Get Your Goose to Lay the Largest Golden Egg

* When do you want to retire and what role will your laboratory will play in a successful retirement?
* Will your laboratory provide the nest egg you need?
* Will you slowly transition out of your laboratory and the technical profession by continuing as a technician for a short time after selling?
* What will you do after you sell and retire?
* Who do you want to sell the laboratory to - employees, another laboratory, a laboratory chain, a family member or one of many other possible buyers?
* Who has the financial where-with-all and needed skill sets to continue the laboratory’s success? This is very important if you need to provide any seller financing?
* How much can you sell my laboratory for? Will it be enough to retire on?
* What do you really want to do in your life after selling your lab or in retirement?
* How can you minimize risk and achieve the greatest value for your business when you sell it to assure your standard of living and peace of mind?
* How early before you sell your laboratory do you need to start thinking about the process to allow an orderly and maximized sale and transition to your life after the laboratory?

If you can answer these and many other questions about selling your laboratory, you are unique to say the least. What I’ve found is that owners of small to moderate sized businesses just don’t plan ahead in most cases until two to three years before they want to sell their businesses. Waiting until the last minute reduces their returns, not to mention their peace of mind in retirement. I can’t tell you the number of times I’ve seen laboratory owners sell their laboratory to a family member or employee using, in many cases, seller financing. Because their own lack of planning, those newly retired laboratory owners find themselves back in the business within a year to protect their investment.

What frustrates me about this wonderful profession is that in too many cases, the technician-owner has not developed sound business skills and principals during his or her tenure. So when they sell the laboratory, many times they don’t realize their dreams for their business and their retirement. As a modern laboratory owner, you must think about how you want to transition out of the business early on (at least seven years before you sell), put a good plan together to do that and execute it well. Consider these steps five, 10, 20 or more years before retirement.

Run your laboratory profitably as a business. Keep it well organized and staffed with people that have sound skills in marketing, sales, operations, technical and finance and work hard to achieve the maximum value for the high-quality products and services you provide your customers. This will be the basis for all you achieve in the short term and long term. The laboratory is a place for you to enjoy utilizing your technical skills, but it can and should be a very profitable business.

Put away the maximum pre-tax profit in the form of a SEP IRA, 401k and weighted Defined Benefit Plans. Start this early enough in your career to meet the minimum earnings you’ll need for the retirement life style you envision. This will reduce the pressure to get top dollar in the sale of your laboratory to an outsider or allow you the opportunity to sell it to your employees or family and seller finance/take back paper without sacrificing your long-term financial security.

Financial planners can be a great help at looking at these options, including the benefit of having a Sub S designation to minimize tax impact and maximize after tax profit and cash flow. They will also help you quantify what the life style you have defined for yourself and your family will require in savings and spending over your lifetime. A good game plan early on will help you reach your dreams.

Decide on the legacy you want to leave for your family, employees/team members and the business you have started/developed. Do you want it to be family or employee owned, carrying out the values and approach to serving customers that you’ve built into the business over the years? An outside organization purchasing your business will most likely put their own stamp on how they see customers and handle employees and you may not want that.

Taking the employee or family sale route means you need to invest heavily in building a strong organization with the needed skill sets to run the business successfully when you’re not there. This option most likely will not maximize short-term profits as you add the needed overhead to the organization. This will most likely reduce the value you could receive from the business over time, but you will have much lower risk in the owner financing/loan you most likely will need to provide. Plus, a strong organization will reduce the need for you to ever return to the business if you don’t want to. That approach is precisely what I used when preparing Lord’s Dental Studio Inc. for sale to my employee leadership team. Over my career, I had always worked for other large and moderate sized companies and I didn’t want to have to sell the company to a third party or laboratory chain but rather let the laboratory team that helped me develop and grow Lord’s into one of the industry’s best run companies have the benefits of being an owner and getting a return on their efforts. People who are owners vs. just employees tend to be the best performers. It was also a great motivator to have top-notch people join the organization in addition to motivating those already in the company to do a superior job in the areas they were responsible for, a true win-win. Think about the legacy you want to leave. It will drive the direction you take your business in both the short- and long-term.

