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  • What to do?

    Greetings all.....

    Long time lurker....first time poster.

    I'm a conservative contrarian, value investor at heart.

    I'm an avid reader/researcher of all things related to the economy(both local and global) and I can honestly say I've never felt so unsure of the future economic climate in my life.

    One thing I'm fairly confident of is that the next 10 years will likely not be as good for MOST people as the last 10 years.

    I'm doing everything I can to prepare for what I perceive may happen.

    My personal investments are focused on energy(Canadian Royalty Trusts), China, a couple monopolies, and precious metals.

    The bulk of my family's net worth is tied up in a nearly mortgage free commercial property located under a quite successful, debt free business we own(Business Week Top 50 Brand).

    Sitting on a good bit of cash, and mostly unused leverage, I'm considering the purchase of another business to diversify away from our existing business if things sour going forward.

    The business I'm looking to buy is a document storage business for a reasonable valuation.

    The document storage business seems to be a somewhat recession proof business(if such a thing really exists). Customers rarely change document storage companies, cash flow is a lot more predictable than the weather, the customer base is diverse(some fast growing companies, some big old school insurance companies, and government departments).

    It WILL require having to use a good bit of leverage to make it happen and still leave us a bit of fat for contigencies until we pay down the debt(3 years).

    I know this forum focuses mostly on more liquid investments such as shares, bonds, commodities, and property......but with the high risk, low return environment we have at the moment I'm wondering if buying another business where I can better influence and control the return(to some extent) is the better option than sitting here, having my cash pile killed by inflation.

    I guess I'm looking for a couple "outside the square" opinions, other than my local fellow entrepreneur friends, to help me in my due diligence and making sure if things proceed I'm taking a WELL calculated risk.

    Any/all opinions or questions are greatly appreciated!

  • #2
    Re: What to do?

    Beyond the obvious question of whether or not there is a market in your location, I'd consider the following:

    1) A trend toward electronic archival. gets easier every year to move a mountain of paper to 1s and 0s. Hard for me to see a need for this business at all within 10 years. Probably already getting close to being cheaper to scan than to store for 3+ years.

    2) Make sure you know what it really costs to be in this business. You'll probably need non-water based fire suppression (halon? - not always allowed without special permits), a non flooding location, humidity control, etc. Not to mention tracking and billing systems. Note this all goes away with #1 above.

    3) No real barriers to entry. You need a building, a sign, some racks and if you're good the items in number two. Unfortunately you'll still have to compete on price with the folks that don't do the items in 2.

    This is really just a property management strategy. The question is can you get enough extra per sf over simply leasing the building to justify the extra work involved. Keep in mind you still compete with other landlords. If you start to realize a better than economic profit other building owners will follow suit.

    That said, I believe there will be folks that do ok in this business. But they will be the ones who offer full document management services and create differentiation. Scanning. Shredding. Online file tracking. Pick/up drop off. Etc.

    Or perhaps the one that happens to land a huge, old-school, paper based, client. :-)

    Comment


    • #3
      Re: What to do?

      Originally posted by lakedaemonian View Post
      The business I'm looking to buy is a document storage business for a reasonable valuation.
      Why do the current owners want to sell it?

      Comment


      • #4
        Re: What to do?

        Originally posted by SeanO View Post
        Beyond the obvious question of whether or not there is a market in your location,

        City of almost 400,000 people...this company is 1 of 4 in the industry operating locally.

        I'd consider the following:

        1) A trend toward electronic archival. gets easier every year to move a mountain of paper to 1s and 0s. Hard for me to see a need for this business at all within 10 years. Probably already getting close to being cheaper to scan than to store for 3+ years.

        I shared the same concern. Upon looking further into it....every company locally/regionally focused exclusively on digital document storage(as opposed to physically storing them) appears to be under serious financial stress....it does not YET appear to present a serious threat......but would appear to mean there would be some serious CAPEX down the road in adding on that service to the existing physical storage service.

        2) Make sure you know what it really costs to be in this business. You'll probably need non-water based fire suppression (halon? - not always allowed without special permits), a non flooding location, humidity control, etc. Not to mention tracking and billing systems. Note this all goes away with #1 above.

        While I strongly prefer to own the real estate under my feet, in this case a robust lease is in place with an excellent security/fire supression system in place. The best part is the company leases space BY THE BOX.....with about 60% capacity remaining...no need to pay for empty space.

        3) No real barriers to entry. You need a building, a sign, some racks and if you're good the items in number two. Unfortunately you'll still have to compete on price with the folks that don't do the items in 2.

        I was thinking the same thing, but apparantly the industry possesses a "wide moat". Customers are extremely reluctant to change providers due to industry norm onerous contract cancellation fees....it costs a small fortune to move boxes to another provider.......the average customer contract life is approximately 15-19 years.

        This is really just a property management strategy. The question is can you get enough extra per sf over simply leasing the building to justify the extra work involved. Keep in mind you still compete with other landlords. If you start to realize a better than economic profit other building owners will follow suit.

        Exactly! It's a real estate play(in my opinion) where I can use leased property(while real estate prices are overpriced) instead of owned property until prices approach reality.

        That said, I believe there will be folks that do ok in this business. But they will be the ones who offer full document management services and create differentiation. Scanning. Shredding. Online file tracking. Pick/up drop off. Etc.

        Shredding, file tracking, ONE HOUR pick up/drop off is offered...I reckon to continue competing in the future.....scanning and digitial storage/retrieval will likely become more relevant over time.

        Or perhaps the one that happens to land a huge, old-school, paper based, client. :-)

        Cheers for the feedback!

        Comment


        • #5
          Re: What to do?

          Originally posted by renewable View Post
          Why do the current owners want to sell it?
          They made some fairly substantial financial mistakes.

          The business is robust, with growing revenues and growing gross profit/net profit margins, but they've been forced to drain company profits to pay off two other failed ventures and their fairly big lifestyle by the looks of things.

          There's enough money in it to pay down their debt and allow them to continue living large for a while.

          I also think there could be a future exit strategy/consolidation play by rolling it into the likes of an Iron Mountain or Recall(two big and growing industry players).

          My biggest concern is what's a likely worst case scenario if we buy, then we see a downturn soon after...how could the industry be affected by the following:

          high inflation....or even hyperinflation
          deflation
          a real estate crash
          a consumer spending crash(where my current business is likely to take a hit)

          Thank you for your feedback as well!

          Comment

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