finance their billboards.  The billboard industry is a good business with high margins, low technology risk, barriers to entry and lots of small firms.  This blog is designed to help small billboard companies understand their financing options.