The Offer, Part One
I once heard a story--attributed to Abraham Lincoln--about a lawyer who was going to visit a friend, the owner of prime real estate in the town where they lived. As the lawyer approached his friend's building, he saw a man come flying out of a window. The lawyer went inside and asked his friend what had happened. The friend said, "That man, I've had it with him. He came to me two weeks ago and offered me $3,000 for my land. I said no. Then he came back and offered $5,000. I said no again. This time he offered $10,000, and I threw him out the window."
"Why would you do that?" the lawyer asked.
"He was getting close to my number," the owner said.
I can identify with that landowner. An offer I recently received for my business is by far the best I've ever gotten. You'd think I would be thrilled about it. And in fact, part of me is thrilled, but the prospect of selling a business raises a whole range of emotional issues. When a good offer forces you to deal with those issues, you find that part of you feels like throwing somebody out a window.
I need to give you a little background. It has always been my belief that I would ultimately sell my company, or rather, my companies. I have three principal ones: a records storage business (CitiStorage), the secure shredding business (U.S. Document Security), and a delivery business descended from Perfect Courier, a three-time Inc. 500 company that went into Chapter 11 in 1987 and came out considerably smaller three years later. I'd prefer to sell them together, but most buyers wouldn't want all three.
Of course, it's one thing to have a long-term goal of selling your businesses and quite another to be faced with an offer that might well be the best you'll ever get. It's especially difficult if, like me, you're not sure you're ready to sell, you're enjoying your life as it is, you don't have the slightest interest in retiring, and you don't know what you'd do after the sale. Then again, I have only myself to blame for the situation I'm in and the ambivalence I feel. For the past few years, I've been flirting with the idea of selling and talking to a variety of potential acquirers. Along the way, I've learned a lot about how this game is played--what buyers want and don't want, why some might be willing to pay a premium, how to structure the business to make it as attractive as possible. That's how I know that I may now be looking at a once-in-a-lifetime opportunity.
My education began with casual banter at industry gatherings in the late 1990s, when a lot of businesses like mine were being acquired. We have a strong national trade association, and the meetings are well attended. I always go and bring a number of our key people with me, so that we can find out as much as we can about what's happening in the industry. It was there that I first got to know people from the large records storage companies, who asked me whether my business was for sale. "Everything has a price," I said.
"So what's yours?" they asked.
"I'll tell you my number," I said. "If you can come up with it, we can talk." I did, in fact, have a number, which was considerably more than the company was worth at the time. Thereafter, when I would see these guys at the annual meetings and they'd ask me if I was ready to sell, I'd say, "The question is, are you ready to buy? You know my number." It became a standing joke between us.
Over the years, two things happened. First, I learned a lot about my would-be acquirers and began to develop a rapport that would help me when we eventually found ourselves negotiating. I also gained a better understanding of how the large companies view acquisitions. Among other things, I learned that after buying a records storage business they would sell off the real estate, keeping only the accounts. With that in mind, my partners and I decided to separate the ownership of our land from the ownership of the business. That way, we could sell the business, keep the land, and wind up with an ongoing revenue stream in addition to what we made on the sale.
I told them I would consider selling the two businesses for an amount that was 33 percent above my original number.
Then, about four years ago, I decided that the company's value was getting close to my number. We called our contacts at the two giants of the industry, Iron Mountain (NYSE:IRM) and Recall, and told them we were ready to explore selling CitiStorage. In retrospect, I can see I wasn't mentally prepared to go through with a sale at that point, but I knew we'd learn something from the exercise.
And we did. Both companies sent in people to check us out. They signed confidentiality agreements; we provided them with audited financial reports and answered their questions. (I wasn't worried that they'd use the information against us. Competitors can't hurt us so long as we stay focused on doing business our way.) They were very interested in our records storage business but made it clear that they didn't want the delivery business. That was a problem because the two were part of the same company. So we split them into separate entities, giving us the option of selling one without the other.
Over the next two years, we had more feelers. A venture capital firm in Boston that had been buying records storage companies suggested we merge, arguing that if we joined forces my partners and I would eventually make more because we'd get a higher multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization) for our share of the combined business. I didn't believe it. Meanwhile, the shredding business was also beginning to attract the attention of would-be purchasers. Iron Mountain, for one, inquired about buying it. I said we would never sell it separately from the records storage company--especially to a competitor--because the two businesses had customers and employees in common.
To my surprise, the Cintas people didn't blink. They believed we would make them players.
Then, suddenly, an opportunity arose to sell them together, and at a substantial premium. Another big company, Cintas (NASDAQ:CTAS), was getting into records storage and secure document shredding. By the time it approached us, it had already acquired a number of shredding businesses and at least one records storage business. The Cintas people said they regarded us as a plum that would overnight make Cintas a major player in both industries. I told them I would consider selling the two businesses for an amount that was 33 percent above my original number and that was based on a higher multiple of EBITDA than Iron Mountain or Recall would be willing to pay.
To my surprise, the Cintas people didn't blink. The company's CEO came to visit us. He and his colleagues courted us, emphasizing how similar our cultures were, even having us read a book on their management philosophy, which was employee-oriented, like ours. But as the negotiations grew more serious, I began to have second thoughts. I felt I needed to get a better sense of what other people in my company were feeling. I met individually with my four senior managers and told each of them how much he or she would get if the sale went through--a very large amount of money. Then I called them to a meeting with my partners, Sam Kaplan and Louis Weiner, and my wife, Elaine, who is our vice president of human resources as well as a co-owner. I handed each person a piece of paper. On each page, there were lines saying "Yes, sell" and "No, don't sell." "You have 10 minutes to mark your paper," I said, "and you can't talk to one another during that time. This is a nonbinding vote. I just want to see how you feel."
I knew that Elaine would vote to sell and Sam would vote not to sell, but I had no idea about the others. When the tally came in five to two in favor of selling, I was shocked. Yes, the managers stood to get a lot of money from the sale, but they'd get that no matter when we sold the business, and the change in ownership might cost some of them their jobs. It would almost certainly transform a culture to which they had become attached. Louis, I discovered, was as surprised by the vote as I was: He told me he couldn't believe that only he and Sam were against selling. In the next few days, all of the managers came to see me. One said she wanted to change her vote. Another told me she didn't really care what we did: She assumed I'd start another business, and she'd join me in it. When all was said and done, I figured the vote was a toss-up, although it did give me new insights into the people I worked with, especially Louis. I hadn't realized how much he liked his job.
Ultimately, of course, the decision was mine. I agonized over it. Cintas was offering more money than I'd ever dreamed the company would be worth. Yet I found it hard to go against my two partners. If they enjoyed what they were doing so much that they were willing to forgo a big payday, shouldn't I be willing to hold off for a while? Finally, I told the Cintas people we just weren't ready. "This is a moment in time for us," the lead guy said. "I don't want to force you into anything, but you know how companies work. This opportunity won't be here forever." I told him I understood. Within a few months, he and his colleagues had moved into different positions at Cintas, and the moment had passed.
Now, two years later, I find myself at another moment in time. I have an offer before me from investors who want to purchase the three companies, including the delivery business, for almost twice as much as Cintas was offering for the records storage and shredding businesses alone. The multiple of EBITDA would be much higher than the norm for the industry. How this came about will be the subject of next month's column.
In the meantime, I'll try to resist the urge to throw somebody out a window.
Norm Brodsky (email@example.com) is a veteran entrepreneur whose six businesses include a three-time Inc. 500 company. His co-author is editor-at-large Bo Burlingham.
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