The Offer, Part Two
In business, as in life, it's often what you don't do that makes all the difference.
The story begins where I left off last month. Right around the time that Cintas (NASDAQ:CTAS) expressed an interest in buying our companies, I was approached by a venture capital firm that was trying to get into the records storage and secure document-shredding businesses. It had already bought the company of a guy I know in New England and was in serious negotiations with another friend of mine in Pennsylvania. The firm wanted to talk about buying our businesses as well, but my partners and I weren't interested. For one thing, we had doubts about the buyer's financial staying power. That was important because if we ever do sell our businesses, we plan to hold on to the real estate and lease it back to the acquirer. So we certainly didn't want to sell them to people who might not have enough money to keep paying the rent. Soon thereafter, moreover, Cintas made its offer. We didn't think anybody could match what Cintas--because of its special circumstances--was willing to pay, least of all a group of VCs who were just starting out in the business.
But, as you know, I decided not to do the Cintas deal. The main reason was that my partners were against it, though there was another factor as well. Cintas wanted only the box and the shredding businesses, leaving me with the delivery business, which I didn't want to keep if I sold the other two. It was profitable enough, but it was so intertwined with the others that I doubted I would ever be able to sell the delivery component as a standalone entity. Besides, my partners and I really didn't want to be in a tough, lower-margin business like delivery. We were still doing it only because some customers were willing to pay the higher prices we'd begun charging in recent years.
Since I still expected to sell the box and shredding businesses at some point in the future, I knew I'd eventually have to decide the fate of the delivery business, but I figured I'd cross that bridge when I came to it. We had more urgent matters to focus on--for example, figuring out what to do when we run out of space in our warehouses next year. Given the outcome of the Cintas episode, selling the businesses clearly did not belong high on our agenda. I wasn't even thinking about it when I showed up at our annual industry conference last spring.
"You're in a bit of a spot, aren't you?" I said. "People don't feel like they have to talk to you. If you bought us, you could talk to anybody. You'd become a player over night."
But a funny thing happened at the conference. One of the VC partners I'd never met before was there, and we hit it off immediately. Let's call him Greg. I found him to be a terrific guy and an astute businessperson. The concerns I'd had about selling to the firm melted away. Perhaps he sensed that. In any case, he said, "Okay, I think it's time for us to buy your business." I laughed. As I thought about it, however, I realized he was right. It was, in fact, the perfect time for him to buy our business--perfect for him, that is, not necessarily for us.
"You're in a bit of a spot, aren't you?" I said.
"What do you mean?" Greg replied.
"Well, right now the three biggest players in the industry are Iron Mountain (NYSE:IRM), Recall, and ArchivesOne," I said. "You've bought a couple of small guys, but you don't have enough bulk to be a real player. People don't feel like they have to talk to you. If you bought us, you could talk to anybody. You'd become a player overnight."
He laughed and smiled. "Okay, so what's it going to take to buy your company?"
"Well, we'll do it as a multiple of EBITDA, but here's the thing," I said. "I won't negotiate. I'll give you the multiple"--I gave him one that was well above the industry norm--"but I won't discuss it. Also, you'll have to take all the companies, including the delivery company. It's a nice little business, and it's an adjunct to the others. So the multiple applies to all three. If you're interested in buying us out under those terms, I'll talk to you. If you're not, you'll still be my friend."
Greg didn't blink. "Can you give me some financials?" he asked.
"Of course," I said. "My partner Sam handles these things. Call him when you get back to New York. I'll tell him to give you whatever you want to look at. You'll just have to sign a confidentiality agreement."
"No problem," he said.
Suddenly we were back in play. Greg contacted Sam, who gave him some basic financial information about the three businesses. Shortly thereafter, he called Sam with an offer. He had looked at our EBITDA and calculated a price based on the multiple I had given him. He said his firm would buy all three businesses for an amount that was several million dollars less than that price. "What do you want me to do?" Sam asked me.
"Nothing," I said. "Do nothing. Don't call him back."
"What are you talking about?" Sam said.
"I told him there would be no negotiations," I said. "We're not negotiating."
We didn't hear anything for the next week or so. Then I got a call from my friend in New England who had sold his business to the VC firm. I'll call him Mitch. He was now on the board of the company that the firm had formed out of its various acquisitions. "I've been talking to Greg," he said. "He was surprised we haven't heard back from you about his offer."
"Listen, Mitch, here's the deal," I said. "I told Greg there would be no negotiations. He's a terrific guy, but I'm not negotiating with him. I don't care if I sell the business or not."
Two days later, Greg called me. "We just wanted to put something on the table," he said.
"Greg, I love you, but I told you: There's no negotiating. If you don't want to do it under those conditions, it's fine."
I don't care if I sell the business or not. And therein lies a paradox. The less interest you have in doing a deal, the more likely you are to get one you'll find difficult to refuse.
"No, no, no," he said. "We'll pay you what you want."
"Okay," I said. "Call Sam back, and we'll get things moving."
And move they did. Shortly thereafter, Greg and his people indicated that they would be sending us a letter of interest as soon as they finished analyzing our balance sheets. We asked them to hold off until we completed work on a refinancing agreement that would allow us to get out from under our personal guarantees. Within a few weeks of closing that deal, we had received and signed the letter of interest stating that--subject to due diligence and the signing of a formal agreement--Greg's firm would buy our records storage, document-shredding, and delivery businesses for a lot more money than we had ever been offered before.
This was not a foolish offer on the firm's part. From a business standpoint, I think it makes sense for Greg and his colleagues to pay that much to acquire us. They need to get themselves on the map if they're going to meet their investors' financial goals. We can put them on the map in one fell swoop. The deal would kick-start their business, especially since my company is still growing at a rapid rate. For me, on the other hand, it's an opportunity that won't last forever. Greg and his partners retain the right to change their minds about the deal (as do I), and I can't imagine that anyone else is going to offer as much. We're worth a lot more to an up-and-coming company than we would be to an established business. Then, too, rising interest rates could reduce the buyers' projected multiples by making money more expensive, in which case the buyers would have to offer less in order to get the returns they're seeking.
So there's one thing I can be pretty sure of: I will never get a deal like this again. Not that I needed any great negotiating skills to land it. If you've ever negotiated to buy or sell something, you know that you're much more likely to get a good deal if you're willing to walk away empty-handed. Indeed, you're probably in the strongest negotiating position when you really don't care very much whether the deal goes through. And therein lies a paradox: The less interest you have in doing a deal, the more likely you are to get one you'll find difficult to refuse.
That's exactly the spot I find myself in at the moment. Assuming the due diligence goes smoothly--as I expect it will--I will soon face one of the biggest decisions of my business career. I really don't know what I'll decide. I'll tell you more about my mixed feelings in next month's column. In the meantime, I'd like to hear your opinion about what I should do. We've set up a special e-mail address for comments and advice from readers. It's firstname.lastname@example.org. Please let me know what you think.
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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