Caution: Exit Ahead

Because significant dollars and your future are at stake, preparing for and managing a sale of an established dental laboratory can seem daunting. Fraught with dangers and pitfalls, a sale should not be taken lightly. Questions arise regarding the worth of the business, whom the best buyer may be, how the sale will affect family and employees, and what the dental laboratory owner will do after the sale. Careful contemplation of the answers prior to beginning a sale is critical for creating the best outcome. A properly managed mergers and acquisitions (M&A) process can make an otherwise average sale a great one.

Of the 7,000 to 10,000 dental laboratories operating in the United States, valuations vary greatly. Owners who are contemplating a sale need to ask themselves: “Where do I fit in now, and how do I maximize my value?” Two dental laboratories with similar revenues can have drastically different values based on a number of criteria, which are outlined below.

Preparation for an M&A transaction should begin months before a process is launched. Identify the strengths, weaknesses, and opportunities of your laboratory. Document the strengths, fix the weaknesses, and understand the costs and time needed to take advantage of the opportunities. All these considerations go into the proper marketing and value generation of the business. Begin and continue internal due diligence, testing your financial and operating procedures so they will withstand buyer scrutiny. Ensure you are addressing all the critical aspects of the dental laboratory, including maintaining accurate financials, as well as addressing current and anticipated legal and regulatory issues. Consider utilizing a high-quality virtual data room service to store necessary due-diligence documents, and create a centralized repository that can be made accessible to select buyers or investors. Today’s sophisticated buyers and investors increasingly rely on such a repository because it protects confidential information and creates tremendous efficiencies for both business owners and potential investors. Getting your business in shape prior to the scrutiny of a buyer requires effort and dedication. A sound financial structure is critical. What do your financial statements look like? Has a reputable accounting firm validated them in a compiled, reviewed, or audited format? Do you know the true value of your inventory and the proper aging of your receivables? A dental laboratory with solid historical financials will always be worth more than one with shoddy bookkeeping. To achieve maximum value in the eyes of an investor, a clean financial statement needs to be in order. Serious investors will be diligent in their requests for information and, as a group, are risk averse so lowering the perceived risk is an important part of the process. Having a written strategic plan in place with achievable 1-year, 3-year, and 5-year goals is also necessary. Early engagement of a team of advisers (eg, accountants, attorneys, investment bankers) is also suggested.

Properly positioning your business in the digital space will be important to buyers. Have you taken full advantage of your laboratory software? Are you integrated into DDX, Labtrac, or other similar products? The more fully integrated the laboratory is, the better its perceived value for the buyer; the buyer will realize less risk is involved.

What are the pluses and minuses of the business? Has your business stayed up-to-date? Buyers are concerned about the software and digital capabilities, the age of equipment, which key executives will be staying, the growth history, the mix of services (crowns versus dentures versus implant, etc), whether outsourcing is being done, and sources for new growth. A solid staff and a history of growth will always be of higher value to an investor. Buyers like to see companies with positive, historical EBITDA (earnings before interest, taxes, depreciation and amortization). Buyers typically take the adjusted EBITDA and multiply it by an industry standard giving an estimate of the current value. Other methods include multiples of revenue and discounted cash flow.

Buyers are either strategic or financial. A strategic buyer is already in the industry and either looking for adjuncts to the current business or seeking to consolidate multiple opportunities. National Dentex and DSG are examples of strategic buyers.

A financial buyer is an institutional investor and would likely be a private-equity (PE) firm. A recent example is the sale of DDS Lab to Blue Sea Capital. PE firms are private companies that take pooled investor money (called limited partners) and buy existing, profitable companies within industries that are defined by the firm. A financial buyer would first look for a platform company for entrance into a particular market and would then seek add-ons. A large laboratory would be considered a platform (such as DDS Lab), and smaller laboratories would be add-ons. PE firms routinely call investment bankers to see if they have clients looking for transactions.

The key to maximizing value for a dental laboratory is to create a competitive environment. Typically, a limited auction is held in which potential buyers are contacted to determine their appetites for acquiring an anonymous company with certain characteristics. Once the prospects sign nondisclosure agreements, they are given the details of the company for sale. Conference calls are conducted with all parties, followed by site visits. The prospects are then asked to submit term sheets indicating their levels of interest. The key is to have everyone at the table at the same time submitting the term sheets, knowing that rivals are in the process. The laboratory then decides which, if any, suitor is its choice. Many times, the seller thinks that once an offer is made, the hard part is over. But that is where the hard work of due diligence begins and a skilled adviser is critical for keeping the process on track. Many hours, days, and weeks are put into the post-term sheet process as the buyer becomes more familiar with the company and fully understands what is being purchased.

Proper preparation and focus can reduce the risk for potential pitfalls. Staying organized, understanding that items can sometimes be renegotiated during the transaction, maintaining all business systems, and keeping a level head are all important. Transactions fall through all the time because someone took their eye off the ball. Keeping an open, honest dialogue is essential.

Deals can take on a life of their own. Properly managing the process with deadlines and milestones is just as important as steadily moving everyone along in the process. Because selling a successful business can be a full-time job, a seller needs to maintain the integrity of the company throughout the sale. Keeping a laboratory in the black is demanding and requires legal, accounting, and M&A advisers in place to put in the time necessary while the owner is continuing to operate the company. Although careful thought and preparation is required, a well-planned exit can be accomplished through a successful M&A process, leading to a rewarding and life-changing experience.

Christopher Gayde, DDS, FAGD is the Healthcare Group Director for Hunter Wise Financial Group, LLC, in Irvine, CA.

Email him at cgayde@hunterwise.com.