Anatomy of an Acquisition
Posted Jun 17, 2014, Published June/July 2014
Since 1972, when Dick and Sally Pilsner founded D&S Dental Laboratory, the lab has grown into a 103-person, full service operation with five locations. Although the culture of the lab remains true to its history as a small, family-run business, D&S is now owned by a nine-person ownership team including the Pilsners and seven employees who were given the opportunity to purchase stakes in the business.
About eight years ago, D&S acquired two laboratories, rolling one into its Waunakee, WI, facility and keeping the other as a separate location. But D&S hasn’t stopped there; the laboratory is again in an active acquisition mode and, this year alone, purchased two other laboratories that function as stand-alone businesses in their original locations. Here, LMT brings you inside one of those transactions: the purchase of Hootman Dental Laboratory, a 10-person operation 80 miles away from Waunakee in Rockford, IL.
Within the last two years, the D&S ownership team decided that acquisitions would be a primary growth strategy, a wholly viable one in today’s market. “We see that it’s increasingly difficult for labs to compete given rapidly changing materials and technology, ever-demanding clients and price pressure,” says Travis Zick, President. “Positioning D&S for acquisitions, or even partial acquisitions, is an opportunity for us to partner with long-standing labs that have great relationships with doctors but may need additional resources or support, who may want to initiate a transition to ensure the continuation of their labs, or who simply don’t want the headaches associated with running a business anymore.
“We can immediately help with production needs, offer a wealth of knowledge and have a full administrative team that removes a great deal of the stress from the seller’s shoulders.”
In addition to gaining additional clients and qualified technicians, acquiring existing labs is also an efficient way to break into new geographic markets. Although D&S has the capacity to handle additional work at its Waunakee facility, the ownership team still prefers to maintain a physical location in these new areas.
“Despite the convenience of delivery services and digital files, there’s a limit as to how you can service clients from a distance. Personal relationships will never go out of style and we feel they will remain a key way for labs to differentiate themselves,” says Zick.
“Also, our goal is to build on the legacy the individual lab has established—rather than try to make it a branch of D&S—and to ensure the continued financial well-being of the lab’s employees.”
FINDING THE RIGHT CANDIDATE
As the ownership team fine-tuned its growth strategy, it began to paint a picture of the ideal lab acquisition; it opted to focus on those in the mid-range in terms of size and annual revenue. “If the lab is more than an hour away, we’re not just going to roll it into our lab in Waunakee. So, to be a stand-alone lab, it would ideally have three-quarters of a million or more in revenue and strong leadership in place,” says Zick.
Also non-negotiable: the owner would have to agree to a transition period, often ranging from three to five years.
In the spring of 2013, knowing that D&S was actively seeking acquisitions, a dentist-client told Zick about another lab he used—10-person Hootman Dental Laboratory—and that the owner was considering selling; the client thought it was a good fit.
Zick made the call to Hootman’s owner, Debra Swenson, to explore the possibility. In those initial conversations, Swenson shared general information on the laboratory, its work and her philosophies.
From D&S’s perspective, Hootman fit the profile. Although the lab had suffered some disruptions since it changed ownership about five times in its 87-year history, it had a loyal following of customers, a great staff and, like D&S, placed a high value on education and relationships. It would also afford D&S a stronger presence in southern Wisconsin and northern Illinois.
From Swenson’s perspective, the timing was fortuitous. “Even though I’m not ready to retire yet, I knew that, as a business owner, I had to starting thinking about an exit strategy so I was prepared,” says Swenson, who bought into Hootman with an existing partner in 2000 and became the sole owner in 2005. “But I also wanted to ensure that Hootman would grow and prosper for both my employees and my dentist-clients. The more Travis and I talked, the more I thought this could work out well.”
By early summer, both parties agreed to proceed.
D&S’s due diligence phase—a thorough investigation into all aspects of Hootman’s business—lasted about four months. According to Zick, it’s critical not to rush through this process, since it’s an opportunity to ensure the relationship is a “fit” and both parties are comfortable moving ahead with negotiations.
Since this phase requires complete access to financial information, Zick first signed a confidentiality agreement. He then supplied a comprehensive list of requested documents to Swenson and she provided multiple years of financial statements, tax returns, sales trends, customer analysis, collection records, and product mix and personnel information. The goal: to analyze the trends in the business and project what they would mean down the road.
