Selling My Company (Again)

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When somebody tells me not to worry, that's when I start worrying, and the steady drop in Allied Capital's stock price did nothing to reassure me. From $22 at the time of the sale, it fell to about $1.80 just one year later and showed no signs of rebounding anytime soon. There wasn't anything we could do about it, however, so we followed the advice we had been given and minded our own business. Weeks went by in which we had little or no contact with Allied Capital. Although a new person was assigned to us, he and his bosses left Louis and his management team to run the company. Meanwhile, Sam and I kept ourselves busy with other projects and speculated about what the future might hold.

Mainly, we wondered what would happen if Allied Capital did wind up violating its bank covenants, as seemed almost inevitable, or even if -- God forbid -- it filed for bankruptcy. Either way, we figured, there was a good chance that we would be sold. So we weren't surprised when the executives of Allied Capital came to us and asked for our help in checking out the market. "We might not sell the business if the price isn't right," they said, "but we would like to know what it's worth. What do you think we can get for it?"

"I have no idea," I said, "but I can investigate."

Sam and I had been following developments in the industry closely and knew the various players who, like us, wanted to build the next big, national records-storage and document-destruction business. We decided to meet with the three most likely candidates and give them a chance to make an offer. The number we got back was $65 million, down from the $87 million Allied had paid. (The $110 million figure I've mentioned before included an interest in the real estate.) When we told the Allied Capital people what we had found out, they said, "No, we won't sell at that price. We don't need to."

But Allied's position was continuing to deteriorate. On January 28, 2009, it announced that it was close to being in default on its loan agreements as a result of the decline in the value of its investments. It was opening talks with its lenders to see if they would agree to a waiver allowing the company's assets to fall below two times its debt, as its covenants required. Without such a waiver, it wouldn't be able to pay dividends -- a key reason investors bought its stock -- or borrow money. Whatever the lenders decided, the firm was obviously under pressure to deleverage -- that is, raise cash and unload debt. That meant selling some of its portfolio companies. Unfortunately, the companies most likely to attract buyers, and thus allow Allied Capital to raise the cash it needed, were precisely those that, under other circumstances, it would be most reluctant to part with -- namely, the most solid, best-performing businesses it owned, including ours.

Sure enough, the Allied Capital executives soon came back to us. "We have to sell some companies," they said. "We have a couple of big deals pending, but we may have to sell yours, too. It depends on the price we can get. We want to hire an investment banking firm to handle it." That was fine with Sam and me. Working with Allied's people, we looked at a couple of investment banks and settled on Harris Williams & Co., based in Richmond, Virginia.

At that point, the major question in my mind and Sam's was, What price, if any, would Allied Capital accept for our business? We could only guess the answer. Allied's people weren't talking, as well they shouldn't have been. Their fiduciary responsibilities to their own shareholders required them to keep us in the dark. What we did know was that, if Allied Capital went through with a sale in the present environment, my partners and I stood to lose our entire equity investment. It was a matter of simple math. Given our own soundings of the market, we could be pretty sure that the bids would be from $65 million to $75 million. Whatever the final offer, it would, if accepted, have to cover, first, the expenses of selling the business, which could amount to a few million dollars. Then the senior debt, about $52 million, would be paid off.

The junior debt and preferred stock totaled $16 million, including accrued interest and dividends, of which we owned $6 million, and we could probably count on getting at least part of that money back. But after paying off the debt and preferred stock, there would be little, if anything, left for common stockholders, and we had $8.5 million of our money invested in common stock.

Allied Capital probably didn't have much choice. But I wasn't happy about this turn of events. After all, we had fulfilled our responsibilities. The problems Allied Capital faced were none of our doing. Under the terms of our deal, it had so-called drag-along rights, meaning that as the majority shareholder, it could force us to join in the sale provided we got the same price, terms, and conditions as Allied did. But I felt strongly that we deserved better. Fortunately, we had an ace in the hole. Any new tenant would have to be approved by the landlord -- and we were the landlord.

Then again, that was not a card I intended to play at the last minute. We had been doing business with Allied Capital for 30 years, and we had always treated each other fairly. I did not want to get into a fight with Allied Capital. I said to Sam, "We need to tell Allied up front what we want and see what we can work out." He agreed.

And so we set in motion a chain of events that would determine our fate.

Next: Let's make a deal.

Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book The Knack: How Street-Smart Entrepreneurs Learn to Handle Whatever Comes Up was named the best book on entrepreneurship of 2008 by 800-CEO-READ.

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