The most attractive component of the records-storage formula is the incredible annuity value of the storage. The purpose of this article is to explain how it works and how it can deliver permanent high-yield storage revenue in traditional self-storage.

Consistent predictable compounded permanent revenue--these five words are rarely part of a genuine business opportunity. Most people run when they hear of an opportunity that seems too good to be true. Commercial records management is the storing of business records for clients. Initially, the industry was driven by a simple need for inexpensive storage space. Today, it is driven by the complexity of finding documents in an ever-growing and complex world. The paperless office is a myth that has yet to be realized. The industry has been "under the radar" for most of its 50-year history, but it has emerged as a real opportunity for several groups of investors.

Investor Groups

The investor groups currently interested in records storage (i.e., records management) include:

1. Corporate--This group is limited to perhaps three companies: Iron Mountain, Recall and Crown Worldwide. They acquire records centers as well as other related businesses such as document destruction.

2. Equity Capital Groups--There are two primary examples of existing private equity-capital groups that are already involved in the market: Archive America and ArchiveOne. Several other equity-capital groups have emerged during the last 18 months and are planning additional acquisitions.

3. Developer Groups--Generally, these include real estate developers or construction companies that specialize in projects. Many of these have developed self-storage projects.

4. Nontraditional--This group is represented by companies that already have another business, the assets of which can be leveraged against the inclusion of a new business or service into the existing.

Typically, these come from self-storage, moving and storage, document destruction and courier services.

Why the Interest Now?

The dot-com boom is over! Investors have a great deal of cash or underachieving funds, and there is a push to find real businesses with substance that perform well, provide high yield and are recession-resistant. Commercial records management has consistently been such a business. It has emerged from under the radar because Iron Mountain (www.ironmountain.com) and others have performed well for such long periods of time. Iron Mountain has achieved a strong-buy recommendation from several investment services. The company has delivered 55 consecutive quarters of revenue growth.

Since Iron Mountain is publicly traded, it is relatively easy to determine its performance. Recall (www.recall.com), a subsidiary of Australia-based Brambles Industries Ltd. and a conglomerate of businesses, does not publish specific records-management results. Crown Worldwide (www.crownrms.com), possibly the world's largest records-management company, is privately held and operates from its Hong Kong headquarters. Its offices are located throughout Asia and Europe, with only one U.S. location in Hawaii.

How the Annuity Value Works and Grows

Let's use a simple example. Here are the assumptions:

1. We have a 100-box account--a modest account, even for self-storage records management.

2. Each box is an average of 1.5 cubic feet (the industry average).

3. The storage rate is 35 cents per month per cubic foot, an appropriate rate for this size account.

4. There is a service-to-storage ratio of 65 percent or 65 cents of service revenue to each dollar of storage revenue--a low-end industry average.

5. We have a compound growth rate of .075 percent annually--again, a low-end industry average.

6. We have a storage-rate increase of .025 percent annually, which is the approximate U.S. Labor Department figure for the regional cost-of-living index increase.

7. We have a 10-year growth cycle. This is below the 16-year average storage life.

This example shows the total compounded gross annuity value of this 100-box account can be worth $15,047. The same example calculated for a 1,000-box account would be worth $150,472. The EBITDA (earnings before interest, taxes, depreciation and amortization) results for the industry in traditional records management can range from 20 percent to 37 percent, depending on the management practices and service levels of each business. In self-storage, the EBITDA can be higher than 40 percent because of the shared resources and use of outsourcing services that improve expense control.

Serious Investors

Is it any wonder serious investors are interested in the commercial records-management industry? The numbers in the above chart may be low compared to the actual results achieved in many self-storage records-management operations. Yield of these accounts can be more than double the numbers shown. Increases in yield per cubic foot can be improved by charging a minimum monthly storage rate, rounding odd-size boxes up to the next cubic foot, and increases in service levels.

In the past three columns, I discussed the nature of nontraditional records management in a self-storage facility. You can add simplified records-management services to your facility easily without a large investment in capital within 30 days. Records management will provide differentiation from your competition, longer-term leases and improved revenue per square foot of existing floor space.

Regular columnist Cary F. McGovern is the principal of FileMan Records Management, which offers full-service records-management assistance for commercial records-storage startups, marketing assistance, and sales training in commercial records-management operations. For assistance in feasibility determination, operational implementation or marketing support, call 877.FILEMAN; e-mail [email protected]; www.fileman.com.