Acquisitions Anonymous - #1 for business buying, selling and operating - Genotyping mice at 55% EBITDA - Acquisitions Anonymous 272

Episode Date: February 16, 2024

In this episode of Acquisitions Anonymous, Michael and Heather discuss an investment opportunity in a genomic testing , specializing in DNA sequencing and genotyping for mice. Despite their initial unfamiliarity with the technical details, they recognize the company's significant role in pharmaceutical research. They are impressed by its financial performance, noting substantial growth in revenue and EBITDA, along with high margins. The conversation also explores potential barriers to entry, the impact of technological advancements, and the type of buyer suitable for such a specialized business. They conclude that the company's high margins, growth potential, and strategic importance in healthcare and pharmaceuticals make it an attractive investment opportunity, albeit one requiring a buyer to quickly grasp the complexities of the field.Today's deal comes from Axial.  Axial is a trusted deal-sourcing platform serving professional acquirers in the American lower middle market.Thanks to this week's sponsors!Acquisition Lab and their team have been longtime supporters of the pod.Created by Walker Diebel author of Buy Then Build: How to Outsmart the Startup Game, is an accelerator with a highly vetted cohort-based educational and support community for people serious about buying a business.Acquisition Lab exists to help people buy a business and navigate all the complexities of the process, as well as provide a trusted framework, tools, and resources to support you from search to close.If you are serious about buying a business, check out acquisitionlab.com or email the Lab's director Chelsea Wood, [e-mail].-------------CloudBookkeeping offers adaptable solutions to businesses that want to focus on growth with a “client service first” approach. They offer a full suite of accounting services, including sophisticated reporting, QuickBooks software solutions, and full-service payroll options.Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Acquisitions Anonymous, Michael here. Today's deal was super cool. Heather and I dug into it with about three minutes of mills before his power went out. Anyway, what this business is was one of the most unique businesses we've looked at. It's a genotyping, so genetic typing business that focuses specifically on mice. One of the most unique deals we looked at, they also operate an incredibly high profit margin. And we dig into whether that's a good sign or a bad sign. here's the deal and here's the episode.

Have fun. Hey, Michael here. Want to talk to you about today's sponsor for the episode, which is cloudbookkeeping.com. So cloud bookkeeping is actually run by my neighbor, Charlie. So I've met him in person and can attest that he's a real human being and a good person. And what cloud bookkeeping does is offer a full suite of bookkeeping services all in the cloud for you around QuickBooks and other technologies that you're using as a small business owner.

So if you're interested in getting the bookkeeping part of running a business off of your plate and focusing on running your business, Charlie and his team are one to call. They can put together a bunch of other stuff in terms of helping you manage and grow your business besides just bookkeeping, sophisticated reporting, definitely helping you get your quickbooks online set up in the right way, and a number of things around payroll as well. So definitely know them and recommend them. If you want to find out more about cloud bookkeeping, you can go to their website at cloudbookkeeping.com,

reach out to Charlie. I know many of you have and see if he can help you make running your business easier and more fun by letting them help with a lot of the bookkeeping solutions. And when you call, mention this podcast, it would help us and help Charlie know that we're supporting him as well. So thanks a bunch.

bookkeeping.com as the sponsor for today's episode. Heather, how are you doing today? I am doing great. How about you? I'm doing okay. It's another Monday, as they say. Hanging in there. You can't be hanging in there on Monday. Monday, you have to be, you know, come on. We got to be hitting it full force Monday. Friday, we're hanging in there, right? I need to just sign up for less stuff. That's what I think. Yeah, that's right. If Monday, you're already feeling that way. You got too much. Well, I brought us a deal from Axial today that I ran across because I think it's interesting because I know nothing about this. So I felt like, oh, there's an opportunity for me to speak a lot

about not knowing anything about it. But let me read it to you and then let's talk about it. And then I think Mills is supposed to join us. So we'll have bills come in from the top rope, as Bill likes to say, which is one of my favorite bill phrases. So this is from Axiol. it's a $3.8 million EBDA DNA sequencing and genotyping company. The summary is, we're presenting a compelling investment opportunity in the company, all caps, a leading full suites provider of genomic testing

and sequencing services distinguished by unparallel expertise and laboratory animal genotyping for mice. The company boasts a robust portfolio of laboratory capabilities excelling in genotype assays, Sanger sequencing, mouse genotyping, microbiome sequencing, cell line, and microbial ID authentication, mycoplasma detection, and fragment analysis services. Okay, I'm going to pause there. What does this company do?

