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.