Ways to increase valuation of your Document Shredding Business above a 1.5x multiple!
I compiled a list of factors that will increase valuation of your document shredding business based upon my experience in over twenty five document shredding transactions. By applying these factors you can increase valuation of your business to a higher multiple when it comes time to sell it.
Good customer contracts will increase valuation.
- Sign all customers to a written binding contract with a minimum 1 year term. Make sure the contract contains an “evergreen” renewal feature. Be sure to include “limits of liability” and “assignability” features. Exclude easy opt out features allowing the customer to void the agreement. Frequently an owner will state “our service is our means of retaining customers so we don’t need a written contract”. That may be true on a day to day basis. In an acquisition it is important to the buyer that customers are bound to a written contract. Be innovative and convert existing customers to written contracts. The contract protects your client so make sure the client understands that aspect as well. Current best practices in the shredding space require a written contract. This probably is the single most important action you can take to increase valuation for your business.
Higher quality revenue will increase valuation.
- Increasing your recurring revenue will increase valuation. Route revenue is more valuable than one time purge revenue when you sell your document shredding business. Most buyers like to see recurring revenue at 75% of the total service revenue.
- Increase route density. A shredding truck with the tires rolling isn’t generating revenue. Efficient operation increases net income and valuation.
- Convert “recurring purge” and “on call” customers to regularly scheduled route customers. Analyze their annual spend and incentivize them to convert to a route pricing structure and schedule. Increasing your route service revenue to a higher percentage of your total results in decreased sales and marketing costs on a relative basis.
- Analyze your pricing structure. With paper prices on the increase it is easy to fall into the poor practice of lowering service pricing. Make sure you are profitable on a stand-alone basis with service pricing. It is very easy for a buyer to spot a company that isn’t charging appropriate service rates and generally it results in a discounted offer price. Profitable revenue is more valuable than unprofitable revenue.
Operational changes will increase valuation.
- Keep up with maintenance on all your equipment and keep good records. Buyers will almost always request maintenance records on your equipment. They will also perform a truck inspection during the due diligence period. A truck assumed to be worth $125,000 in the offer stage that drops to $75,000 in value after inspection will lower the offer price or potentially kill the deal.
Accounting changes will increase valuation.
- Organize your P&L Statement to separately track all revenue categories. I recommend the following revenue categories; route, route-purge, recurring purge, one time purge, sub contracted revenue and recycled paper. If you provide other services such as paper recycling, e-waste or hard drive destruction track them as well. A more confident buyer will make a better offer resulting in an increased valuation.
- If you offer both plant based and onsite shredding track each separately.
- Clean up all financial statements. In the business broker world, we have a statement that is used frequently. It basically states “you won’t get paid twice” for your business. If you are running extraordinarily high personal discretionary expenses through your business it lowers the net income. If you expect an unreasonable “add-back” for those expenses, to increase valuation, it is likely you will be disappointed.
- Don’t track separate business unit activity on the same P&L Statement. There is less confidence in a recast a P&L for a document shredding business that also performs medical waste transportation or commercial cleaning services. Greater buyer confidence in your financial statements results in a better offer and will increase valuation.
Use a Business Broker to increase valuation.
- Utilize a professional to assist you with the sale of your business. Many buyers are very experienced and employ M&A teams whose sole job is to identify and acquire companies. You are at a severe disadvantage if you aren’t represented and even more so if you are negotiating directly with only one buyer. It is a proven fact using a business broker increases valuation especially when multiple buyers are evaluating a business as a result.
If you have questions or would like to discuss selling a document shredding business, purchasing a document shredding business, or increasing the valuation of your business, please contact me.
DeFoor Business Services
404 394 7670