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I’ve looked at thousands of businesses for sale, and learned to read between the lines. Every issue, we'll take a deeper look at a listing, learn something, and I'll rate the deal at the end!
This week’s listing: A gene testing lab for mice. What does that actually mean? I have no idea. (I’m a businessman, Jim, not a scientist!)
The numbers: In 2021, they did $4.7M revenue. The next year they grew 23%! And all this at an insanely good 55% EBITDA margin.
Green flags
I love this deal because I am confused as heck as to what it does. And that’s gonna scare away a lot of potential buyers, which creates an opportunity.
I also like that the growth is super steady. When you’re buying a business, predictability is always a good thing. If you know what the cashflow and profitability is going to look like, that creates an opportunity to win.
They’ve also got a diversified customer base. The listing mentions biopharma, academic, and research institutions. Ideally, that's pretty spread around different customers. And it keeps them from being dependent upon any single client/ market segment that might go away.
Next: they’re really vague on geography. The listing just says “United States”. To me, that smells like a natural monopoly — you’re probably not competing with many other mice genotypers out there.
(Natural monopolies are great. I once met a guy that was the only supplier of armored cars in his part of the States. Or — in San Antonio, you sometimes have to do an archaeological dig before you build anything. Not a lot of people offering that service! So, you end up with one provider and with that comes pricing power.)
Red flags
Right away I know I’m not the best buyer here, mainly because I don't know crap about gene testing. I don’t know the vertical, so all my assumptions could be totally wrong.
That also means I don't know where the industry is going. Are we going to be doing mouse science for a long time? Are we going to be simulating stuff soon? I don’t have a clue, so that worries me.
(But if you’re the person who does know about gene testing, you’re ahead of 99% of the buyers out there.)
I’d also want to understand why this hasn’t been snapped up by a competitor. Surely they’re not the only DNA sequencing company out there. So there must be a reason it’s been passed on.
What I’d ask
This would probably be a fun conversation. I’d love to learn about this stuff! As for questions, I’d want to dig into two things:
One: Why are they selling? This seems like a great business that’s relatively easy to operate and generating a ton of cash. There’s no clear reason to sell. So what gives?
Two: Profit. As I’ve said before, EBITDA is a very squishy number. Especially that “A” for Assets: this company might have some expensive equipment. So I’d want to understand how much money do I really make owning a business like this?
My rating
If you know what you’re doing, this could be a stellar deal!
It’s also potentially a great leverage buyout business for a small private equity shop.
The play is: you raise money, buy the business, get some debt on it because it’s been so profitable for so long. Use the profits from the company to pay that debt off over time, and sell the business in a few years.
Through to be honest, I wish I owned this business. It looks amazing!
🐁🐁🐁🐁🐁 out of 5.