We might be a little lost on the science front on this deal, but obviously it's got to serve pharmaceutical industry, right? that's my guess. Yeah, and then how do mice? I guess that's where the mice part comes in. Yeah, because they do, you know, they study, the first level of studying a new drug is studying how it performs in animals, which is usually mice, and then they sort of, you know, move on up.

So that's my guess, is that this is a company that does something related to that. Yeah. Yeah. Well, I mean, my first thought goes back to the lunch that I just got out of, and I had a delightful lunch with my buddy, and he's like, I want to go buy a business. And I said, it's sweet. And he's like, well, I was like, well, what are you interested in? He's like, I'm not sure. And I'm like, what are you really good at? And he has spent the past 10 years working in the healthcare space. And he's like, you know, you can really get yourself in trouble in the healthcare space.

I'm like, yeah, but you have an unfair advantage there. You've spent 10 years in the healthcare space. and this is a stark reminder to me that I don't even know what some of these words mean, much less, is this a business I should buy? Correct. This is definitely, we're in the realm of something where you really need to know

what you're talking about here, and we don't. Yeah. Okay, well, good. That's going to make a great podcast then. So let me keep reading this and then let's talk through some, I think some interesting stuff about it. One is like, let's say I did see a business like this

and I wanted to buy it, like how do I do it? So let's come back to that question in a second. But okay, let me keep reading here, Key strengths, they have unrivaled expertise. The company stands out in the industry for unmatched proficiency in laboratory animal genotyping specifically for mice. The specialization purchased the company as a go-to partner for clients seeking precision and reliability in genomic testing. Diverse laboratory capabilities with a comprehensive suite of services ranging from genotypic, genotype essays to bichrome microbiome sequencing, the company caters to the evolving needs of

its diverse clientele. The expertise extends across cell line and microbial ID, authentication, mycoplasma, blah, blah, stuff we heard about before. High quality. Attractive financial profile. Boasting an attractive financial profile, the company has achieved all revenue growth organically without the need for extensive sales and marketing efforts. This attests to the inherent demand for its services and the efficiencies of its operational model.

Enduring market presence, focus on large, resilient, growing in markets, blah, blah, blah. Expansion opportunities. The prospect of significant white space for expansion is notable highlight. By introducing expanded service offerings and, leveraging a driven sales force, the company aims to capitalize on untapped market segments, thereby enhancing market share and revenue streams. The customer base is a diverse one that includes 74% biofarmac, to what you just said, Heather, 22% academic and 4% research institutions.

The balanced distribution underscores the broad applicability of the company's services across key sectors, reducing dependency on any single market segment. All right, pause there. Well, I won't pause there. Let me talk about the financials. 2021, they did 4.7 million in revenue, 2.6 million in EBDA. 2020, they did 5.8 million in revenue and 3.3 million in EBDA. And last 12 months have been 6 million and 3.8 million in EBDA. So growth of revenue from 4.7 to 5.8 to 6. And EBDA has gone from 2.6 to 3.3 to 3.8 million and running at 55, 57, and 63%

EBITA margins, Heather. Those are incredible margins. I need to learn how to do some genotyping, like, fast. I don't think you can learn this fast, though, unfortunately. This is fascinating. This is a really interesting business. If you can achieve margins like that, I guess it kind of hints to that there's barriers to entry, right?

There's probably, you know, a lot of people costs and some capital costs and proving that you do this right for a while before you can be trusted, you know, so there's probably just a lot of just sort of natural barriers to entry. And then sounds like, you know, they're in a growth space because this is kind of where science is going towards, you know, this particular type of study. I was telling you before we came on that I just recently did, it's not the same, but it's something, you know, that's kind of new. I did a DNA sort of blood test that talks about your epigenetic age. it uses your blood to estimate, you know, not your chronological age, which we know from our birth date, but like your biological age.

