Franchise Opportunity?

Franchising has worked for many industries; but, with few exceptions, the concept has not really taken hold in the North American shredding industry.

"Get big or get acquired" is the mantra that many shredding firms now espouse. As large, national companies snap up mid-sized firms, and one-man operations undercut pricing, many established shredding companies are finding that the landscape of the industry is changing.

For companies that aren’t interested in being acquired by a consolidator, achieving long-term success may mean using a variety of methods to grow their businesses. One such step could be to become part of a cooperative endeavor, such as Information Protection Solutions of America (ISPA), though there are several organizations establishing networks of independent operators.

Other companies are finding the allure of consolidation to be a more tempting opportunity. Certainly, within the last year, a number of companies have allowed themselves to be acquired by larger, nationwide companies.

Left in their wake, many smaller companies are realizing that, while the market is expected to continue growing, the ability to offer large clients national service is of growing importance. To accomplish this, many companies are using a number of strategies that can give an independent company the opportunity to grow its business and its reach.

While some companies grow organically, the capital involved in this approach makes it challenging for many small to mid-sized companies. And, while posting strong numbers can enable a company to add vehicles to its fleet, it is a much larger step not only to add to a company’s fleet, but also to open up a facility in a new geographic area.

Other companies opt for a cooperative agreement with different independent operators in which they bid on national contracts and compete with national companies.

Franchising is an option that several shredding companies are contemplating with varying degrees of success. Shred-it, one of the pioneers in the mobile shredding business in North America, used the franchise model to grow its business in the early days; however, only a handful of other companies have attempted to use this approach to extend their brands.

The franchising concept has transformed the U.S. economy throughout the past several decades. From restaurants to muffler service stations to other specialty service companies, franchising has allowed many companies to grow from humble beginnings to industry prominence.

However, franchising has had mixed success with companies in the document destruction industry. Overall, the franchising philosophy seems to have been greeted somewhat tepidly within this sector.

Oakville, Ontario-based Shred-it, a Securit company, was one of the first to implement a franchise arrangement to grow its business. Shred-it, which started nearly 20 years ago, expanded significantly long before the industry began attracting attention through the use of franchises. While the company now has more than 130 locations in North America, several sources say that Shred-it has been buying back a number of its franchisees.

Barb Anderson, Shred-it chief financial officer, says the company has been buying back some of its franchises. However, she says that despite some conjecture, most franchise owners that Shred-it has bought out have honored the length of their contracts and are looking to move on to other opportunities. She says that many of these franchisees have been financially successful, selling their operations back to Shred-it as an exit strategy.

Anderson says that in a minority of cases, the parent company has purchased a franchise when the franchise owner was unable to fulfill his or her obligations, which could be because of medical or other reasons.

Despite the buybacks, Anderson estimates that roughly 45 percent of the Shred-it locations are franchise owned and "coexist harmoniously" with company owned locations. The majority of these are in North America, though the company does have offices in Western Europe, South Africa, parts of Asia and South America.

While the company doesn’t expect to have any additional franchises available in North America or most of Europe, Anderson says that franchise owners enjoy a number of benefits. These include getting a piece of the business from any national account that Shred-it may win; a cohesive, comprehensive advertising program that can reach a wider audience; and the opportunity to take advantage of training programs for top management from the franchise locations and corporate offices.

Another advantage, Anderson says, is that Shred-it offers its own consoles and shredding trucks. "Our franchisees benefit from our R&D (research and development)," Anderson says.

"Our business is to provide the strongest customer service to customers," she adds.

Tom Caso, general manager of Shred-it’s San Diego operation, says that his company’s success can be directly attributed to operating under the Shred-it banner. "It is a worldwide company," he says. "They have training and education. We all go to the shredding school," Caso says.

While providing its various franchises with the information and resources to grow the individual locations, having Shred-it’s reach also provides the various offices with the opportunity to bid on national accounts. This area, many industry professionals feel, will grow in importance in the short term.

In many industries, franchisees complain that when it comes to dialog, it is strictly a one-way street, with the parent company dictating rules and regulations. However, Caso notes that Shred-it has set up a Franchise Advisory Board that meets regularly to discuss the locations and their strategy. The information that is generated at these meetings is taken very seriously by the parent company, Caso says.

