Positioning for Purchase

A portion of a laboratory’s value to the buyer is directly related to its management. A strong management team positively reflects on a laboratory’s overall value, as a well-run business is much more appealing to potential buyers. The question of what happens to that management team value when the owner departs is also of vital concern to a buyer. Buyers often look for a strong management team that will stay in place. In fact, some buyers may be interested in the management team taking a minority equity interest in addition to offering management team incentives for them to remain on staff and support the transition to new ownership.

While valuation formulas can be quite complex, the selling price will likely be calculated as some multiple of earnings or of cash flow. This value will be higher if certain owner perquisites—such as excessive compensation, rent on owner’s properties, travel, etc, which will disappear when the owner departs—are segregated. Doing so will ensure that they do not adversely influence the application of a valuation formula and allows a laboratory owner to paint a more accurate picture of the post-acquisition earning power of the business.

The performance record of a laboratory can be seriously distorted by one-time costs unless they are isolated and identified to a potential buyer. These costs may include bad debt write-offs, settlements of litigation, environmental cleanup, fines and penalties, severance payments, etc. If isolated, these costs will not negatively influence valuation calculations.

The primary nemesis of accurate valuation is uncertainty, and there is no greater source of uncertainty in business than unresolved legal disputes. Therefore, pending litigation should be resolved to remove any uncertainty. If that is not possible, it will be necessary to call in appropriate expertise to quantify the probable outcome of any legal issues. Unresolved or unquantifiable legal disputes can erode market value and, in most cases, will make the business entirely unmarketable until the dispute is resolved.

The viability of existing contracts, leases, vendor agreements, employment contracts, and product or technique licenses can be an attractive selling point. The author advises that laboratory owners make all such contracts transferable, thus providing additional continuity of operations for the buyer.

Assets not essential to the post acquisition operation of the laboratory, such as real estate and family automobiles, should be identified and evaluated for possible transfer or disposal in the most cost effective way possible. Such assets can be sticking points in negotiations with a buyer.

Today, every laboratory is under the scrutiny of regulatory compliance issues. It is prudent to retain an independent consulting firm to conduct an audit to ascertain the laboratory’s level of compliance and possible exposure. Such an audit will either provide assurances to the potential buyer that compliance has been adequately achieved, or it will specifically delineate the potential liabilities that can then be more explicitly addressed.

A business plan with financial, productivity, and sales metrics is a benchmark against which a buyer can compare actual performance. It is also the sign of a credible and well-run laboratory—and a tool by which managers can be evaluated.

Perhaps the best advice for positioning a laboratory for acquisition is simply to adopt the mindset of a buyer. The author suggests laboratory owners consider the following when looking for a potential buyer:

Acquisition-oriented businesses maintain a network of contacts to identify companies for acquisition. Don’t assume you are on an acquisition list. Instead develop a list of potential buyers with whom you would feel comfortable.

Develop solid market intelligence about these potential buyers, their needs and preferences, how they negotiate a deal, as well as recent laboratories they have acquired.

Ask yourself some pointed questions. If you were interested in acquiring a laboratory of your size, what would make that laboratory attractive to you? What would make the laboratory unattractive? If you can answer those questions honestly and accurately, and then manage your business accordingly, you can then position yourself for eventual acquisition on your own best terms.

Robert Gitman is the company administrator at Thayer Dental Laboratory in Mechanicsburg, PA