It is 2:30 in the morning. Rap music is blaring in the background, and I am busy pushing paper through a machine. I look around and see the guys steadily working to the beat of the music and I try to think about how many nights in a row I have worked and I honestly can’t remember—It all seems to run together. One steady thought constantly goes through my head: “Why I am I doing this?”
I had started a document destruction company with my long-time friend John Bauknight in the fall of 1997. The business was simple enough. John would go out and sell, I would drive the truck, and we both would shred the paper at night. By late 2000 the plant was running 24 hours per day, and we had no control over our lives or the business. We had reached a point where this simple idea we had for a business had actually turned into a very real business and we had no clue what to do next or a plan to get us there.
By 2002 Shred First had become a recognizable name in the industry, and with that came offers to buy our company. These offers came with questions such as, “What’s your exit strategy?” to which we would clearly have no answer. At some point that year we came to the conclusion that we needed to answer another ever-present question, the one that we keep asking ourselves: “Why are we doing this?”
We hired a consultant, called our long-time accountant and planned a three-day retreat. After three long days and nights, we emerged with a plan and purpose. We separated the company into departments, and each department had very specific goals. With all the daily headaches removed, John and I were able to focus on our mission to grow the company. It was an incredible experience to see how fast we grew with a clear plan and set of goals. We made two acquisitions in Alabama, opened offices in Atlanta, Dallas and San Antonio.
Each year several companies were very motivated to buy our company, only now we had a clear plan. We knew what we wanted and why we wanted it and, if we were not able to reach our goal, we would wait.
In August of 2006, we sold Shred First. Since then, I have had the privilege of being a part of the growth of our industry by assisting companies with their plans for expansion along with the buying and selling opportunities they encounter. Through my experience, I’ve amassed a number of tips to pass along to those business owners whom I meet.
HAVE A PLAN
According to an American proverb, “If you don’t plan for yourself, you will become part of someone else’s.” Companies that are in acquisition mode have very specific plans and goals. If you are not very clear in what you want and how you are going to get it, you will become part of their plans.
The best way to get started is to assemble the key decision makers and one or two advisors for a company retreat. It is important that retreat revolve around developing a road map for your company. Planning is a team effort, so make sure you assign each person with a task associated with the plan. Then follow up with monthly meetings that are devoted specifically toward your company’s plan for the future.
I have realized that good plans are made up of small steps toward the final goal. Without a plan, you are simply taking leaps of faith and hoping for good luck. As our bankers often say, “Don’t let your poor planning turn into an emergency for me.”
DETERMINE VALUE
Plenty of people are well-trained and licensed in the art of business valuation. I am not one of them. So before you run off and start buying companies or selling yours, make sure you consult with your accountant and legal advisor.
That being said, I can give you a few basic rules for determining value.
1. Value a potential acquisition’s business on what it will look like once you have integrated it into your business structure. It is very important to remember that the way you run your business will be different from the company you are acquiring.
2. The value of a business is typically determined by a multiple of cash flow. Our industry has generally started with a multiple of gross revenue to determine value, but I can assure you the ultimate decision comes down to cash flow. As a very general rule, a business may go for four to seven times cash flow. For example, a company you are looking to purchase has annual revenue of $1million. You determine that once this book of business is integrated into your organization, it will generate an additional $300,000 in annual cash flow. Let’s assume the company is well-run with a diversified revenue base and warrants a multiple of six times cash flow, which would give this company a value of $1.8 million.
Another common question is what makes a document destruction company more or less valuable? The following are all attributes to consider:
• Revenue Allocation—A healthy company generally is comprised of 51 percent scheduled service, 24 percent purge business and 27 percent paper revenue.
• Customer Concentration—Nothing lowers value like a company having all its eggs in one basket. If the revenue is concentrated in just a few customers, you can protect the value by having them in long-term assignable contracts. A diversified customer base that is under contract will bring the most value.
• Route Concentration—How far your trucks are traveling can profoundly affect value. When a company has a customer base that is spread out over a large area, the transportation expense will drive up costs and lower cash flow.
WHEN TO BUY
Any plan for growth will contain targets for improving customer density and growing into strategic markets. Acquisitions provide an avenue for rapid growth and are less expensive in the long run than greenfielding a new market. Of course, the major drawback of an acquisition is the upfront cash it takes to complete the deal; whereas, you can spread the cost of greenfielding a new market over time.
With either process you need to take the time to build relationships with potential targets while doing research on the markets you want to service.
WHEN TO SELL
Before you sell your company, you need to answer the following two simple questions:
1. Why? Excluding people who are selling for health or financial reasons, this is a very hard question to answer, especially if no formal plan is in place. For us the answer was simple. We both had young children and wanted to spend more time with them. We had a good idea of what it would take financially to accomplish this along with the funding of our other businesses. By doing this, we were able to set a target number that represented what we needed and then we waited for the right deal.
2. What are you going to do after you sell? We had several other young companies that we had started during the time we were growing Shred First. Our plan after the sale was to put more time, cash and energy into growing these companies. Using the cash to fulfill a lifelong dream, focus time on other businesses or retire are good reasons to sell. Selling with the idea that you are just going to go do “something else” with no clear direction is a bad idea. Each year at the National Association for Information Destruction (NAID) Annual Conference, we see people hanging around full of regret, wishing they had never sold their companies.
STICK TO THE PLAN
The experts caution against getting emotionally attached to your business and your employees. That’s easy for an M&A guy who has done hundreds of deals to say. But when you have built a small business from nothing, you become pretty attached to it and the people who work for and with you. Once you have built a company, it becomes part of your identity and what you are recognized for. Selling your business will be an emotional experience, but it will be a much more manageable one with a clear plan.
Most importantly, remember that it is your company and you must make the final decision on which way to take it. Never let anyone talk you into a deal you don’t feel comfortable with. Don’t be afraid to walk away from a deal with or without the money.
The author co-founded Shred First, based in Spartanburg, S.C., which he and his partner John Bauknight sold in 2006. He is also a founder of Total Product Destruction, Total Records and Information Management and Total Training Services as well as other businesses in the Longleaf Holdings family. He can be contacted at nwildrick@longleafholdings.com.