Billboard owners sometimes find it difficult to obtain financing from banks that are not familiar with the industry. Even if owners take the time to educate lenders about the outdoor advertising business, banks may not be willing to lend to industries where they are not experienced.

Billboards are usually very valuable assets. The Market value is much greater than the book value on the balance sheet. Billboards have three main components to their market value: the permit, the leasehold interest for a specific site, and the physical structure. A fourth element can also include advertising contracts to display the customer’s message.

High Cash Flow

One aspect of the billboard industry that is not well known is the high rate of cash flow. The largest billboard companies in the United States consistently report earnings before interest, taxes, depreciation and amortization (EBITDA) in the range of 40% to 50% of revenue. This is very high compared to most other industries. Some small companies with signs on highways and in rural areas can achieve EBITDA margins of 60% or more, since there is often lower required maintenance on rural billboards that may not need to be painted more than once each year. Overall, billboards tend to generate consistently high cash flow.

Strong Demand for Billboards

Basic demand for billboard space allows virtually anyone to own the signs and operate profitably. While some owners may not do a good job of keeping the sign faces filled with advertising and maximizing profits, a new owner can usually take over and maintain at least the same level of earnings. A new owner may even raise occupancy, revenue, and profits. The risk is quite low that bad management will extinguish the business value in an outdoor advertising company. Usually the only question is whether profits will be modest or substantial. The risk of failure exists in any business, but it is low in this industry. Risk is reduced even further for lenders because revenue usually continues to come in for long contract periods that typically range from one to three years for most highway signs.

Market Values

The market values of billboards have remained relatively high in the past few years, after rising to peak levels during the mid- to late-1990s. Prices are usually based on the “effective gross income” (EGI) that can be achieved each year. EGI is the amount of actual revenue for existing signs, or the estimated amount for signs to be erected. The amount can be estimated by starting with the market rate for other billboards nearby, and deducting allowances for vacancy and commissions to advertising agencies. For instance, if ad rates in the market are $500 per month per face, EGI might be estimated at $350 per month after an allowance of 15% for vacancy and 15% for commissions. The monthly EGI is normally converted to a yearly amount, in this case $350 per month is $4,200 per year. Billboards on steel supports and signs near cities and towns often sell for multiples of 4X to 5X EGI. Prices are even higher for some premium locations. For example, tight restrictions on new permits may create a premium price for existing signs.

Documents

There are three key items often found in a billboard file.

First is the list of billboard locations and copies of leases for the sites. The most advantageous leases obviously are those at low rates for long periods of time. This assures the continued operation of the sign at the best possible profit margin. The site lease expense is normally at an amount that ranges from 10% to 30% of effective gross income, although there are always exceptions. The beginning lease amount usually escalates over time, like typical real estate leases. Some site leases call for the landowner to receive a percentage of the billboard advertising revenue. Percentage leases may have a base rent that puts a floor on the amount that the landowner will receive each year. The Seller can provide information on billboard income in order for the site lease amount to be calculated. If actual advertising contracts for billboards are not available, income data can be found in published or quoted advertising rates by billboard operators in the area.

The second item is a copy of each sign permit. A permit is issued by the appropriate governmental authority such as a state, city, county, etc., and may need to be renewed annually for a small fee. The permit is critical because without it, the value of the sign is gone. Buyers rarely buy a billboard that does not have a valid permit.

A third part may be copies of advertising contracts.

Summary and Outlook

Prices can be estimated at three to six times EGI in most cases. The outlook for the industry is very bright. While the national economic recession put a damper on ad spending, future ad rates should be higher and vacancy should be low. With tight restrictions on building new signs in most cities and towns in the United States, billboards will continue to be scarce assets. This bodes well for continuing high cash flow and resale values for billboards.