Prevailing Market Conditions Entice the Private Sector
Posted May 27, 2014 in Industry News
Just in the past six months alone, there have been a number of laboratory acquisitions by private equity portfolio companies: Welsh Carson Anderson and Stowe, which owns National Dentex, acquired nSequences; HealthpointCapital added Cosmo Dental Lab and Lemke Dental Lab, which will be combined with Hermanson Dental Laboratory to its MicroDental Laboratories network (formerly DTI); and Beacon Bay Holdings, which owns da Vinci and NuLife, acquired Cal Ceram Dental Laboratory. While private equity is not new to our community, the prevailing market conditions continue to entice the private sector. “On the surface, our seven billion dollar industry with low, single-digit growth might not look like an exciting investment opportunity. However, beneath the surface there are persistent trends that are fundamentally reshaping our industry,” says Kim Bradshaw, President and CEO of MicroDental Laboratories. “The general investment thesis is that the combination of CAD/CAM technologies and industry consolidation will enable the labs of the future to add more value to dentists, patients and therefore investors.”
The private sector sees an opportunity to acquire laboratories; roll them into a larger company; and then increase the value and market share of that operation by infusing capital, achieving economies of scale and using their outside perspective and management, operational and marketing resources. They are poised to make the most of an industry in transition.
For example, Welsh Carson Anderson and Stowe, which invested in National Dentex in 2009, is one of the largest healthcare investors in the U.S. It was founded on the strategy of investing in healthcare industries on the cusp of transformation. “All of the market forces—the rapid adaptation of digital technologies and advanced materials, clients demanding better support from their labs to help them achieve their business goals and increased competition among dental labs for a share of the doctors’ lab spend—are pushing the dental industry toward transformation. We think we can be the catalyst to help dental labs through that transformation,” says Steve Casper, CEO, National Dentex Corp.
Some industry experts believe this influx of private equity firms is a compliment to our industry, a testament to its financial strength and long-term viability. Since private equity firms tend to be looking for larger operations—typically over one million dollars in annual sales—they’re also good news for larger laboratory owners who are looking to change their business model or considering their exit strategies.
“By becoming part of Beacon Bay Holdings dental lab investment, there’s more access to capital and a great opportunity to partner with other strong laboratories to deliver better products, more quickly grow the business together, leverage technology and educate employees versus what an independent lab could do on its own,” says Jennifer Stewart, Managing Partner. “We also can help provide a smooth transition for an owner who wants to spend less time in the business, create liquidity for his family and still ensure a strong lab for years to come.”
Owners of labs that are acquired by private equity-owned laboratory groups reap the benefits of shared corporate functions and knowledge such as marketing support, customer relationship advice, pricing strategies, material recommendations and buying power. Also, they hand off numerous administrative functions. “Many labs are struggling to manage a patchwork of software packages, health insurance requirements and regulatory obligations. One of the first questions owners ask when they come on board is, ‘How soon can I get HR, IT and regulatory assistance?’” says Casper.
However, one challenge former owners face is that their business changes when they are no longer their own boss and have to be accountable to the budget, financial and sales goals, and the strategic plan established for their operations. “Lab managers need to learn how to leverage the resources of a larger organization,” says Bradshaw. “Our centralized services—like marketing, human resources, IT and finance—are designed to provide lab managers with more time to spend on production or interact with customers. But this also means the manager has to get comfortable delegating these administrative or secondary activities, instead of personally owning them.”
What Are They Looking For?
Typically, selling your laboratory to a private equity firm is not a quick trip to retirement; the firm wants to make sure you and key personnel stay involved with the lab. “We want to work with like-minded people who are positive about the future of this industry, who want to see their lab flourish as part of a larger organization and are passionate about serving their clients. Good chemistry with the lab leadership is extremely important,” says Casper, who notes that National Dentex acquires laboratories with annual sales of less than $500,000 to north of $10 million.
While HealthpointCapital is actively evaluating labs in the one- to 10-million-dollar range, cultural and strategic fit are of paramount importance. “Values and strategic alignment are our key evaluation criteria,” says Bradshaw. “After these two criteria, we prefer lab managers who have knowledge and experience in scaling up their operations.”
The starting point is an open and honest conversation to be sure the lab’s long-term goals are aligned with the buyer’s goals and to gain an understanding of how you’ll work together in the future. If both parties agree to move forward, you’ll sign a confidentiality agreement and provide financial information about your lab, including profit and loss statements for several years, client transactional data and collection history. In addition, portfolio companies will look at your technical expertise; reputation; staff members, job descriptions and employment terms; geographic region; customer profiles, longevity and demographics; pricing structure; building leasing arrangements; and brand awareness. Depending on the size and complexity of the acquisition, the entire process ranges from 30 to 90 days.
While group laboratories owned by private equity firms provide a viable option for some, they’re not the solution for many lab owners. “There will always be room for exceptional labs that satisfy a specialty need. However, the facts are that most labs are finding it increasingly difficult to compete. The owners of these labs should consider how to make their operations more appealing to buyers,” says Bradshaw.
Stewart agrees: “I think if your lab has talented people who are working really hard, your lab could do well, regardless of whether you’re a small independent lab or a large independent lab. What’s critically important is that you need to understand your business, your customers and continually be able to service them in this rapidly changing industry. You have to make the right decisions to be relevant.”
Part II in June/July includes Anatomy of an Acquisition and advice on making your lab a valuable, saleable operation.
MicroDental Laboratories Inc.: HealthpointCapital acquired Dental Technologies, Inc. (DTI) in 2006 and one year later, purchased MicroDental Laboratories, headquartered in Dublin, CA. The DTI network has been renamed MicroDental Laboratories and includes 18 labs throughout North America. Visit www.microdental.com.
National Dentex: In 2009, Welsh Carson Anderson & Stowe (WCAS) acquired a minority stake in Geodigm Corp. and, in 2010, acquired National Dentex (NDX). The two companies merged in 2011 and operate under the National Dentex brand. National Dentex currently has 40 laboratory locations throughout the U.S. and Canada. Visit www.nationaldentex.com.
Dental Lab Holdings, LLC (DLH), a portfolio company of Beacon Bay Holdings, is the newest private equity player in our market. In 2012, DLH purchased daVinci Dental Studios, Canoga Park, CA, and since then, has added NuLife, West Hempstead, NY, and Cal Ceram Dental Laboratory, Van Nuys, CA, to its group. Visit www.beaconbayholdings.com.
Editor’s Note: Due to company policy, Bolder Capital, which operates Dental Services Group, declined to be interviewed for this article.
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