Category Archives: Laboratory Business

Build or Buy – That is the Question!

carpenter toosWhen you are looking to get into the laboratory business – should you go out and try and buy a lab or should you build it from scratch? Well it depends.

It depends a lot on the type of lab (whether it is in highly regulated industry, such as a clinical lab and where someone else, such as insurance companies decide on what you can charge), whether you can find the type of lab that you are looking for in your preferred geographic area, and last but not the least, your own personality, skill sets and knowledge.

Case for Buying a Lab

More buyers seem to prefer going this route as it seems like a safer route to take. Particularly, if you are not experienced in this industry. For a healthy laboratory, you avoid the steep learning curve, you get a business that is generating a positive cash flow from day one. You inherit a working system and a trained staff. You also are more likely to get a loan from the bank to fund your dreams. You can bring your own skills and capabilities to grow the company. As they say, it is much easier to make the second million than the first million.

And in some industries, it may be perhaps the only preferred choice. For clinical labs in certain states such as NY, it takes 12-18 months or longer to get CLIA-accreditation. and in certain states, small independent labs have a hard time getting accepted by the insurance companies. It would make sense than to buy an existing lab with CLIA-accreditation and existing insurance contracts if such  a lab was available.

But expect to pay a price for this – the labs are typically (but not always), valued by a multiple of EBITDA. EBITDA is a metric defined as Earnings before Interest, Taxes, Depreciation and Amortization. We’ll discuss lab valuation in an upcoming post, but expect to pay about 3-5x of EBITDA for a healthy lab. So if an EBITDA for a lab is say $300K, expect to pay on an average about $1.2 million.  Can you afford it? Is it worth the price? Are you better off building on your own? Exception to this maybe if you find a good lab which is doing poorly but you see great potential in it and are confident that you can turn it around. Such “turn-around” labs can sometimes be had at a bargain.

 Case for Building Your Lab

If you (or someone in your team) is great at sales and marketing, have rich contacts in your industry, and are confident that you can bring the business to your new lab, or you are buying a lab for internal research, perhaps you should build your own lab (as long as regulatory hurdles are not too high). The advantages include cost savings (you could save as much as 50-75% over buying a healthy lab), you can have it at a location you prefer, equip it as you want it, and build your own culture in your business. And if you are unsure about how to go about setting one up, there are companies and consultants who can help you set it up.

 Summary 

Buy a lab if:

a. You are looking for a “turn-key” lab with ready cash-flow and which may perhaps need only a few tweaks

b. Regulatory and insurance constraints makes this a much more practical solution

c. You are flexible as to the exact location

d. You are looking to grow your market share via acquisitions

 Build a lab if: 

a. You can bring in business or have captive internal business

b. Want to work on a shoestring budget without taking in a lot of debt

c. Want to have it on your terms – building your own culture, your preferred location, and choosing your own equipment

d. You enjoy creating business from scratch

e. You can survive for some time without an income or salary

Exit Strategy – Right Time to Think About It is Now

exit strategy on door

There are risks and costs to a program of action. But they are far less than the long-range risks and costs of comfortable inaction. – John F. Kennedy

They say that every business should be started with an exit strategy in mind. It applies to any kind of business, not just the laboratory businesses.

There may come a day when you may want to retire, or running the lab become very stressful, or your health isn’t what it used to be. Do you have an exit strategy for such a day?

Exit strategy could be having a succession plan – turning over your lab to a family member whom you have been mentoring, or selling the lab to an outside company, or selling within to your employees.

It is never too early or too late to start thinking about your exit strategy. After-all, you never know when you think you will need it. Kind of like a Will or an Insurance Policy. You never know when you will need it.

Real Life Stories

Recently, in the span of a few months, we were unfortunately involved in emergency sale / liquidation of two labs that had to be sold off at a significant discount.

Sometime ago, I received an email from a lab-owner that we should talk. We set up a time to talk and he described his situation, which was really sad. He told me that his young, two-year old lab was doing well, he had found some unique niches, and the business was growing by 25-30% a year and future looked great. He was thinking of hiring more people. And then he got shocking news from his doctor about a terminal disease. But he said he was still feeling good and he had at least some time – perhaps couple of years- to plan for the future.

We tossed around a few options. Since he was feeling well at the time, and the lab was still growing well, it seemed like it might be a good idea for him to take in a minority partner, train him or her, grow the business and when the time came, the partner would buy him out. This way, the business will grow in size and value, the partner would be ready to run it and he would get much better value for his lab. We decided to talk again in a few weeks. Next month I sent him an email and received a shock when I learnt from his wife that he was no more. I can never forget that email and the shock and disbelief that someone whom you spoke to was suddenly no more.

Well, life throws you such curve balls, and in these kinds of cases, there is not much we can do. I must say, that his wife, somewhat involved in the business, was very brave under the circumstances, and was fortunate that the lab did get bought by one of its customers. I still at times think of my conversation with the lab owner and what could have been.

Another incident happened more recently. A lab-owner became too sick to carry on and his business. His business was once spread across continents, with offices in Europe. But it had to be liquidated to salvage whatever little value one could get out of it. I am sure it must have broken his heart to see something that was so dear to his him, and his pride and joy, had to be almost given away – and even then, it was not that easy.

Time to Act is Now

So what can you do starting Today, so that when the time comes, you can hand over the baton to the next captain?

I think the number one thing that every one of the business owners should be thinking about is to increase the valuation of the business. Something you should be thinking about everyday you are at work. But how can you do that?

Well, I will leave that to the another post.

Thank you and so long till later!

yatin