When referring to self-storage, the phrase "set 'em up and sell 'em on" makes the whole business sound so simple. Last year's acquisition of Aardvark Self Storage Ltd. and Rent-A-Space by Mentmore PLC demonstrated the "sell-out" most dream of may have been oversold. But the big sale has become significant news because of its positive impact on the fledgling European marketplace.
I'm a great lover of win-win situations, and I think any market sell-out or takeover is good news for all involved. First, the small guy who sells makes a bundle—subject to his assumed debt—for his hard work and risk. Second, the buyer gets profit-making power, positive cashflow, and a site at a good discount to its 85 percent occupancy earnings potential. Third, good news travels fast. The industry gains credibility in a sale of this nature, which leads to more lending for small and large operators alike.
And so the cycle should continue—even in times of war and recession. Our fantastic product will seem safer and safer in investors' eyes, especially when profits are proven by the "big guys" in the not-too-distant future. But back to the point: Nothing is ever this simple, even self-storage—if it were, everybody would do it. Even when you have the necessary time, financial resources and expertise to set up a small chain of facilities, it doesn't mean you will be able to sell it at your target price, let alone find anybody who wants to buy it.
Taking this into consideration, the best thing to do is build to operate, not sell. That way, you can't lose—if you can fill the place, of course. If you want a steady, pension-style income, set up one facility, get it profitable, and sit back and reap the best return you could ever get on a self-administered pension scheme. But if want more excitement (and risk), open three facilities in three or so years and try to secure a sell-out.
The most important piece of advice I can give anyone who fancies his chances of a multifacility set-up and sell-out is location, location, location. Wake up! I'm not talking about a nice drive-by location, I'm talking about the strategic location of sites in relation to the "big boys." You need to research and find an underdeveloped area for your facilities within an established self-storage market.
For example, France, the Netherlands and the United Kingdom all have established self-storage marketplaces in key cities or large urban areas; yet the bigger players are still concentrated and generally represented in only a few regions in these countries. So don't go and set up in a competitive market with plenty of current supply—like London, for example. Focus on under-represented cities or large towns and urban areas in the provinces. OK, the going might be tougher initially, but again, it's a win-win situation. You benefit from being the pioneer, and you don't have to operate in a price-cutting environment. Think positive!
One major reason the large operators have focused on London and Southeast England is because, quite simply, it's easier. It's easier to fill facilities, and easier to build brand awareness and critical mass in a more educated, space-starved market (although recently, supply may have exceeded market demand in some hot spots in Greater London.) So if you understand the big boys' logic and model, copy it.
Focus on building your small chain of high-quality facilities with a strategic outlook. Find an area where you feel a big operator might eventually want representation and build a small chain of sites that fit well together on the bigger area map. You create value because you end up with sites that allow potential buyers to expand within and near the area, justifying a regional infrastructure to build more facilities and marketshare. Suddenly, your sites have value and appeal—but only, of course, if you can tick the rest of these items off the list:
- The facilities must generate month-on-month operating profit.
- Although producing profits, the facilities shouldn't be full.
- The facilities must be second or third generation.
- The facilities must be in good drive-by locations.
I said it wasn't as simple as it sounds. Let's be honest—for the new operator, it's bloody hard work finding a single site, securing it, financing it and filling it. It takes time and commitment, and is a long way from a strategically located chain. It is possible, and if you can successfully build one, the second is certainly easier. If you can establish a good monthly income stream in the first six to nine months of opening while looking for a new, tactically located site, you're a winner. If you can prove to yourself and your financier that you can build one from start-up, hopefully, the next facility will come along in time.
Now let's talk about sell-out valuations. We'll keep it simple. I am going to suggest the easiest way to value a facility in Europe is to predict what the site could make when 90 percent occupied (deemed full). If a facility for sale is in month-on-month operating profit and 65 percent to 70 percent occupied, the buyer and seller both win. The seller sells at eight to 10 times his annualized monthly revenue—less debt—and the buyer, although buying at eight to 10 times the revenue, is, in the long term, getting the facility at three to four times its value.
When you look at selling your business as a going concern at eight to 10 times current earnings, it sounds fantastic; but when you consider you've already done the hard work—getting the business to break-even—and that, in the long term, you're only getting three to four times future earnings, it may be time to reconsider whether you want to sell at all. So what's the solution? Build to operate but within a strategic framework. That way you're in control, and you can consider the sell-out when a window of opportunity is open.
Andrew Donaldson is chairman of Active Supply & Design (CDM) Ltd. and Storage World Self-Storage Ltd. He established, built and sold a chain of facilities in the United Kingdom to a PLC formally known as Rent-A-Space. He is also chairman of The Princes Trust in Cheshire, England, and a former director of the Self-Storage Association of U.K. & Europe. For more information, e-mail firstname.lastname@example.org; visit www.askactive.com.