Business Valuation 101
An operational review is just as critical as a financial review
Bob Yenkner
At some point in the life of the typical laboratory owner, they will ask themselves a question: "What is my laboratory really worth?" Laboratories that are to be transferred, sold, or acquired, for whatever reason, typically undergo a thorough and intensive review of their financial condition. Typically, 3-year trends of financial measures such as profit/loss, working capital, balance sheet, cash flow, and expenses are examined in great detail. The author's experience is that this same level of due diligence looking at the operational side of the business is often ignored at worst, or performed in a cursory manner at best. An operational review assesses the culture of the laboratory, evaluates its ability to compete with current resources, and gives a good indicator of the potential earnings or profit the current business model can bring.
Performing the operations review of the laboratory can be likened to purchasing a car—something we all have experienced. If we looked strictly at the financial side of the purchase, we would limit our knowledge to cost, cash flow, operating expenses, resale value, and depreciation. But since we don't choose a car solely based on financial considerations, we need to assess the operational side of the purchase as well. We look at the mileage to evaluate future life, recent repairs/upgrades for mechanical reliability, the intended purpose for the vehicle, what will be needed to improve any negatives, the accident history, and how the appearance of the vehicle matches our taste and personality. If we think back on our own experiences, we have all made the mistake of overvaluing either the financial side (eg, it's a good price) or the operational side (eg, the paint is new this year) and gotten into a situation that had disastrous results (read: money pit).
Conducting an operational review should be an integral part of selling or buying a laboratory. Operational questions that you, as a buyer or seller, want answered are:
• Does the business have the mindset necessary to compete now and in the future?
• Where does the business stand relative to market expectations?
• Are the measures used to drive the business in conflict with long-term plans?
• Does the laboratory take advantage of the latest methods to produce products?
A good operational review should be conducted on two levels: First, look at the "15,000-foot level" to see potential areas of concern that require additional focus. Second, conduct a review "in the trenches" as dictated by the trouble spots identified in level one. Why the two-level approach? On the higher level, a potential buyer will want to know the operational "landmines" to be sidestepped or corrected as quickly and cheaply as possible, thereby avoiding the unnecessary commitment of time and money. A seller, in preparing the laboratory for sale, should be aware of the relative strengths and weaknesses for pre-emptive corrective action or in order to reasonably explain the current state of affairs.
On the more detailed level, either the buyer or the seller can gain an intimate understanding of the size of the issue under examination. This intimate understanding can then be used as leverage, risk assessment, cost/benefit tradeoff, etc, by either buyer or seller to ensure maximum benefit and minimal risk to the entire venture.
The operational review, when completed in concert with the financial review, will provide a true picture of the laboratory in terms of current financial viability and the ability to sustain that viability in the future. What is your lab really worth? Be sure you answer the question correctly.
About the Author
Bob Yenkner is the owner of Practical Process Improvement in East Hampton, Connecticut.
