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When it’s time to sell your business and move on, having an effective succession plan can make a huge difference to the outcome. By Frank Leggett
A succession plan is much more than a way to exit the dental lab business. It enables the owner to decide when and how they leave, and maximises the sale price achieved. The golden rule of any succession plan is to start planning early. The general timeframe is five years before departure but even that can be extended.
“Dental lab owners, like all business owners, should consider their succession plan several years in advance,” says Simon Palmer, founder and managing director of Practice Sale Search, the largest dental practice brokerage in Australia. “Starting the process when you’re ready to retire doesn’t leave you with time to fix things or delay if the timing isn’t right. To achieve the best possible outcome, a five-year plan offers more options and the ability to do a course correction if needed.”
Exit options
When it’s time to move on, there are a few different options for lab owners—external sale to an individual, company or group; a family transition, an internal sale to someone presently on staff, or a complete liquidation and wind down. Selling to a company or group is a popular exit strategy but it often comes with a few conditions.
“If an owner/operator wants to maximise the financial outcome when selling to a group or company, they should be prepared to make themselves available to the buyer for a few years post sale,” Palmer says.
“Staying on as an employee post sale reduces risk for a buyer as it allows the business to transition to the new owner without losing goodwill or disrupting existing clients. Transferring the business to an individual or family member usually requires part-time work from the original owner. Liquidation and wind down is the least attractive option with a minimal financial return.”
Richard Salter is the managing director of Avant Dental, a dental lab based in Sydney that services dentists Australia wide. The company has purchased and incorporated dental labs into its business model and looks for specific qualities.
“We need to see a certain level of revenue and a certain level of EBITDA [see breakout box],” Salter says. “We don’t want the business too tied to one technician as it’s difficult to integrate.
“If the operator is willing to stay on for a few years after the sale, we can come to an arrangement. We want a lab that can be joined to our operations and grow the business. We don’t want to inherit a headache.”
Best interest
To achieve the best sale price, the business should go on the market at the top of its game. Starting the process when you’re ready to retire often means that fatigue has crept in.
A common pitfall we see is when an owner decides to go on a big holiday as they wind down so their final year is only representative of nine or 10 months of trading. When they try to sell the business, they want a buyer to look at it as if it did its usual trading figures.
Simon Palmer, founder, Practice Sale Search
“A couple of years of running a business while fatigued is not going to do you any favours,” Palmer says.
“A common pitfall we see is when an owner decides to go on a big holiday as they wind down so their final year is only representative of nine or 10 months of trading. When they try to sell the business, they want a buyer to look at it as if it did its usual trading figures.”
When a buyer is valuing a business, they place the most importance on the final year’s figures. These financials need to look as good as possible to highlight the financial return.
The one thing that’s guaranteed is that the acquirer, when purchasing a lab, will do their due diligence.
“We need to fully understand the customer base,” Salter says. “We don’t want to purchase a lab that has clientele who are also close to retirement; that gives the business an obvious end date. Every lab owner who’s contemplating selling must make their business an attractive proposition. The structure and the accounting must be squeaky clean. Starting succession planning at least five years in advance makes the transition to the acquirer as smooth as possible.”
Selling and retirement
Successful succession planning is all about timing and emotionally divorcing yourself from the process.
“Something that has surprised me is the emotional value dental owners place in their business,” Palmer says. “They feel the need to have some quality control over to whom they will sell. It’s lovely they care about their clients, however, I don’t think there is this level of concern from sellers in other industries.”
One of the most important things to remember is that selling and retirement are two different things.
“The more you wait until you’re ready to retire and hang up the tools, the more likely you’re going to sell a business that has suffered from your fatigue,” Palmer says. “The best possible outcome is for an owner to sell when they’ve got a couple of years left in the tank. This means the business is still running optimally and they’re able to give some time to facilitate a smooth transition.”
What your lab is actually worth
A common way to value any business is to use EBITDA—earnings before interest, taxes, depreciation and amortisation. In this instance, ‘amortisation’ is spreading out a loan over time.
“EBITDA takes out personal expenses and non-recurring expenses, and shows profit as it would transfer to a buyer,” Palmer explains. “Buyers are looking at the predictability of the financial return in the future. A laboratory with amazing assets that has a history of making no money is not worth anything. Goodwill is far more valuable as it shows the trading history and a loyal and returning client base.”
The more profit a business makes, the more attractive it is to a buyer. To get a truly accurate valuation of a business, it’s worth bringing in an external expert to look at the financials. It can help an owner see the strengths and weaknesses of the business—something that can be obscured when they’re in the thick of things.
