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Developing an Active Acquisition Program
Expanding a business’s reach through the addition of new laboratories
By Robert Gitman
All laboratory owners eventually arrive at a crossroads in their business life where they realize that the long and short-term future of their businesses must be planned and objectives (both personal and business) must be defined. At the same time, and most often concurrent with the above, the necessity of expanding the base of the laboratory is realized as a natural next step in its growth. To accomplish such expansion, a laboratory can either rely on its organic growth efforts or grow through acquisitions and mergers.
Assuming that a laboratory owner is committed to developing an acquisition program as a major tenet of his or her laboratory growth program, let’s discuss some of the ways by which this can be accomplished.
The primary decision stems from the present composition of a laboratory’s operation. Is your laboratory a full service or a specialty laboratory? Do you want to focus on acquiring other laboratories of similar or different composition? Should you focus on augmenting sales by bolstering departments that represent the bulk of current sales, or should you focus on the smallest part of your sales mix? Is the acquisition technology driven to either gain new technology or to achieve a better ROI on existing technology by running more shifts and maximizing machine capacity? Or, is the objective as simple as acquiring any laboratory that employs good technicians, offers stable sales, and has a good reputation?
Once one’s desires relative to an acquisition program have been defined, it is prudent to outline the general shape of the proposed acquisition program. First, assemble a list of relevant laboratories. From there, compose solicitation letters to be sent to all selected laboratories on the mailing list. A third party that represents you, such as an attorney, business broker, or other consultant, can mail the letters if you want to initially maintain anonymity. As you receive responses, determine whether or not you would like to continue to pursue each business as a potential acquisition. It is paramount that during this step you execute a confidentiality/non-disclosure agreement with the prospect.
If a certain laboratory appears to be a good fit, arrange a preliminary meeting with possible acquisition candidates to determine if your personality and that of the owner of the prospect laboratory mesh well. No deal, regardless of the financial attraction, will succeed if you and the owner of the prospect laboratory do not click.
If you decide to move forward with the acquisition, have your CPA or valuation professional gather the documentation for valuation purposes. S/he will likely determine the laboratory’s value based upon several valuation approaches (market, income, and asset). If the owner(s) of the laboratory accept an offer, then execute a letter of intent and arrange to perform due diligence of the financial and personnel data supplied by the laboratory being acquired, eg, three to five years financial statements, tax returns, corporate records, benefit plan documents, employment contracts, etc.
Finalizing the Deal
Once all data has been substantiated, the laboratory owner must decide whether to execute the purchase agreement (and employment agreements as necessary); adjust the purchase price accordingly and execute a purchase agreement (and employment agreements as necessary); or exercise the option not to close on the sale. If the above steps have been followed, this final decision can be made with confidence that it will positively affect the businesses of everyone involved.
When initiating a program to attract acquisition candidates, there are basic parameters that one must follow to meet business goals. Consider the answers to the following questions in an effort to create such a structure.
• Would you be willing to bring a person or persons from the acquisition into any equity ownership of your existing laboratory?
• If the acquisition agreement demanded that you relinquish up to 10% of your equity ownership, would you consider such a situation?
• Following the above precept, would you be willing to relinquish up to 25% of your equity ownership?
• If you do not want to relinquish any of your equity, and thus maintain 100% of ownership, would you consider creating a new corporation in which equity ownership would be shared with the principal(s) of the acquired laboratory (while still marketing both laboratories under an existing corporate umbrella)?
• If your structure for an acquisition is predicated upon a leveraged buy-out that requires a cash deposit at settlement, what is the maximum amount of cash you could access or borrow for the purposes of a down payment?
• In your present facility, how many additional technicians could you accommodate without moving to a new facility?
• Should one of the criteria for an acquisition hinge upon purchasing a laboratory that owns or leases a facility larger than your current premises?
• Suppose in the acquisition agreement that you have two or three “junior partners” who may or may not have voting shares of stock. Do you think that you could work in a corporate environment where there are numerous individuals who, more or less, have to agree?
About the Author
Robert Gitman is the company administrator at Thayer Dental Laboratory in Mechanicsburg, PA.