The Offer: Part 10
So where were we? Much has transpired since the last installment in the saga of "The Offer." That column (July 2007), you may recall, was subtitled "What I Learned From My Fiasco." Well, it turned out that my fiasco wasn't such a fiasco after all. On the contrary, it was just about the best thing that has ever happened to me in business. It opened my eyes to possibilities I had never considered and probably wouldn't have considered if I hadn't gone through the excruciating process of trying to sell my records-storage, document-destruction, and trucking companies to Nova Records Management.
Those possibilities became apparent soon after I walked away from the Nova deal, on April 5, 2007. By then, we had received several inquiries from private equity firms that wanted to get into the records-storage business. We had told them that the company wasn't available. As word spread that the Nova deal was dead, the trickle of calls became a flood. We quickly realized that we would have no trouble doing another deal if we wanted to, and that -- given the business's growth in the previous year -- we could probably get at least 20 percent more for it than Nova was going to pay.
My partner Sam Kaplan and I were surprised. While we were wrapped up in the Nova negotiations, the world had changed. The most important development had been the discovery of the records-storage business by some major private equity firms. Our deal may have played a role in attracting their attention, but the primary stimulus had been the sale of another company, ArchivesOne, which at the time was the third largest in the industry. ArchivesOne had retained a mergers and acquisitions firm to find a buyer. The firm had put together a deal book and sent it out to private equity investors, who were duly impressed.
What they saw was an industry full of companies with guaranteed cash flow. That industry, moreover, had only one dominant player, Iron Mountain (NYSE:IRM). The investors realized that if you could acquire and merge the right group of smaller companies, you could build a credible challenger to Iron Mountain in four to six years, at which point you could have a so-called liquidity event. That is, you could take the company public or sell it to someone else and earn a nice return on your investment. To do it in that time frame, however, you needed to start with a company that was large enough to serve as a platform. ArchivesOne filled the bill -- until it was acquired by Iron Mountain at a substantial multiple. That left only a handful of potential platform companies, and my business, CitiStorage, happened to be one of them.
So the phones started to ring. People wanted to meet with us -- any place, any time. They wanted to take us to lunch. They wanted to sit down with us at the next industry conference. They wanted to visit our offices. They wanted to tell us about themselves. They wanted to make us an offer. The calls just wouldn't quit. We laughed about it at first, but the fun quickly faded. The calls became a constant, nagging reminder that we didn't know what we wanted to do. We began to feel besieged. We cringed whenever the phone rang with another suitor on the line. Finally, Sam and I had had enough. We decided to sequester ourselves in an office, stop all phone calls, and spend as much time as we needed to figure out what we were going to do.
We quickly realized that we basically had two alternatives: We could do nothing right away and wait for a better moment, or we could take advantage of the hottest private equity market in history. The more we thought about it, the more convinced we were that, by sheer luck, we had been handed a golden opportunity to cash out. By all indications, the private equity market was nearing its peak. Besides, we had already separated from the business. Neither Sam nor I had been involved in operations for more than a year. The Nova episode had left us feeling a little beaten u p and depressed, as well as about $500,000 poorer, but the company was coming off a spectacular year, and the stars were aligned for a sale. So we said, "OK, we're going to do something."
But what? We decided to list all the groups that had approached us. There were six or seven that understood the industry and were desperate to get into it. The first question was, Should we deal with them ourselves, or should we hire an M&A firm to represent us? Some people had criticized us for not bringing in experts to help us with the Nova deal and for not shopping it to other potential buyers. That criticism was probably valid, but Sam and I decided we knew enough at this point to go ahead on our own. (I'm not necessarily recommending this to anyone else. Frankly, I'm not sure it was the right decision even for us.)
< We further agreed to two conditions on any deal we might make. First, our employees and our culture would not be put at risk. We would be the platform company, and ours would be the defining culture. Any company that was added to the platform would have to adapt to us. Second, we would work only with private equity firms that had the financial resources to do the deal themselves. With Nova, most of the financing would have had to come from outside sources, which greatly complicated the entire process. We didn't want to go through that again.
We proceeded to invite the interested buyers to meet with us in our offices. Louis Weiner, who is CitiStorage's president and a partner, joined us for the meetings, each of which lasted about two hours. The interested firm's people would make a pitch. Then we would ask questions, as would they. We learned about their investing philosophies. They learned about some of the uncertainties in our business, including our dwindling warehouse capacity and our search for additional space. We told each group that we were interviewing other potential buyers. They all left with the understanding that we would soon be back in touch. By then, Iron Mountain had also put out some feelers, but -- because of our commitment to our culture and our people -- we knew we wouldn't be selling to the giant, and so we didn't pursue that possibility.
After finishing the interviews, Sam and I went back into the office to think about our next step. We asked ourselves, Is there anything else we can do? Hardly had we posed the question than the same thought popped into both of our heads: What about Allied?