Determine who can truly buy your business and pay what you want for it. Some small business owners have a dream to sell their business to family or employees only to find at the 11th hour that it can’t be financed by a bank and they don’t have enough money themselves to complete the transaction. While an earn-out may be a way to accomplish a family or employee sale, unless you have built a strong self functioning organization or put away a lot of money ahead of time, it may be a very risky option for you. A third party sale may be the only safe option you have if you don’t prepare early.

I’ve run into several laboratory owners over the years who tried to sell to their family or employees only to be dragged into the business to straighten it out or eventually are forced to sell it to a third party or chain, which can be the best option for a late in the game sale for both employees, customers and the seller. If you don’t want to go through the significant and costly effort needed to develop a strong multi skilled and smooth functioning organization, it may be best to take the avenue to seek the best third party or chain sale that fits your values. To find potential buyers, trade journal ads have companies looking for laboratories. Suppliers are another referral avenue to pursue, as are other laboratory friends. Two to three years ahead of the time you want to sell the business is a good time to start making contacts to assure an orderly transition and higher return. Most third party buyers expect and want you to be available 1-3 years after the sale to transition the customers to the new ownership.

Maximizing the price you achieve for your business will be a function of a multiple you negotiate (based on the growth, profit history and organizational competency for the business) X the profit normally expressed as EBITDA (earnings before interest, taxes, depreciation and amortization) = the price you receive. The profit used will most likely be the historical profit over the past 3-plus years, not just the current year. If you have a declining profit history and an underdeveloped, less stable organization and market, you may only get a multiple of 1-3 times your EBITDA. On the other hand, if you have a high sales and profit growth history, solid organization and superior market position you may get a multiple in the 4-6 range. I know one laboratory who claimed to have achieved an 8-times multiple from a strategic buyer who not only wanted the market position but also the technology and unique marketing ability of the laboratory. The multiple will vary for a whole range of reasons but this will give you some idea on how your business may be valued. Remember the price you receive is not determined by what you want for the business in most cases but rather on some specific rationale. Knowing that rationale and focusing on the key elements will be important in maximizing what you get paid.

When selling to family or employees the bank loans will require a valuation based not only on the cash flow from the business but also the valuation of the industry and your position in it. Most likely, that will mean you will get a lower multiple or price by selling to an employee or family purchaser vs. a third party.

Finally, buyers will restate your earnings when determining the profit by taking out the expense for you in the business. If you charge a lot to the business for cars, travel, lifestyle, etc., taking you out may actually improve the historical profits particularly if what they add back in to replace you is less. Visa versa, if you have been running the business in the last few years with limited staff and say expenses for capital improvements because you’re trying to maximize profits and thus your pay out in the short term, they may add back what would be normal expenses and deflate the profitability and price they’re willing to pay. The key in my view is to maximize you product value/price and company productivity at all times so you won’t have any surprises when it comes to selling your laboratory. That may be easier said than done.

Finally, the major shortcoming I see in planning a transition and sale of a company is by the owner them selves not planning their own “life after.” All of a sudden, the business is sold and fishing, golfing or sitting on the beach every day does not give them a good image or self realization of themselves or fulfillment in life. Your business was your identity, after the sale what will your identity be? You need to take as much time planning for what you do after as you do for selling the business. If you think you just want to sell and run form the business due to the stress a sale can and will bring on in the last few years of ownership, I don’t believe it will be that easy. You may want to negotiate in the sale a fazed withdrawal that will allow you to develop outside interests and hobbies before you leave, go home and have your wife wonder what she’s going to do with you around. My advice to you is plan you next life before you leave the current one. There are a lot of opportunities if you look for them to keep yourself game fully employed and fulfilled if you so desire.

I hope these ideas about transitioning by planning will help you in thinking about your eventual successful exit from your business. The key is having a successfully run business today - keeping the goose healthy - to maximize your return and security - the golden egg - when it comes time for you to start your next career or phase in life.