Security Shredding and Storage - a shredding industry publication

Don’t think shredding. Think information management. Not only is that what customers value, it’s what buyers want—buyers of businesses like yours.

By Tom Andel

David Lane says there are plenty of entrepreneurs looking to buy shredding and document storage companies and roll them into big single-stop information management service providers nourished by mergers and acquisitions. As president of Lane-Link Group, Inc., an investment banking firm specializing in the document management sector, he’s helped many entrepreneurs serving this niche establish their value in this post-9/11, post Sarbanes-Oxley business environment.

“More than $250 million of capital is committed to investing in information management in the next couple years,” Lane says. “Now is a great time for someone trying to decide what to do with their information management business.”

However, just as in comedy, timing is everything. With capital gains rates expected to jump in 2011, after-tax considerations become much more important than the initial purchase price. Lane says of capital gains changes are implemented then an entrepreneur could net 15-25% more dollars by selling his business this year rather than waiting until next year.

“Right now you have 15% long term capital gains if a deal is structured appropiately,” he explains. “If the Obama Administration takes it back to 28%, well now you’re at a 13% swing. If they take it up to 36 or 38% then you’re over a 20% swing. That’s significant and a real reason to have an Exit Strategy Plan."

To take advantage of these circumstances, an entrepreneur must prepare his business and understand what separates a good time to sell from a bad one.

When it’s not a good time to sell

If you’ve just made a significant investment in your business and haven’t yet realized a return, you might want to postpone a sale. A buyer won’t pay you for the fact you have a new shredding truck or new buildings. That's why Lane warns people about just hiring someone because they throw out a high sale price or trying to do it on their own. He feels Lane-Link is unique because they are willing to help people over time and inform them when the time is right, which may be today, tomorrow, or well into the future.

“Some tell everyone they need to sell now because they’re driving their own income by taking the purchase price and multiplying by their commission percentage,” he says. “The more “For Sale” signs, the higher probability of a paycheck, especially when they perceive their job as finding you a buyer. Others sometimes provide ballpark valuations without ever analyzing your business or financials. At Lane-Link, we have an entire team devoted to each project with the experience and skill set to assist you both before and after a buyer is found. 95% of investment banking is adding value by analyzing the client’s situation and saying whether or not now is the time, structuring the transaction before and during a sale to achieve clear objectives and then diligently working the transaction through to a conclusion and closing. It could be that a buyer should be a seller and a seller a buyer."

Some clients may work with a company like Lane-Link for years before selling. It may take that long to maximize their business value so it’s more appealing to a buyer. If there are issues, a value-added service provider will help the client correct them before the sale or work them into the transaction so they don't detract value.

When is it time to sell?

Not so fast. Do you understand the value drivers of your business? Maybe there’s something that could be capitalized on in the next two or three years to increase the value of the business. Again, factor in next year’s expected capital gains tax increases. That said…

“This is an opportune time because there are multiple buyers and significant committed capital from the private equity market,” Lane continues. “Private equity has found the information management space and there are four or five extremely large private equity firms backing these expansion companies to do acquisitions along with the standard industry consolidators we all know. Now is a fabulous time to talk to us about an Exit Strategy and where & when you may fit into these growth strategies.”

That’s quite a change from only a year ago. Professionals in the information management space were not only constricted by the credit markets, but spooked by a dramatic drop in paper pricing in the fourth quarter of 2008. These companies were sitting on their paper and had trouble moving what used to represent a significant revenue source. It woke them up to the fact they couldn’t afford to live off paper revenues and throw in value added services for free. That got people thinking about changing their business models and focusing on service pricing.

The "Net" of the deal

Analyzing every option is one of the value added services investment bankers like Lane-Link can provide. It’s part of a proprietary package of services that can include customized confidential marketing materials for potential buyers that highlight the key value drivers of a business or net after tax analysis. This information confidentially gives buyers in the market the information they need to make an offer for the business and you the real information you need to make a decision.

Then Lane-Link will work on due diligence and negotiating the purchase and sale documentation to close the transaction. Lane-Link’s duty is to structure the best possible transaction that meets all of the clients' objectives and actively manage the process, consistently dealing with the known and unknown until the money is in the bank.

“I’m going to talk to you about structure, objectives, and net after tax in your back pocket,” Lane says. “I’m not taking my calculator and multiplying purchase price times commission percentages. That's a cost center. I quickly become a profit center for you, proficing an exponential return on what you invest in us. So we’re always after what’s in the best interest of our clients, and at the end of the day, among other things, that translates to how much is left in your bank account when everything is paid and settled—including Uncle Sam.”

The Forging of Lane-Link

Sixteen years before getting into managing mergers and acquisitions in the information management sector, David Lane specialized in agribusiness. That was a good field to start in because it taught him respect for understanding clients needs and objectives instead of just his own.

“In agribusiness, from April through September everyone is so busy planting, treating crops, dealing with their fertilizer and chemical programs, or harvesting that you are a nuisance or a hassle to them if you call and talk to them about potential deals,” Lane says. “That’s why I decided to diversify into separate industry segments. I assembled my team and got into information management, which had the same characteristics (multiple buyers in a consolidating industry) without the seasonality."

He saw big companies like Iron Mountain buying record storage and shredding companies and the continuation of business consolidation. That’s why he decided to become an expert in information management in 2000. His timing set him up for a very interesting time in U.S. history once business scandals made Enron a household word and document security became the watchword for every industry. Suddenly the accounting department of every large company became a security center.

The Sarbanes-Oxley Act of 2002 was created in part to counter the decline of public trust in accounting and reporting practices. Among its major provisions is one that calls for public companies to evaluate and disclose the effectiveness of their internal controls. Information control systems had to ensure the disposal of obsolete business records.

This concern was already spreading in healthcare, where the Health Insurance Portability and Accountability Act (HIPPA) of 1996 set national standards to protect individuals’ medical records and other personal health information.

And in the banking industry, The Financial Modernization Act of 1999, also known as the “Gramm-Leach-Bliley Act” or GLB Act, established provisions to protect consumers’ personal financial information. Its Financial Privacy Rule governs how financial institutions collect and disclose customers’ personal financial information. It also applies to any company that receives such information. Its Safeguards Rule requires all financial institutions to design, implement and maintain safeguards to protect customer information.

Keeping up with such changes in how documents need to be handled can be a daunting task for small and medium businesses. So can knowing when it’s time to get out of those businesses.

“We focus on the entrepreneurs who put themselves and their families at risk to build a business,” says Lane. “We can connect with them because we’re entrepreneurial buyers and sellers too. We own, buy and sell companies ourselves and understand the decision process these clients go through when it’s time to buy or sell a business. We haven't just been an employee, we have actually had to make these tough decisions after years of "Sweat Equity", decisions that not only dealt with timing, but our family, future and value maximization."

According to Lane, Sarbanes Oxley changed the information management landscape by turning shredding into a value driver for the service sector. Information management is a fragmented market characterized by entrepreneurial business owners interested in building up their businesses.

The challenge is knowing when buying or selling is the right move or whether you can design a business model that positions you to better compete with the bigger, consolidating companies. That's the nature of investment banking services and the differentiation Lane-Link can provide.


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