Posted Apr 28, 2011 in Management
In an ideal world, your long-term business plan includes an exit strategy that outlines how much income you need to retire, what exit route you want to take and how you'll prepare your business accordingly. Experts say you should be thinking about how you'll retire from the moment you open your doors; at the very least, you should begin formulating your plan 10 to 15 years in advance of your expected retirement date.
An exit plan is not just about the day you'll leave the laboratory, it's about setting long-term goals for your business and yourself so the future doesn't sneak up on you. When you operate your business with the end in mind, it gives you a strategic plan and the impetus to operate more effectively along the way. "To truly run a business successfully, it's vitally important to know what your exit is at any moment in time because it impacts everything you do," says Peter Engel, author of What's Your Exit Strategy: Seven Ways to Maximize the Value of the Business You've Built. "It's not a question of getting out. It's thinking about maximizing the value at whatever time you intend to get out."
The reality, though, is that many laboratory owners don't have exit plans; they are too caught up in their day-to-day responsibilities or they can't imagine extricating themselves from the business they've spent so many years building. "In theory, business owners understand the importance of planning ahead but most people don't actually do it until a crisis situation forces them to take action," says Sutton Landry, director of Northern Kentucky University's Small Business Development Center and Family Business Center.
Laboratory owner Tom Moore, CDT, knows this situation firsthand. Last year, he experienced a major medical event that kept him out of work for a month and nearly cost him his life. It changed his perspective on his future and the future of his laboratory. Being a single-person operation, Moore quickly realized that he had to make a change. He wasn't ready to retire so he merged with Centex Dental Laboratory and now owns one-third of the 14-person Waco, Texas laboratory.
"I could have lost everything I had been working my whole life to build. My best case scenario would have been to liquidate and sell my equipment. But now, owning a piece of a larger lab gives me more security than owning all of a small lab and now I have more exit options than I did before," he says. "What happened to me is not unusual. There are tons of baby boomers in our industry who need to start thinking about their exit strategies."
When you've considered your exit options, you're better prepared for such a crisis or other unexpected situations like an alternative career opportunity that you can't pass up. Or, to use an even more common scenario, it minimizes the chances that you'll wake up one day, feeling bored or burned out, wondering what you'll do with the laboratory.
There are a number of exit routes you can take and your choice depends on your goals, personal circumstances as well as market conditions. For example, do you want to sell your laboratory to a third party and cash out or build the business so that it can operate without you and continue to draw an income? Do you have family members, partners or employees who are interested in buying the lab? Do you want to merge with a competitor or sell to a laboratory group to unload some of your management responsibilities yet maintain an active role in the lab? (See articles Selling your lab to a family member, Selling your business to a laboratory group, and Selling your lab to your employees.
Exit plans aren't set in stone. They will evolve as your goals change or as outside factors affect your business, so you need to be flexible and plan for contingencies. For example, as part of his exit plan, laboratory owner Jerry Ragle, Ragle Dental Laboratory in Champaign, Illinois, who plans to retire in 10 to 15 years, recently bought Underwood Dental Lab to expand his market share. "The equity and goodwill I build will become a large part of my retirement if the business is sold so the business has to be a marketable asset. Ideally, I would hope my son or daughter will want to take over the lab but if neither one does, I want to position my lab to be attractive for someone else to purchase, such as an employee(s), laboratory group or a competitor," he says.
Ragle's approach--to maximize the value of his laboratory--is an important aspect of any exit strategy. Obviously, operating a profitable laboratory with good cash flow and having well-organized financial statements are critical (see How to Add Value to your Laboratory below). However, the key to boosting the desirability and worth of your lab is to build a self-sufficient organization to the point that you can walk out the door, hand someone else the keys and know the lab will continue operating like a well-oiled machine. "If you're an owner who still trims every die, talks to the clients, quality control checks every case and still does the work of a few "pet" clients, how can you ever leave?" asks Josh Green, owner, Green Dental Laboratory.
Green's exit strategy is to have his employees run his laboratory in Heber Springs, Arkansas. Now living in the Virgin Islands, Green is only in the laboratory periodically and available by phone for consultation. When he started implementing his plan in 1995, he had about 100 employees and was still very entrenched in the business. He focused on finding the right team of managers and offered generous incentive plans to motivate them. He developed their skills by working with them and sending them to management training courses, trade shows and other laboratories.
It was seven years before he felt comfortable leaving the laboratory in the employees' hands. "It took that long to get them up to speed and for me to learn to stop micro-managing and prepare myself psychologically to let go. Also, I had to hand off responsibilities long before I planned on being completely out of the picture because I had to be absolutely sure that the lab could run and grow without me," says Green.
In a small lab with just a few employees, extricating yourself from the laboratory is inherently more difficult. If you're an owner who wears every hat in the laboratory, you are the laboratory. This can be a negative in the eyes of a potential buyer or successor whose primary concern is that the lab can operate successfully in your absence.
In Green's opinion, small laboratory owners have two choices: either to grow their business large enough to be self-sufficient or, if you're going to remain small, you need to invest wisely while you're still working. "Without the owner, there's not much left to sell, so you can't necessarily count on getting enough profit for your lab to retire," says Green. "Your exit plan should be to start funneling money out of the laboratory into other investments. If you're one of the lucky ones who does make a profitable sale, then that's gravy--but don't depend on it."
Small laboratory owners have more options if they are committed to being involved after the sale. "When we buy a laboratory, what we're really buying is the hope to keep its sales. Although we provide a technical product, personal service is extremely important in our industry. So if we can keep the owner, who is the key to that service, we're able to keep more of the sales," says Jerry Neuenschwander, president, Johns Dental Laboratories, Terre Haute, Indiana.