While a far smaller operation, Proshred Security is another shredding company that has experimented with the franchisng model. The company, based in Toronto, is owned by Heron Capital. Jim Reid, Proshred director of franchise development, says the company hopes to grow to 70 different franchises within the next three to four years.

"Franchising is important if you are looking for a good business opportunity," Reid says.

As to going the franchise route versus starting an independent venture, he says franchises offer advantages. "When you look at starting a franchise system, you have so many more advantages by working with a proven system," Reid adds.

As for Proshred, Reid says that the company has the sales know-how and expertise to help grow and expand shredding businesses. Additionally, the company, Reid says, has a long history in the secure shredding industry in Canada, dating back 20 years.

While Proshred has many years of experience, the company has had to reconfigure itself, as its earliest operation was acquired by Boston-based Iron Mountain several years ago. With that acquisition, the company was prohibited from marketing its services in Canada under the Proshred name. However, the company has been able to use the Proshred name in the United States to market its services. At the present time, Proshred has 11 locations in the United States that provide mobile shredding services.

The company, Reid adds, is the only nationally franchised shredding firm that is ISO 9000 certified. "We spent a lot of time, money and resources to develop the system and build support. This includes providing a comprehensive training program for new candidates," he says.

While Proshred is looking to grow significantly throughout the next several years, the company is targeting geographic areas with a population of nearly 1 million people for its new franchises. Also, the ideal facility would have a business density that would require 10 employees.

Another company that is looking to launch its own chain of franchises is Shred Alert, a South Carolina-based mobile shredding operation.

Shred Alert President Adam Parness says that when you buy into a franchise, you buy into a name or professional operation. Parness says franchises, particularly Shred Alert, can offer benefits to franchisees by providing a model for important business issues, such as advertising the service.

While the company is fairly new, Parness says he feels that the approach his company is taking should result in success for potential franchisees.

Shred Alert plans to stick strictly with mobile shredding operations to start, Parness says. The company is looking to target mid-sized cities, which, Parness says, have not been adequately served by large shredding operations. Targeting smaller cities in the South, where Shred Alert is based, is also a step in the company’s franchise plans.

Parness stresses that candidates who are interested in buying into Shred Alert, in addition to not having a criminal record, must have some financial liquidity that would enable the company to borrow funds if needed. Additionally, he says candidates must also be willing to become involved in their communities.

Along with representatives from other shredding companies, Parness says that a large-enough operation could have improved pricing power when it comes to purchasing the equipment needed for the operation.

In addition to the possible advantage of better pricing for equipment, Parness also says that having a cohesive advertising program in a particular area could boost the company’s visibility.

While many people speak of the benefits of growing a business using franchising agreements, not everyone is as optimistic about the possibilities franchises present.

Tom Thompson with IPSA, an alliance of independent shredding companies, says that at present only a small number of companies in the shredding business are seeking franchising opportunities. One big roadblock, according to Thompson, is the cost of a franchise. "It is pretty expensive, and there are so many restrictions and state laws," he says. This could serve to deter aggressive growth in the franchising of mobile shredding operations.

At the same time, Thompson says that some long-time companies have already established their companies’ names and reputations and wouldn’t benefit from franchising.

David Murray with Evergreen Financial, a Portland, Ore., company that provides financing to companies in the secure shredding industry, says that franchises can be challenging if the parent operation has a strong agreement in place by making it potentially more difficult for the individual locations to succeed.

David Lane with Lane-Link Group Inc., a Rockwall, Texas-based investment-banking firm that targets small and mid-sized companies, says that because of the relative ease by which an individual can obtain his or her own shredding vehicle, it is more challenging to offer something different through franchising.

Another potential drawback for a franchisee, according to Lane, is the exit strategy written into the contract. Regardless of the industry, if a franchisee is looking to sell his or her operation, he or she would have to sell to an owner/operator rather than a large conglomerate, which could shrink the available pool of candidates.

"The biggest issue for anyone considering a franchise," Lane says, "is to have an exit strategy. My advice is that when considering a franchise, you have to know how to get out of the business before you get into the business."

Much as with any major business decision faced by an entrepreneur, considering the merits or drawbacks of franchising means taking a good hard look at several potential future scenarios.