And it takes your DNA to do that, which is pretty cool. That's one of those fun things about those people who are like selling all these supplements and stuff that are supposed to reverse aging and, you know, all that kind of stuff is I look at how they measure aging and it's just like totally arbitrary. It's just like, well, you know, my age is 22 now. It's like, oh, fantastic. Thanks for that. How'd you measure that? Well, yeah, I mean, that's basically how it works. Okay.

So, yeah, I agree with you. This is where it's going. I mean, what I can suss out and the way I think this business works. So I know I asked what the hell they do. So I think the way this business works is it's a laboratory. Where do they say they are somewhere in the United States? So it could be San Francisco or Philly. Those are some pretty hot, big, you know, drug development areas.

and I think people really underestimate how much healthcare and especially big healthcare businesses there are in Philadelphia. Like it is a shockingly, for as little as little as people talk about the Philadelphia market in the United States and how little it is discussed as a meaningful city, like it is enormous. And so much of it is healthcare and all these different, you know, healthcare services, drug companies, all that kind of stuff.

If you ever have a chance, go look at the GDP of the Philadelphia MSA, it is shockingly big, shockingly. You consider it versus all the other cities that you hear so much more about. San Francisco is a great example. Like the MSA of Philly is shockingly big. This could also be in Boston. I think San Diego has a hub like this as well.

Yeah. So good chance you're San Francisco Bay Area, SoCal, you know, San Diego, Boston, or Philly. It would be my guess it's one of those four markets. And they probably don't list my, and one thing I like about this, Heather, they probably don't list exactly where it is because it would be a dead giveaway if they told you what you're going to figure it out real fast. Yeah. Yeah, you could.

So that's a good green flag here. So anyway, that's my suspicion, like as to where this is. And I think the way this works is they have a laboratory somewhere that basically has the unique set of capabilities to do this type of testing. And it's probably a 20,000 square foot building somewhere and it's got a bunch of techs. And if you are a pharma research company doing testing in mice or an academic institution, you hire these guys, you send them a sample and it does genomic testing, which may be just like one thing you do at the very beginning or once a week, but instead of having that equipment inside of the university or inside of your corporation, because you do it relatively rarely, you send it to these guys as a specialist. And I think that's, and then you get the

results back and that's just the way this business works. Is that how you guys are reading it or do you think I'm full crap? More than usual. I think so. And the closest I've come to this is I did finance a business where they manufactured the assays, the diagnostic tests for different types of diseases. And they specialized in like four specific types of diseases. They had, you know, very extensive QC and they had a little lab. It was a little, it was a really tiny business for the for the size margins, and they had great margins, and they sold, you know, domestically and all over Europe. So that would be really interesting, you know, like, is this just serving the domestic market, or does, do they have pharma clients, I would imagine they do, pharma clients all

over Europe and all over the world, potentially? But I think you're right. It's a small lab, you know, that has all the people and the equipment to do this right. I'm sort of struggling with it. who can buy this? You know, in the case that I was just talking about, it was a strategic, you know, acquisition, a guy that already owned this company, bought one of his competitors as they were retiring. So he certainly knew the business.

And he just increased the sort of product offering. They made a few different types of diagnostic kits and basically served all the same customers. That seems like who kind of needs to buy this. I don't know who else can really pull this off, right? I like that you're like, who should buy this? And in my head, I'm like, screw that, I want to buy this. Oh, you want to buy it.

All right. It's a great business. We're going back to science class then first, right? Yeah, I have no idea what's going on here. But it smells like a natural monopoly, right? And we've talked about a natural monopoly show up just inherent in the types of things. Like a city tends to only have one dump, right? You get a natural monopoly for that reason.

and there's lots of other natural monopolies that happen. eBay is a natural monopoly. You know, Microsoft is a natural monopoly in many of its businesses. This smells almost like a natural monopoly to me. And here's my case for it. And the case for it is this is a very niche product that for none of the customers does it make sense for them to bring it in-house?

