Determining value of a lab

[EJADA]

I am presently looking into a major change and am considering buying an existing small lab in a different region. The owner is looking to retire in a year or two so we could work through the transition. The big question is how to determine the value of the lab. ie.... Equipment, inventory, pervious sales, good faith with existing customers, etc...

Is there a formula or any ideas? Today's market place makes this a bigger challenge than maybe 10 years ago. I have always been a start to finish guy well for the last 15 to 20 years as has been the previous owner. We seem to have very similar philosophies which should help.

Just looking for ideas.

 

[TECHARTISAN]

Im not a business management guru or anything...so take this or leave it at your own risk....but when I was looking at a lab a couple of years ago, this is roughly why the accountants told me I would be a fool to buy at the price that was being asked.....so I didnt.

You need solid figures of the 5 year adjusted net income (business net plus owner salary, owner benefits, use of a company vehicle etc etc),graph this and use the graph to project the trend over the next 3-5 years, average the projection, this figure is typically adjusted by a multiplier based on type of business, risk exposure, and market...in general for an average dental lab with a stable or positive/negative low slope trend a multiplier of 1.5-2 is appropriate a 3 would take a sharp up trend...then add to that the Tangible assets (property if owned, equipment, materials etc) DO NOT FORGET TO DEPRECIATE!

 

[CatamountRob]

This is a "one man lab" that you're looking at?

IMO, a one man lab is worth the value of the Real Estate, used equipment and usable materials and that's it.

A little more if you can go in as an employee for a while, get to know the accounts and let them get to know your work, so that you have a pretty good sense that they will stay with you.

If you are talking about a lab with more than 5 employees or so, and they are willing to stay on, then your talking about a real business that has value beyond its hard assets.

 

[Bobby Orr ceramics]

The question is ..... Are you buyin a job? Or a business that can run without you being there? If you're buyin a job, it's asset value only(equipment stuff)..... If you're buyin a business that is not solely reliant on you......then you can pull out a formula and negotiate. Cash flow multiplier will be dependant on size of Net Income and stability of income trending.

 

[JohnWilson]

Good will on a one man lab has no value in this equation. As others have stated the price should be on used equipment only.

With that being said if this person has had solid long term clients, I would suggest a structure for a monthly payment based on client loyalty for a certain duration of time. IF you are able to retain a certain percentage you would pay a specified amount, if it falls below this base line you could negotiate a % of this number.

The problem is that most small labs have an inflated value in their mind as to what they actually have. Convincing the owner to do something as I suggested may be more difficult than it appears.

Good luck to you

 

[EJADA]

Thank you for the great comments. All are very helpful. I have not made any decisions yet and may ask a few more specific questions as I go. Youalls thoughts are the best.

 

[user name]

Ive had the misfortune of having others hostile to me try to set the value of my business/lab because I went through a divorce. If you cant walk away and have it still generate an income without you being there, you just own a job. If you want to buy a bunch of used equipment and some business contacts, thats thin ice. Are you going to be taking over the other guys reputation? Do you even know 'why' the Doctors have been sending him their work?

Im curious about the 'whys' of relocation. Just remember...where ever you go...youll still be there.

 

[Affinity]

I agree with John, service his accounts for a percentage over a certain amount of time. Find something that works for both of you, tell him to take his equipment to the ebay dump, because unless hes digital, its worthless..

All he can hope to get is the value out of his existing clients, and even that is fleeting.. theres no guarantees when he retires... only the fact that he recommends you after he is gone..

Play hard to get, chances are he will be begging you in a few years..

 

[EJADA]

Ive had the misfortune of having others hostile to me try to set the value of my business/lab because I went through a divorce. If you cant walk away and have it still generate an income without you being there, you just own a job. If you want to buy a bunch of used equipment and some business contacts, thats thin ice. Are you going to be taking over the other guys reputation? Do you even know 'why' the Doctors have been sending him their work?

Im curious about the 'whys' of relocation. Just remember...where ever you go...youll still be there.

All great points. As to why relocate first off. Getting the h..... Out of CA. The rest it's the right time. Of course it sounds like you know more about me than most.

 

[EJADA]

I agree with John, service his accounts for a percentage over a certain amount of time. Find something that works for both of you, tell him to take his equipment to the ebay dump, because unless hes digital, its worthless..

All he can hope to get is the value out of his existing clients, and even that is fleeting.. theres no guarantees when he retires... only the fact that he recommends you after he is gone..

Play hard to get, chances are he will be begging you in a few years..

I really like John and yours thought on a percentage of the accts for a period of time. My wife suggested this to me also. She's a pretty smart cookie too. I am waiting on a list of the equipment, and as for digital, I already own a scanner and have CMC mill most of my stuff so I am already ahead of him with this.
For me it's mainly about accessing his contacts in this area as he has been there many years and has a good reputation. Many smaller areas have a bit of a good ol boy network and I feel a year or so working together would be of great benefit in this area.

 

[Al.]

I already own a scanner and have CMC mill most of my stuff so I am already ahead of him with this..

Do you have any other equipment ?

Model room stuff, porc firing/pressing furnace, hand pieces etc?

 

[EJADA]

Do you have any other equipment ?

Model room stuff, porc firing/pressing furnace, hand pieces etc?

Yes I have all equipment to run a lab. I am running a lab currently and have been for almost 20 years.

Why?

 

[Al.]

Yes I have all equipment to run a lab. I am running a lab currently and have been for almost 20 years.