Allied Capital (NYSE:ALD) is one of the preeminent private equity firms in the country. It was founded in 1958 and has been public since 1960. Today it has total assets of about $5 billion. More to the point, it is a firm we have known for a long, long time. Sam has done six deals with Allied Capital over the past 35 years. I've done four or five, the most recent being the debt restructuring that allowed me to get rid of my personal guarantees (see "Free at Last," September 2007). Over that time, we have formed strong bonds with Allied Capital's people. Indeed, we liked them so much that we invited Allied Capital to become a shareholder, with 10 percent of our stock.
Given all that, you might wonder why we didn't think to approach Allied much sooner. I have asked myself that question. The reason is that, up to that point, we had been in defensive mode. We were so caught up in reacting to what other people were doing that we didn't see the potential solution right in front of our faces. I suspect that some of Allied's people may also have wondered what took us so long when we finally broached the idea of selling them the business. They reacted very positively. Although they weren't as familiar as some other firms were with recent developments in our industry, they knew the players. We suggested that they do some fact-finding on their own. They did and came back to us ready to do a deal, but then events took an unexpected turn.
Previously, Allied Capital had had little contact with anyone in the company other than Sam and me. Its people were unaware of the strength of our management team and didn't realize how well it functioned without the two of us. In our discussions, we noted that Sam and I had been out of operations for more than a year, and -- thanks to the hard work, skill, and dedication of our people -- we'd had one of the best years in our history. Allied's people asked, "With all this talent you have, what's your role going to be? What are you going to do after the sale?" Sam and I said we didn't know. "Well, you know what?" they said. "We don't want to buy your company. We want to do a leveraged buyout. We want you to leave a substantial amount of money in the company and become our partners. Then we want you to work with us to do acquisitions. We'll provide the financing. You'll provide the contacts and the industry expertise. If it goes well, there'll be a liquidity event in four to six years, and we'll all do very nicely." It was an appealing proposition. The shareholders -- Sam, Louis, me, and my wife, Elaine -- would get to cash in most of our stock while retaining a significant investment in the company. Sam and I would continue to work together to build the company into a major player in the industry. Employees at all levels would have opportunities to grow and take on new responsibilities while keeping the culture they had come to know and love. And I would be close enough to advise them if they wanted me to. With half a dozen interested buyers, we had a decision to make. The first step was to narrow the field. Sam, Louis, and I went into Sam's office, shut the door, turned off the phones, and opened a flip chart. We decided to begin by listing the various issues that were most important to us. We framed them as questions. There were five:
1. Which acquirer would be the best for our employees?
2. Which would be best for our customers?
3. Which would be best for us from a financial standpoint?
4. Which would be best for our lives going forward?
5. Which do we have the best chance of closing the deal with?
Next, we decided to rate the different groups according to how well we felt they addressed these issues. We wrote the five questions on five separate pages. Then, without conferring among ourselves, each of us gave each group a ranking from one to three on every question, with one being the best and three the worst. When we looked at the results, it was obvious that we all felt Allied Capital was far and away the best choice.
We signed a letter of intent in late August. In short order, Allied Capital sent in its own due diligence team, as well as a group of outside accountants to examine our books and some lawyers to go over our contracts. Things moved quickly from that point, although it didn't seem that way at the time, partly -- I'm sure -- because we had spent so much time on the Nova deal and its aftermath. It soon became clear that signing the contract, which I had considered so critical back in April with Nova, was nowhere near the end of the sale process. There were still all kinds of things that had to be worked out. At every step, I couldn't help noticing the enormous difference between negotiating with Allied and negotiating with Nova. I can sum up that difference in one word: trust. With Allied, we had it to begin with, and it got stronger as we went along. With Nova, I could now see, there had never been any trust, and any hints that it might have been developing had been an illusion.
In negotiations, Allied Capital's people were always willing to compromise and showed a real determination to get the deal done. They clearly wanted us to wind up with a deal we felt good about. Nova, I realized in retrospect, had constantly tried to beat us down. We would reach compromises with Allied Capital on 50 points, and the revised contract would come back with all 50 changes. We would negotiate 50 things with Nova, and the revised contract would come back with maybe 12 of them included and a dozen new changes no one had mentioned, most of them completely unacceptable. Looking back, we could thank our lucky stars that the Nova deal hadn't happened.
Even our timing turned out to be perfect, although we weren't sure about that at first. In the midst of our deliberations, the private equity market collapsed, and credit became as tight as a drum. We asked Allied Capital how those developments were going to affect the sale. We were told they would have no effect at all. The firm would honor the terms and spirit of our signed letter of intent, even though it had the legal right to back out. "This is unbelievable," I said to Sam. Thanks to our longtime relationship with Allied Capital, we had managed to escape the turmoil that was killing other deals left and right.
And so it came to pass that, on December 21, 2007, majority ownership in our three companies officially passed to Allied Capital, and our new lives began. What that has been like will be the subject of the next column.
Norm Brodsky is a veteran entrepreneur whose six businesses have included a three-time Inc. 500 company. His co-author is editor-at-large Bo Burlingham.
NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.