Because it's so rarely used. It's very specific to genomic for mice, genotyping for mice. It appears to be geographically constrained because when you have these samples, they have a shelf life after they come out of the mice to where it can't be shipped overseas or whatever to China. And then the market is so small, the market is so small that nobody else is going to pop in here

and be like, you know what I need to do? I need to spend $5 million or $10 million to hire all the right people, buy the right machines for assaying and doing all that kind of stuff, and compete with these guys. So to me, it's like, that's why I'm like, this is a great business. Somebody should buy this business. That's terrific. Hey, everyone.

This is Bill. I'm just taking a quick break from this week's episode to tell you about a long-time sponsor, major fan of the podcast, Acquisition Lab. So a lot of our listeners that you guys tune in every week for our deal reviews, you want to get in on buying a business, but you're not really sure where to start. The cool thing about Acquisition Lab is they were created to solve that problem. So they exist to help people buy a business and also to navigate all the complexities of the process.

They provide a trusted framework, tools, resources. They kind of support you all the way from search while you're looking to buy a business, all the way to close. So if you're serious about buying a business, you want to learn more about the process and you want someone to shirpah you through buying a business, check out AcquisitionLab.com. Or you can email the labs director, Chelsea Wood, directly. It's just Chelsea at buy, then build.com. Yeah.

I mean, absolutely. But here's the other side of what I was just asking. who's selling this business at these kind of margins why aren't we selling? My suspicion is this may be it doesn't tell us why somebody's selling it

but I think there's an opportunity here this smells like maybe some doctors put this together or it could have been a spin out from one of these places like an academia or something like that or somebody that's just old and owns it and wants to retire

but yeah. But yeah, I think that's a really good question of where I would start with. Yeah, because it's just, like you said, it's just printing money. And it looks like they've just got kind of natural built-in growth. The margins just keep getting bigger because probably their fixed costs are pretty stable. And, you know, this isn't going to slow down this kind of research and pharmaceuticals testing. Not going to slow down. It's going to only speed up.

So what a great business to be in if you know what you're doing and can, you know, and can navigate this world if you come from, you know, medical science, a fantastic business. And, you know, there's a lot of doctors out there who are looking for a second act or decided that medical practice wasn't for them for one reason or another. It could be a really good opportunity for someone like that. I mean, the biggest racket you get is, I mean, if I'm a doctor, by the way, I should have been, I would have been a terrible doctor, but a terrific medical healthcare entrepreneur. The biggest racket those guys do is you've seen the one where the radiologist

owned the radiology clinic or like the, what's another one? Like they own the catskin clinic. The surgeons own the surgery care center. And then there's another one, which I think is a great doctor hustle, which is you use, and I've seen this done numerous times, they go develop their own healthcare office building. they become the anchor tenant, they go recruit all their doctor friends,

and then they go sell the building after they develop it with their lease at like a four cap. And they just cash out all their money and make huge profits from the thing. And then they stay, they wait till their lease runs out and they go do the next one.

Yeah. It's just genius. Yeah. My favorite medical entrepreneur was a veterinarian practice, and he also owned a crematorium for the animals. Genius. It was great. That's where he made most of his money. Absolutely.

Our cat died. Our cat died. We had a very fancy crematorium ceremony for him. I neglected to tell my children that the cat got to the veterinarian's office and a plastic bag. Oh, yeah. I know. You don't want to explain how that business works. There's like freezers and they got to pick up the animals and it's not a pretty thing. I am a horse person and I had horses at the time that I visited this place and he said, you have horses, you're going to love this. Let me show you something. And he was all excited to show me the big oven for the horses. I was like kind of devastated.

I had to pretend to be excited. I was not excited. Stone cold. No. All right. So Heather, we're going to do time to pretend. It's time to pretend here. And I want you to pretend that you are the buyer for this business.

and I'm sorry, let's pretend you're a six foot five idiot who has a diverse Zoom setup out of an office in San Antonio and a podcast about buying business. Let's say, and no hair. Okay. Let's say you're, and you're a guy. I'm trying. 49 years old.

