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.