Since there isn't a surplus of technical people in our industry, small lab owners who focus on strengthening their technical skills and productivity will make themselves more valuable. "The reality is that when buying a one or two-person laboratory, it's really more like hiring a manager or technician, and in that situation, technical expertise and proficient productivity levels are essential. In other words, the owner has to be profitable without having to work an 80-hour week," says Bob Ditta, president and COO, Dental Services Group, based in Minneapolis, Minnesota.
Creating an exit plan can be a time-consuming and emotional task. But even if you think retirement is years away, don't make the mistake of assuming that exiting your laboratory will be easier than getting it off the ground. Taking the time to formulate a plan early on sharpens your focus, gives you time to examine your options, consult with professionals, put your plan in place and optimize your chances of getting the most beneficial financial and personal results.
How much do you need to retire?
Part of developing your exit strategy is deciding how much money you need to retire. A common rule of thumb is that you'll need 65-75% of your pre-retirement income, but it really depends on how you envision your retirement. Perhaps you want to continue to work part-time and, therefore, will still be generating income; on the other hand, maybe you're dreaming of traveling extensively. Or perhaps you're eager to spend your days in the garden or visiting with your grandchildren.
Many websites now have retirement calculators that help you crunch the necessary numbers, using factors such as your required yearly income, the expected inflation rate and your expected annual investment return (check out kiplingers.com and quicken.com). Basically, you can get a good idea by examining your current lifestyle and adjusting it for your retirement vision. Here are some questions to consider:
What will be your income sources? There are three main sources of retirement income: pension/retirement plans (IRAs, Keoughs, 401(k), etc.), your personal savings and investments (assets from the sale of your laboratory as well as annuities, dividends, trusts, real estate, etc), and Social Security (to determine your estimated Social Security benefits, call 800-772-1213 and request a Personal Earnings and Benefit Statement or visit http://www.ssa.gov/pebes. Keep in mind that even if your retirement accounts are impressively large right now, you may be losing up to a third of the balance to federal and state income taxes.
What expenses will you have? While some current expenses like commuting costs may be lower once you've retired, other expenses like leisure activities, medical costs and prescription drugs will surely increase. And while your house mortgage may be paid off, you may have higher maintenance costs as the home gets older. Even those expenses that you have now and will continue to have once you've retired--utilities, property taxes, insurance, groceries, etc.--will be driven up by inflation.
When do you plan to retire? The earlier you plan to retire, the more you need to save now to take advantage of compounding interest on your investments. Remember that you'll pay a penalty if you touch your 401(k) before age 55 or your traditional IRA before 59-1/2. Also, you can't get Social Security until you're at least 62 and, the earlier you start taking it, the less your benefits will be. "If you retire in your 50s, for example, not only will you have to make it through your initial retirement years without any help from Social Security, but once you start receiving your monthly checks, they will be smaller than if you had kept working," says Jonathan Clements in The Hartford Courant, October 22, 2000.
What's your life expectancy? As uncomfortable as it might be to think about, you need to get some idea of how long your retirement years will last. According to IRS data, the average life expectancy for a 65-year-old man is 79 and for a woman it is 84, but you may want to assume a longer one to be sure you're covered. (For factors that affect your life expectancy, check out http://www.livingto100.com.)
Are there any special considerations that relate to your retirement? For example, will you still be paying your kids' college tuition or student loans--or helping with your grandchildren's? Do you plan to move to a location that has a higher or lower cost of living? How would your financial situation change in the event of divorce or your spouse's death?
Is your portfolio tailored to your plans? Since the rule of thumb is that you should move away from higher-return, riskier investments as you approach retirement, talk to a financial planner to determine if your investments are age-appropriate. You may want to keep at least part of your portfolio in stocks so that you continue to earn healthy gains.
How to add value to your laboratory
Maximizing the value of your laboratory to make it as enticing as possible to a buyer or your successor is one of the most important aspects of an exit strategy. Laboratory owners who have implemented successful exit plans agree: the best way to do this is to build a self-sufficient organization. However, there are a variety of other ways you can enhance the saleability of your business:
Create a solid client base. Statistically, even if all goes smoothly, a buyer can lose 10 to 20% of your accounts so he's going to be looking for strong customer relationships and low client turnover.
Strengthen your financial statements and cash flow. During the due diligence phase, a buyer will want to examine financial statements--including income statements, balance sheets, income tax returns and aging reports--and your sales history for at least the past three years. While it's always a good idea to have impeccable financial records, if selling is imminent, it's especially important. Now's the time to get debts paid off, focus your collection efforts and reduce the number of perks you or key personnel are receiving from the business in order to increase your EBIT (earnings before interest and taxes). "Treat your business as a business and not your personal piggy bank," advises Sutton Landry, director of Northern Kentucky University's Small Business Development Center and Family Business Center.
Hire professional advisors. If you own a small laboratory in which you don't really have the option of grooming a management staff, it's especially important to hire a strong team of professional advisors such as an accountant, legal counsel and a financial consultant who know your business intimately. For example, according to Landry, "Hiring a reputable accountant can add 10 to 15% to the value of your business."
Price and produce for profit. Buyers are looking for profitability and productivity. "We're adamant about our pricing. If a laboratory is simply growing by selling its product at any price to get an account, we're not interested in that. We want to be sure a lab is pricing its products appropriately and has proper labor controls to match the function, quality and productivity of its employees," says Dave Brown, president and CEO of National Dentex, headquartered in Wayland, Massachusetts.
Maintain staff continuity. A laboratory's success is closely tied with the people it employs, so if you have a high turnover rate or a morale problem, it's going to detract from the value of your business. Most buyers will want you and your employees to stay for a transition period and ideally for the long term. They'll be particularly interested in retaining staff members who have relationships with dentist-clients and they may look for non-compete agreements.
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