Lending Standards Are Easing - A Little

The federal reserve surveys senior bank credit officers four times a year about whether their lending standards are tightening, stable or easing.  Here's a table summarizing the trend in bank lending standards for small businesses over the past 10 years.  The table shows that after tightening during the three years of the recession (2007-2009) a few banks have begun to ease their lending standards.

Federal Reserve Survey of Bank Lending Practices

Date	Tightened	Stable	Easing
Oct-13	3%	86%	11%
Oct-12	2%	89%	10%
Oct-11	2%	90%	8%
Oct-10	4%	86%	10%
Oct-09	14%	86%	0%
Oct-08	74%	26%	0%
Oct-07	10%	90%	0%
Oct-06	7%	85%	8%
Oct-05	0%	94%	6%
Oct-04	2%	78%	20%
Oct-03	0%	84%	16%

My experience reflects this trend.  I rely on bank lines of credit to finance my companies.  Credit was easy to obtain prior to 2007.  The world changed during the 2008 recession.  My banks almost doubled the cost of my lines of credit.  A couple of my banks ceased making new loans.  In the last year it has gotten easier to finance my lending companies.  I started doing business with a new bank.  My existing banks have been easier to work with.  My borrowing costs, however, are still higher than they were prior to the 2008 recession. 

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.