A Deal Falls Through
I doubt that anyone is keeping track, but it's been exactly three years since the appearance of my first column about the offer I'd received for my records-storage, document-destruction, and trucking businesses. (See "The Offer, Part One," November 2006.) Never in my wildest dreams could I have imagined back then that I'd still be negotiating with potential buyers this far down the line.
Yet less than two years after selling my business, it feels like déjà vu all over again. That's because Allied Capital, the company that bought a majority stake in CitiStorage, asked me to help it sell my former company after Allied ran into problems with its lenders in the wake of the financial crisis.
As educational as the entire process has been for me, it has taken a toll on the morale of my employees, especially my senior managers. They've endured three rounds of due diligence and watched a parade of potential buyers come through the company. Each group of strangers in suits served as a reminder of the uncertain future we faced. I could almost feel the anxiety level in the building rise whenever a new group showed up. Staff members couldn't help wondering whether they'd still have jobs after a sale. Inevitably, the rumor mill cranked up, and we began hearing disgruntled noises from some key people.
Our latest upheaval occurred when Goldman Sachs pulled out of what seemed like a slam-dunk deal after raising a laundry list of doubts in the 11th hour. So I knew I had to lay down some new ground rules when Allied Capital decided to continue shopping the deal. First, there would be no more meetings in our offices. Second, potential buyers would have to deal exclusively with my partner Sam and me. Third, we would not allow any due diligence to happen or discuss any terms of a sale until the prospective acquirer had resolved whatever questions it might have about the three issues that had ultimately led Goldman's people to kill the deal. Those issues were: 1. the terms of the lease they'd have to sign with us (since we own the real estate); 2. the possible condemnation of the property by the city, which wants to turn our land into a park at some point; and 3. the danger that the buyer might be held liable for environmental problems caused by a previous landowner.
Sam and I were pretty certain that Goldman's decision meant CitiStorage wasn't going to be sold anytime soon, but Allied Capital wanted to go back to the other companies that had expressed interest in acquiring us, and so did Harris Williams & Co., the investment banker we'd hired to manage the process. That was understandable. It wouldn't get paid for its work unless there was a sale. Despite our skepticism, we told our contacts at Allied Capital we would do whatever they wanted.
In the end, the exercise proved to be instructive, even though -- as Sam and I had predicted -- it did not lead to a sale. There was just one serious prospect, a former storage-company executive backed by Friedman Fleischer & Lowe, or FFL, a San Francisco–based private equity firm. We had a four-hour meeting with FFL at a neutral location and spent most of it going over the three issues. About a week later, I heard back from Mike Hogan, the Harris Williams managing director who was handling our deal. FFL had contacted him and laid out its reservations about buying CitiStorage, and he wanted to pass them along to me and Allied Capital.
For one thing, he said, FFL's people had found in the past that entrepreneurial companies don't always maintain their previous level of performance after the entrepreneur leaves. They wondered whether that might happen here. They were also concerned that we were almost at full capacity. Then, too, they worried about the disruption of the business if the city decided to condemn the land and the company was forced to move. And what if we couldn't line up financing when our securitized mortgage expired in five years? These were all risks that FFL would have to take into account in making a bid. Its people said that, as a result, the most it could offer would be a price it knew Allied Capital would not accept. So FFL had decided to pass.
And that was that. The resale of CitiStorage isn't going to happen after all, not now and in all likelihood not for several years. By then, the company will be larger, the economy will have recovered, and the mergers and acquisitions environment will have improved, or so we expect. If we sell the company at that point, we should all be able to get a reasonably good return on our investment. In the meantime, CitiStorage will continue to grow organically. Sam and I don't expect to be doing acquisitions of other records-storage companies. Although Allied Capital is clearly not in dire straits -- something I could not have said nine months ago -- its business model has changed. It probably won't be buying companies like ours in the future.
The new game plan has forced me to adjust my thinking about my own future. The fact is, I hadn't expected to be involved with CitiStorage much longer. Mentally, I was already out of here. I'd told the Goldman Sachs people I could be available on a part-time consulting basis for about 20 weeks in the next year, but no more.
Looking back, I figure I've been fortunate to have had two years to scale back my role after selling the company. During that time, my partner Louis and his team have completely taken over day-to-day operations. If they've needed my advice, I've been nearby. But this period was coming to an end. Sam and I had discussed a variety of projects we might get involved in. We'd already made a few investments and were looking for others. Psychologically, emotionally, and practically, we'd moved on. And I was not unhappy about that.
Now, suddenly, I find myself looking at an extended period of responsibility for CitiStorage's financial well-being. My partners and I have too much money tied up in the company for Sam and me to walk away and hope others will look out for our interests. If the business isn't going to be sold for another three or four years, we need to make sure we do what's necessary to get the best price at that time. That means, first of all, continuing to expand the business as we've done in the past -- one customer at a time. In addition, we have to address the concerns raised by Goldman Sachs and FFL, which we can assume other potential buyers will have as well. Those concerns boil down to uncertainty about the future status of the land.
You might ask why I didn't realize earlier that questions about the land could have such an impact on the value of the company, perhaps even making it unsellable until they're resolved. The truth is, nobody was paying much attention to risk before the bubble burst, and so these real estate–related questions never arose. How things have changed! Two years ago, people were lining up to buy this company at 10 times EBITDA (earnings before interest, taxes, depreciation, and amortization), with relatively few questions asked. Today, we can't find anyone to buy it at a price Allied Capital would find acceptable. Figuring out how we went from having many buyers to having no buyers has given me a deeper appreciation of what everyone has been through in the past two years -- and what the future holds. And that's the subject of my next column.
Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, was named the best book on entrepreneurship of 2008 by 800-CEO-READ.
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