For example, one noted trend was that Hootman had lost some business because it could not afford to invest in digital technology. “Doctors were demanding zirconia and the lab didn’t have the capability to offer it,” says Zick. “That was a concern, but it was also an opportunity. Since D&S does a lot of zirconia—it represents over 60% of our business—we knew we could fill that need and bring some of those clients back.”
In addition to the paperwork, D&S also looked at Hootman’s facility, noting that some items—including computer systems, handpieces and the denture tooth stock—would require additional investment, although minor.
By November, when the due diligence was nearly complete and it was clear that a deal was feasible, Zick met with Hootman’s employees to ascertain if they would be accepting of the change.
The feedback was positive, and they saw how the acquisition could provide additional resources and opportunities for them in terms of continuing education, more comprehensive benefits packages and the ability to work with new technology.
While the details of the final deal remain private, Zick explains that D&S usually prefers a payout structure that’s spread over a few years, coinciding with the seller’s transition period. The ownership team determines a price based on a multiple of annual cash flow; the multiple varies depending on due diligence findings and projections.
One factor that impacted the price favorably in this case is that Swenson was not looking to leave the business altogether. “The best way to ease the transition with existing clients is to have the owner continue with the business. If the seller is out in six months, it adds a lot more risk and that affects the price,” says Zick.
“This was the ideal scenario for us, because Deb wanted to stay on and manage the laboratory.”
However, it was important to spell out Swenson’s role and responsibilities in an employment contract to ensure each party was on the same page with regard to the other’s role.
The D&S team immediately took over much of the stress of managing the business, including payroll, accounting, human resources and marketing; Swenson’s main focus is now on the day-to-day production, overseeing employees and servicing dentist-clients.
In early January, the deal closed and it was official: D&S now owned Hootman, which continues to operate as Hootman Dental Laboratory in its original location in Rockford, IL. The period following an acquisition can be tumultuous for employees and clients alike, so the D&S team took a proactive approach to making both parties feel welcome.
“It can be challenging to make employees feel part of the team when you have facilities in different areas,” says Zick. “So we immediately visited the lab, offered an orientation about D&S, and invited employees to visit us in Waunakee when possible.
“We also started including Hootman employees in our weekly production meetings via teleconference, and have had training and team-building meetings for all of our lab employees.”
Swenson addressed the acquisition with existing clients, calling them to introduce D&S and emphasizing it would allow Hootman to offer a greater variety of products and services, including digital design, milling and the latest materials. Although Swenson had to quell a few initial concerns, dentist-clients quickly got excited about the new products lines—especially press-to-zirconia and full contour zirconia options—and were soon comforted by the fact that they saw very few other changes.
“We have always had a great rapport with our customers, and that continues; they still talk to the same technicians here, reach me for case consultations, and see the same people do pickup and delivery,” says Swenson. “They’ve always relied on our years of experience and now I remind them that there are years of expertise and knowledge at D&S too; together we can be an incredible resource for them.”
D&S also sent out an announcement to about 3,000 dentists in the area and hosted an implant seminar in March just down the road from Hootman. As a result, Hootman has not only gained new accounts but also welcomed back some who had left now that they can get a full range of restorations through D&S; since mid-February, Hootman has seen a 7% increase in business.
In April, D&S also acquired eight-person Hansen Dental Laboratory in Greenfield, WI, expanding into southeastern Wisconsin and northeastern Illinois.
This deal was a bit different in that, while Zick was finalizing a price and transition plan last January with Owner Tim Hansen, Hansen died suddenly. Hansen’s family took over the negotiations and, while the transaction was being finalized, D&S stepped in to ensure that Hansen Dental Lab continued to run smoothly by doing some of its work and acting as a resource for the lab manager.
“Although it would normally be a concern not to have the owner on board for the transition, Hansen has an outstanding staff that we knew could handle the transition and we haven’t been disappointed,” says Zick. “We’re glad that, like Hootman, we can continue the tradition and legacy of Hansen Dental Lab; we’re excited for the future of both businesses.”
© 2015 LMT Communications, Inc. · Articles may not be reprinted without the permission of LMT
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