Okay. Let's say you're somebody like that. Okay. And this idiot, this idiot wants to learn how to become an educated buyer of this business and go examine it. what would you do to go learn everything you could about this business and about this opportunity to a point to where, you know, say you wanted to potentially have the goal of doing the deal?

Like, what should this six foot five idiot with a podcast do, whose name may rhyme with Slykle? Well, I would feel like I have a huge front-end education piece, just vocabulary. I would like literally just start with vocabulary. What do all these things mean? Who am I serving? What is the biopharma market that uses these mice genotypes?

What is this all about? What kind of drug pipeline is that? What are the schools? I'd have to spend quite a few weeks in an education mode. And I would try to latch on to somebody who is an entrepreneur in this space, you know, not just a scientist because I think they would get really annoyed with me really fast, but like an entrepreneur who is in the space. Somehow, you know, somehow connected to this.

They could teach you sort of the business side of what you need to know. But I feel like you just, I'd have to start with vocabulary and understanding what it all means and who are my customers and what do they need. So really learning. And you would do that, it sounds like, by finding some folks who've been in this market, potentially on the operator side, or the medical advisor side, the scientific advisor side, maybe then on the customer side as well, and just like have a lot of phone calls. And at what point, if you're this idiot, would you start talking to the seller?

And how transparent would you be with them about the fact you know nothing about this market? Oh, that's a good one. I think I would take at least a month of education before I would approach the seller, so I wouldn't make too big of a fool of myself. And then- So let me interrupt you. Remember, this is on Axial, so it's represented by a broker. Oh, right. So we can talk to a broker. That's true. We can talk to a broker who should be a little more forgiving of us. I still would take a few weeks. I don't know. There would just come a point where I would have to decide in myself, do I feel confident with what I'm talking about? Do I still like this deal after everything I've learned? So I feel like a few weeks. And then I would be very transparent. And that's just me. I think it's always better if you're going to get into something like this, to be honest about your background and how you would come at it so that you can learn a little bit about who the seller is at that point and why they're selling. Yeah. And I think that's a stylistic choice that I really agree with. Like, I always tell people, and I do this myself, when you're talking to a seller or an investor

or anybody, like, be truthful and transparent about what you're doing, but it's okay to spin it in a good way. Right? And I think that's, don't lie to people, don't misrepresent what you're doing, because they always figure it out, right? Don't tell. people you have funding lined up if you don't. If you want to hint that it's not going to be hard for you to get funding or explain why it won't be hard for you to get funding, that's absolutely fine. But you don't want to promise people stuff that you're not going to, you know, that's not for truth, right? That's not good. No, exactly. And sometimes it's weird, though. Sometimes these healthcare businesses aren't owned

by someone from a healthcare background. I'm working on a deal where that's the case. does neither the buyer nor the seller come from the clinical background. What this is kind of more of a counseling business, a really unique one, though. And neither of them have that background. And so they kind of hit it off because, hey, look, you don't need it. Look, I didn't need it. And I started this business. So, you know, I think being honest, always kind of leads you to a better place.

100%. Well, and I find it also gets them to teach you what you want to know about the market. And also it gets you screened out quickly. right like i've we we we looked at a business wants to buy um where the broker was just like look we're not going to talk to anybody who has doesn't have five years manufacturing ownership experience like we just have just determined like this manufacturing business we're not going to talk to anybody unless they have that and that was just their decision as a seller the broker and the seller just got together and said that and it screened us out really quickly whereas if we kind

of bullshited them from the beginning like that you know would have wasted everybody's time you know And it's their business. They can sell it how they want to. And I may think that's a mistake. But they also may have a good reason for doing it. And by just being truthful about what they're asked around the core stuff, I think it's a huge benefit. Yeah, absolutely.

In every process, can I share that in lending is the same thing. Every once in a while, we all lenders have a story or a few, unfortunately, where someone talks through and gets kind of deep into a credit process. Well, we don't run people's credit report right up front. You know, we run it later because we don't want to be. running it multiple times. And occasionally you have someone who's gone through all these hoops and we find out they've had a bankruptcy or something. You know, so just terrible credit. And it's like, why didn't you say that in the first place? Why did you waste everybody's time? Always a bad idea.

