By: Dean Viskovich
COVID is front and center in all aspects of everyday life and has shined light in the strangest of places that were usually in the dark. In healthcare the laboratory space has always taken a backseat to other sectors in terms of recognition and value. The current climate in the lab space has shifted and it is not an illusion, labs are front and center.
COVID has taken its toll on areas of the economy and investors are certainly one of the first to become aware of this situation. Clinical laboratories are currently an attractive acquisition target and the reasons are numerous, sectors like retail, entertainment and travel are performing poorly and investors are shifting their investment dollars into healthcare and technology. Investors are looking for growth and profitability and are finding it in healthcare. Mergers and Acquisitions (M&A) is nothing new in the lab industry, but now careful consideration is required when it comes to deciding the appropriate time to sell your lab.
Prior to deciding to sell a lab, the owner will ask a question of utmost importance, how much is my laboratory worth? Publicly traded laboratories can be evaluated by using the stock price. The midsize and smaller lab value is usually related to financial performance. Determining a specific formula to determine value is difficult but generally the value of the private lab is based upon cash flow. Factors such as equipment, contracts and clients are all areas that need to be taken into consideration, but growth and cash flow are the main areas investors prioritize.
The preparation of a lab for sale is a process that requires an owner to embrace the fact that it is a journey that should not be taken alone. Surrounding yourself with a team of advisors who can guide you through the process is a decision that should be made early to maximize the value of your laboratory. The size of the lab will determine the type of business entity the lab owner should retain. The range of representatives include commercial real estate agents, business brokers, merger and acquisition advisors and investment bankers. The complexity of the transaction and value of the lab will be the main factors in deciding the type of representation that is needed.
An advisor with experience in the clinical laboratory space is highly recommended, as this individual will already have contacts in the lab space and may have an interested buyer. In addition, this individual or entity will be able to recommend the team that would be best able to prepare your lab for sale. The team should consist of a healthcare attorney (preferably with lab experience), financial advisor and a lab subject matter expert (SME). Revenue is not the only consideration in determining the value of a laboratory. The owner’s team can review other areas of a lab that affect its value, including but not limited to certifications, such as CLIA, CAP and COLA. A labs client base, history of growth, equipment, geographic location, enrollment in federal and third -party payer programs and compliance issues all need to be vetted. The value of any lab depends on the buyer’s perceptions as to what is and is not a priority. At the end of the day any entity is only worth what someone is willing to pay. The lab representative that can obtain multiple offers for the client will hep determine what the market is willing to pay. Determining the value is only one part of the preparation of a lab for sale. The ability to create a team that can identify buyers, undertake marketing, conduct due diligence, and prepare all the documents required to close the deal are just a few of the consideration a lab owner must be aware prior to a successful sale of the laboratory.
This article is merely an introduction to consider the numerous issues that a lab owner should be aware of when considering the sale of a lab. I would recommend that if you are interested in an in depth understanding of the process of lab sale and purchase is read the book The End Game by Melissa Butterworth of Advanced Strategic Partners. Melissa’s book is an in depth look at the laboratory owners exit strategy and is a valuable tool for both lab sellers and purchasers.