HOW MUCH CAN I GET FOR MY LAB?
This is a million-dollar question for the seller, and a rough answer is usually surprisingly easy. However, when you Google the answer, you usually find a long essay discussing various valuation models (e.g., Income Approach, Market Approach, Cost Approach).
All of the above is true, but in practice, a majority of buyers (and banks who fund them), follow a relatively straightforward method in valuing a profitable lab – which is either a multiple of EBITDA or a multiple of Discretionary Earnings (DE), also known as Seller’s Discretionary Cash Flow or Seller’s Discretionary Earnings (SDCF, or SDE). EBITDA is typically used for a business of reasonable size (say over $1 Million in revenue). In contrast, the DE is usually for smaller and normally owner-operator types of companies where the owner of the lab is fully involved in the day-to-day operations.
EBITDA stands for Earnings before Interest, Taxes, Depreciation, and Amortization (yes, it is a mouthful). But essentially, you take the net earnings of the business, add back the interest expense, state and federal income taxes, depreciation, and amortization, and you get the value of EBITDA. In practice, we always use Adjusted EBITDA rather than ‘pure’ EBITDA because in businesses, often there are “discretionary expenses” that are not business-related and also one-time expenses, such as specific amounts of capital expenses which are typically not usual but are expensed out in one year, instead of being on the balance sheet, for tax benefit. So, the EBITDA is adjusted by “adding back” these types of expenses, often called “add-backs.” So by adding these ‘add-backs”, one gets the Adjusted EBITDA. One example of add-backs is higher than the market salary for the owner, in which case you add back the excess salary paid. If the owner’s salary is below the market rate, you subtract the amount that will bring the salary to the market salary. Other examples of add-backs are personal car at the company expense, owner’s wife or son on the payroll even if they are not involved in the regular work.
Once you have this magic Adjusted EBITDA number, you can estimate your lab’s value by multiplying this EBITDA by a multiplier. This is where it gets a bit interesting. For example, for a small lab with revenues of, say, between $1-$5M and EBITDA under $1M, the multiplier is typically between 2.5-4.5 but usually between 3-4. Depending on the type of the lab, it could be higher or lower than this range or on the high or low end of this range. Some factors that decide where it will fall are discussed in the section for Sellers and determining your Value Builder score. However, the most important thing to remember is that a correct value is what a buyer is willing to offer at a given time, depending on how badly he or she needs it.
Also, remember that as the size of the lab becomes more significant, it attracts higher multiples – EBITDA multiples could go up to 5-8 for labs that are much bigger in revenues and EBITDA, or sometimes even higher depending on the type of lab and demand for those labs. Remember the famous saying – value is in the eyes of a beholder. A strategic buyer who is not able to capture certain businesses because he or she lacks specific capabilities, geographic presence, or certification could easily pay a premium for a certain lab. For that buyer, the price is justified.
What about smaller labs that are owner-operated and use DE or SDCF instead of EBITDA? DE or SDCF, in simple terms, is EBITDA plus owner’s compensation, and the valuation multiple generally in the 2-3.5 range for DE.
Exceptions to the Rule
Of course, there are several exceptions to this general valuation method. Some labs may be very fast-growing and may have something unique or proprietary, which can be an exception to the rule. It is tricky for labs that have small, zero, or negative EBITDA.
For example, we cannot use the above method for a lab with a very small, zero, or negative EBITDA. We have to look at the value of the assets – assets could be hard assets, such as equipment and inventory, could be employees and the turn-key nature of the lab, licenses that are hard and time-consuming to get, such as in-network contracts for labs, licenses such as NELAC, FDA or Health Canada registrations, CLIA, COLA or CAP, and licenses such as those for testing Cannabis, etc.
Such labs are not easy to value—for example, some licenses could be very valuable to someone who needs them badly and worthless to others. It all depends on supply and demand.
On the other extreme, there can be labs that seemingly have healthy revenue but are not making profits. So sometimes, they are sold as a multiple of revenue. Because the lab obviously has clients but, for some reason, is not running efficiently. Or if it is just at a near-breakeven point and has excess capacity, then a slight increase in revenue can mostly go to the bottom line. A strategic buyer who brings business can immediately make this lab profitable.
We Provide Valuation Guidance
From our experience, we can provide you with valuation guidance—or a “Broker’s Opinion of Value.” In some instances, such as getting an SBA loan, we could also provide you with an appraisal from an accredited Valuation Professional. And in listing your lab, sometimes we will list it with a listing price and sometimes, depending on the lab, we will invite offers instead of listing the price – to see what the market will offer.
Contact us if you want us to help you sell your lab.