Why?

Since you already have a lab then really you are relocating. Really don't see buying something you already have as far as equipment.
Like others said its different if he has a operation that runs without him or you being at the bench full time.

Have you already decided on a state? On a county?

I would weigh the costs and time line of relocating and starting a new lab vs the cost of buying him out. And your confidence of picking up new Drs.

For sure it's a scary thing to close down and move if you have dependents.
I saved a years income, secured a location, sold the house then went by myself and set the lab up. My wife and 2 boys stayed at her parents while i was gone. We made 2 trips in a Uhaul from Fl to Ky to put everything in storage units. One load was mainly the lab.
Then went back and got my wife and kids 2 months later after school let out for the summer and i had finished setting up the lab. I slept on a mattress on the floor in the lab while I was setting it up.

Before we ever pinpointed a county or city we subscribed to several local newspapers to get a feel for the areas.
I researched populations and number of dentists within driving distances and number of labs.

Most Drs in my area were mailing their work out so it was easy to pick up work here. 2 small fixed labs (one 3 person one 2 person) here and around 60 dentists within 45 min drive in all directions.

We rented an apartment till I had enough work coming in then we built a house.
Never needed to tap in to much of the years savings.
Built the lab on the bottom floor of the house then moved it there.

Took me about 4 years to save and get a location then another year and half before we moved ourselves and the lab into the new lab.
Part of that time length was because we searched for and bought land. A small farm with a old 700 sq ft house on it. That is where I put the lab.
When we sold our house in Fl I made enough from it to pay off the land.
I paid $1,200 per acre here in Ky 10 yrs ago, Compare that to $10,000 per acre in Fl.
Wow what a trip!!!

Don't know how that would have compared to buying a lab and moving and working myself into it and paying previous owner.

 

[EJADA]

Since you already have a lab then really you are relocating. Really don't see buying something you already have as far as equipment.
Like others said its different if he has a operation that runs without him or you being at the bench full time.

Have you already decided on a state? On a county?

I would weigh the costs and time line of relocating and starting a new lab vs the cost of buying him out. And your confidence of picking up new Drs.

For sure it's a scary thing to close down and move if you have dependents.
I saved a years income, secured a location, sold the house then went by myself and set the lab up. My wife and 2 boys stayed at her parents while i was gone. We made 2 trips in a Uhaul from Fl to Ky to put everything in storage units. One load was mainly the lab.
Then went back and got my wife and kids 2 months later after school let out for the summer and i had finished setting up the lab. I slept on a mattress on the floor in the lab while I was setting it up.

Before we ever pinpointed a county or city we subscribed to several local newspapers to get a feel for the areas.
I researched populations and number of dentists within driving distances and number of labs.

Most Drs in my area were mailing their work out so it was easy to pick up work here. 2 small fixed labs (one 3 person one 2 person) here and around 60 dentists within 45 min drive in all directions.

We rented an apartment till I had enough work coming in then we built a house.
Never needed to tap in to much of the years savings.
Built the lab on the bottom floor of the house then moved it there.

Took me about 4 years to save and get a location then another year and half before we moved ourselves and the lab into the new lab.
Part of that time length was because we searched for and bought land. A small farm with a old 700 sq ft house on it. That is where I put the lab.
When we sold our house in Fl I made enough from it to pay off the land.
I paid $1,200 per acre here in Ky 10 yrs ago, Compare that to $10,000 per acre in Fl.
Wow what a trip!!!

Don't know how that would have compared to buying a lab and moving and working myself into it and paying previous owner.

Al these are excellent points, all of which I am considering when establishing what I am willing to pay for this lab. I am still considering just starting from scratch. This would be different 20 years ago. I do have dependents actually a whole crew which is what makes this an added challenge in many respects. I have 3 bigger boys that will help tremendously. I can't get into too much detail at this point as this is an open forum.
All you say is very helpful and encouraging. Thank you. EJADA

 

[Al.]

If your a praying man, do a lot of it before every decision and if you have any checks in your spirt listen to them.

 

[Affinity]

AL, any trick to introducing yourself to new docs in town? Do you bring a portfolio, or does your reputation preceed you?

 

[Al.]

AL, any trick to introducing yourself to new docs in town? Do you bring a portfolio, or does your reputation preceed you?

No no reputation to precede at least not in the past.

I have 4 case pans of demo cases. Crowns on models with no opposing. All multiple unit cases.
90 units total.
Pfms capteks and emax.

My wife would drop off a case pan at a Drs office of around 20 or 25 units. Usually of one type of restoration, leave it there for 3 days, pick it up and drop it off at another office. In a week or two drop off another pan of different type of restorations.
So all the restorations were floating around till I had all the work I could handle. Hit about 50% of the Drs before I stopped.
Didn't go to a town 30 miles south of me that has over 2 dozen Drs because I was sort of friends of the lab owner there.
But he accused me of hitting on his Drs, and I never did, so we parted our friendship. So because of that the Drs in that town are an option if I ever needed to try to get more local work.

This was before I had a camera, so now I would use both if I was starting up again.

 

[EJADA]

Al, I recall reading a previous thread you relayed your intro approach. I liked it then and still do. I am working now on some example work so I can do a similar approach. You da man. EJADA

 

[Sandra]

you can determine the value of the lab according to the market price of it. You can check all equipments and accessories that it is in good condition. If you find something wrong then you can deduct it from the price you are going to give to that lab owner.