Getting Ready to Sell Your Laboratory: Who, What, When, Why, and Where

Many factors should be considered before agreeing to a transaction

By Mark T. Murphy, DDS, FAGD

The number of dental laboratories in the US continues to decline as consolidation, offshoring, and attrition take their toll. It is estimated that there are now fewer than 7000 laboratories reporting a business payroll. A recent survey showed that more than 40% of laboratory owners will be of retirement age in the next 10 years. No one plans to work forever, and most of us don't want to end this game at the bench face down. At some point we all must think about, prepare for, and maybe even execute the sale of our laboratory.

It would take a small book to cover everything about transitions for dental laboratories, so I won’t try. Instead, I will list some ideas to consider, based on my experience handling mergers and acquisitions for DTI, MicroDental, and Health Point Capital on and off for several years.

Who

Laboratory owners can sell their business to employees, a private equity group, another laboratory or group of laboratories, family members, or a large corporation currently not in the dental space. Pros and cons exist for each option, impacting how and when you get paid, who is in charge, and your role over the next few years.

Some buyers have more business-centered goals than others, and some will have performance criteria for you as an employee. The money you get is only part of the sale package. You have to live with these folks for a while and your former employees forever, in many cases.

What

Although rare, asset sales do occur. Most of the time, people sell an ownership stake or stock in a laboratory to a new owner. Goodwill is a consideration, but the driving forces for the purchase price will be revenue and EBITDA (earnings before interest taxes depreciation and amortization).

Your free cash flow is important and intimately related to your debts and balance sheet. Having an understanding of the detailed financials and being able to transfer that information transparently to potential buyers is important. They need to see everything. They will normalize your profit and loss statement to reflect operations after the sale to determine the best fit and price. How much you expect to earn if you stay on impacts that normalization too. If you want to keep a large salary, you will be paid less as they multiply your EBITDA by some factor.

When

This is not as easy as it sounds. “Whenever you are ready” is the right answer, but how do you determine that? Financial, operational, and emotional issues must be considered. Cleaning up operations so they produce stellar financials starts the ball rolling, but only you can decide when you are ready to let go.

Your laboratory is like a child you gave birth to, raised, and now prepare to let go to strangers who do not know your team or your clients. The emotional component can be the most difficult for many. Separating solid business considerations from walking off into the sunset can weigh heavily on an owner’s heart.

Why

For money, of course! There is no fame or cure for cancer associated with selling a laboratory. Plain and simple, the motivation is the payday for the laboratory owner, the potential of continued employment for the team, and the legacy of knowing the business lives on in the future. We can take all cash, cash and stock, or all stock.

“Cash is king” is often heard, but a bigger payday may await you if stock in the new entity appreciates more than your return on investments. It is a gamble that requires consideration of how much you need, now and in the near and far futures. It is also about peace of mind and risk tolerance. Get good, professional financial advice in these and other areas where you are making risk/reward decisions.

Where

Perhaps the plan is to roll your laboratory into one of the existing facilities or theirs into yours. Maybe your laboratory will continue to operate independently and stand alone as part of the new group. There is no wrong answer here, but relocation and merging have consequences. It may involve downsizing structure, people, or operations. If you are also the landlord or worry about what happens to your technicians, those factors can be very important. Think this through and make sure you understand that you no longer will be empowered to make final decisions. You will be an employee or on the outside looking in at the process.

The market is excellent right now for selling a dental laboratory. I am hearing robust multiples being paid for good laboratories. If you understand the market expectations, valuation process, and the consolidation forces that are shaping our profession today, you will be better positioned to make good decisions. Private equity and manufacturers are continually looking at the laboratory space for opportunities that are present. Create a list of questions from this article that you want answered when meeting with potential buyers. Then, polish things up and let them have a look under the hood and kick the tires.

Mark T. Murphy, DDS, FAGD, is the Principal of FunktionalTracker.com and Lead Faculty for Clinical Education at MicroDental Laboratories.