Build Your Value
Strategies to help your laboratory thrive
Larry Weiss, CPA(Ret), CEPA & CPBA
Astute laboratory owners often ask themselves how they can effectively increase the value of their business. Business owners spend more time working than the average employee, but how they spend that time typically determines how they can increase the business's value. Unfortunately, most owners spend their time working in the business and not on the business. That distinction is significant. The first involves arriving at the laboratory early and immediately performing tasks and putting out fires, continuing for 10 or so hours, then going home exhausted, fretting about returning the next day for the same scenario. The second scenario involves first checking in on the team to receive a quick update, and if there are issues, offering assistance. If a team member needs help, the owner asks the team member what they would do if it was their laboratory. This may lead to a simple go or no-go decision on the owner's part; if no-go, it involves a session later in the day where they help the employee think through the issue and see if they can devise a resolution. If they cannot, the owner will provide one. In other words, "Give a man a fish, and he will eat for a day. Teach a man how to fish, and you feed him for a lifetime." Which are you doing? The answer will determine your ability to increase the value of your laboratory, which is important regardless of whether you plan on selling next year or 30 years from now. Addressing the value of your laboratory as soon as possible will help maximize it whenever the time comes to sell.
Lifestyle vs Scalable
During my initial discussions with a laboratory owner, my favorite question is: "In the past 3 years, what is the longest vacation you have taken that was not associated with a dental trade show?" The answer to this question tells me quite a bit about the owner's ability to delegate and their confidence in their team. This also is an excellent indicator of the stress level experienced by the laboratory owner; the less time off, the higher their stress level is.
How you increase value differs depending on whether your laboratory is a "lifestyle" business or a scalable company. Lifestyle businesses create and sustain a particular level of income for the owners. In other words, their purpose is to facilitate a very comfortable lifestyle. This does not mean that lifestyle businesses cannot be significant. Such companies can easily be multimillion-dollar laboratories. However, they tend to be self-limiting in their ability to expand beyond a certain level. Overwhelmingly, they tend to rely on one key person, the loss of whom will stop the company in its tracks. Scalable businesses not only have the potential to move beyond their founders, but the goal is to do so. They can replicate and expand unconstrained because a single individual does not limit them.
The lifestyle laboratory is about providing income and security for the owner and their family. Think of the one- or two-person laboratory that operates in a basement or garage. Because the goal is a high standard of living and the business is entirely dependent on the owner's production, often these owners bring in another employee who could continue the business when they decide to leave. The advantage of this strategy is that the new employee may eventually buy out the owner's interest, or they might create more value to a purchaser who believes customers will follow the second-in-command when the owner cedes the reins of the business.
The Business Life Cycle
The scalable business can pull many levers to increase value. The choice of which levers to use is determined by their specific situation; I categorize situations according to the "Business Life Cycle," which is a progression of phases over time: Nightmare, Survival, Growth, Scale & Systemize, Value Enhancement, and Tragedy. The cycle is shown on a graph with the horizontal axis as time and the vertical axis as dollars (Figure 1). I assume three financial metrics to describe the business life cycle phase: sales, profits, and cash flow.
The Nightmare Phase: The reality of starting your business and subsequent frustration of what you have done sets in. You fear people do not want what you are offering. Cash is very tight; you are not sure how to adapt to your new reality and you may experience depression.
The Survival Phase: A few things start to work. You still struggle with what direction to pursue and what to offer. Results are starting to trend up, and there is a glimmer of hope.
The Growth Phase: You experience rapid sales growth. As sales increase, the business starts seeing a profit. However, profits still lag behind sales. Finally, cash flow during the growth phase becomes positive, generating excess cash flow for the first time.
The Scale & Systemize Phase: Sales and profits continue to increase, and for the first time, cash flow exceeds profit. You are building systems, processes, and a stronger team that allows you to delegate responsibility (and build a succession plan), scale faster, and start to feel in control of your future and destiny.
The Value Enhancement Phase: Positioning the company for maximum increases in value, personal wealth, and personal wellness. Successful businesses extend this cycle by reinventing themselves and investing in new technologies and emerging markets. This allows companies to reposition themselves to continue their growth.
The Tragedy Phase: Unfortunately, many business owners hang on too long and stop reinventing themselves and their companies. The owner often finds they lack a plan, have lost their passion for the business, exhibit low energy, and just want out. This usually results in declining sales, profits, and cash flows.
Importantly, every business can reinvent themselves and not move into the tragedy phase. The Exit Planning Institute provides an extensive list of elements that can make a business valuable (Table 1), and each of these should be viewed as levers a laboratory can pull to increase its value; likewise, having a deficiency in any of these can lead to a reduction of your value.
Value can also hinge on whether a potential buyer has specific needs or interests. An example of this is when a laboratory for which I was an executive was purchased by a large laboratory group in 2006. The buyer was willing to pay a premium for our diverse national customer base because they planned to use it to augment their national network of local laboratories. They were also very interested in the systems and processes we developed for the exclusive license of a unique oral appliance, because they planned to leverage this new product across their network of laboratories and sales teams.
What You Can Do
A number of actions can be pursued to increase the value of your laboratory, regardless of where you are in the Business Life Cycle. I have outlined several of these actions below:
1. Think like a buyer: Remember, anything you can do now that will elevate a buyer's impression of the business will benefit you. Upfront preparation is crucial for making the company as inviting and understandable as possible, as well as reducing transaction risk,
2. Perform a SWOT analysis: A SWOT (strengths, weaknesses, opportunities, and threats) analysis is a self-assessment tool, identifying and evaluating the company's strengths and capabilities, its competitive market position, and its future potential. This exercise identifies opportunities to increase the value of your laboratory.
3. Build your management team: Not having a capable team can be one of the greatest detractors from the value of your laboratory. If you cannot walk through the laboratory without answering a handful of questions or grabbing several case pans, you have work to do. This group allows you to take extended vacations and gain more control of you free time
4. Know your numbers: What are your EBITDA, Sales Per Day, Sales Per Full Time Equivalent, and more? These are the financial metrics you can use to improve your profitability, which often drives value.
5. Spring cleaning: It is important your house be in good order, not just to build value but to create a more enjoyable, successful environment. The laboratory should be a clean, well-lit, and inviting place to work; this includes the building, parking lot, storage areas, lawn, and landscaping. Financial records should be organized and current; clean up accounts receivable (write off old receivables), payables, and anything else on your balance sheet that should not be there. Equipment should be in good order and clean; has it been maintained properly? Inventory should be organized and usable; identify obsolete inventory and write it off or segregate into an area by itself.
Anyone Can Do It
Dental laboratories around the country fall into different categorizations between lifestyle and scalable, and different phases of the Business Life Cycle. Accordingly, they may find the above action items easier or more difficult depending on their specific scenarios. What is important to remember is that, as previously noted, any business can reinvent itself and maximize its value with the right strategy and commitment.
About the Author
Larry Weiss, CPA(Ret), CEPA & CPBA, is President of Weiss Advisors.