Strange. I never understand people that do that. So anyway, I, man, I like this deal. Like, I think so we should buy this deal. I'm going to record a YouTube short about this deal. That's how good this deal is. I think it's really good. It's a great company. It's a great company. Though this kind of feels to me like there's just something I don't know about this. That's right. It kind of feels like when we did that quote unquote casino in Costa Rica. Do you remember that?

I don't think I was on that one. No. Oh, my God. So it was one of the most embarrassing acquisitions anonymous moments ever. So we did this weird looking casino on our holiday episode like two years ago. And it was like this weird bar and green. in Costa Rica, and they kept showing us, they showed us all these pictures of the bar and grill.

There was like one blackjack table in the corner, and like huge bar, and then just picture after picture of the rooms. And I was like, this is super weird. Like, who wants to, you know, it just seemed like a great opportunity to like get in trouble being an American owning a casino in Costa Rica. And then like, we published the episode and I'm like, yeah, this is a terrible idea.

Don't do this because I don't know anything about a casino, in Costa Rica. And I got a listener DM like four weeks later. And the guy's like, yeah, that wasn't a casino. That was a brothel. You guys reviewed a brothel. I was like, oh, that's the worst. Oh, man, that's funny.

That's funny. Guess what, guys, the podcast is free. Yeah. Well, I mean, you try. I mean, you were naive. I think that's good. You guys didn't go there. You didn't think that that was what it was.

This, who knows what they're serving? I guess that would be really interesting. Is there some kind of underbelly here that, you know, they're doing some kind of weird, you know, drug pipeline that's controversial or something? I don't know. I mean, yeah, there's a lot to learn. But, boy, they've got great margins and growth built in. And if someone can figure out the business side and kind of know enough to be a little better than dangerous on the science side,

I think this is a great business. A million percent. Well, and, you know, I think something worth to get into, you know, technology and AI and the stuff, for software around doing some of this stuff is really increasing. I don't know if that solves or threatens this business, but that would be another thing I would think about. Like what's happening to tech?

Are there, say, even so far as a new class of these type of genotyping machines that is small and portable, and a lot of the customers are going to be bringing them at house? Like those are all kind of a technology threat is something we haven't really talked about. And it's definitely something I would look into when I examine this business.

but man, it's a pretty good business. Yeah, but you're right, though, this is technical, this is medical technology, and AI has got to have some pretty big impacts in this space, just like everything else in the coming few years. So that would be another learning curve, I hate to say, for someone to kind of dive into for this. An interesting test is,

have we ever looked at a business where they have above 50% EBITA margins year after year, and it's not been a great business? Well, sometimes I have this bias against them. Of course, I look at a lot smaller deals often as an SBA loan brokerage, right? I see a lot of small stuff. And usually when I see above 50% margins, I think, oh, this is buying a job, which is fine if that's what you want to do. But that's like one of the first things my brain goes to. So do I ever see a business of this size with these kind of margins? I can't think of any. Oh, this is incredible. What do you think this would trade at? Ooh. Usually I guess low, but I'm going to see what you guess. I'd say six to eight.

I was going to guess eight times. Yeah. Eight times EBDA. And some of it depends upon how big EBDA is. I think for a business like this, I'd be curious how much are they having to reinvest in capital expenditures, new machines, repairs, all that kind of stuff. what is the ratio of EBAA to actual net operating income? I would be very curious what that looks like.

In the end, this may be a business that only throws off 500,000 in profits because they're having to do $2 million in CAPEX every single year and get rid of these machines. So I think that's one of the first places I would start. And again, EBDA, as we've talked about, is not cash, and cash is not always profit. So you have to triangulate those as best you can. And EBITA is sexy, profit is sexier.

True. But also having cash in the bank is the ultimate. Sexy, I guess. Yeah, that would be super sexy. You know it would be the sexiest, Park City Ski House. That's what's the sexiest. That's the sexiest. Okay, okay.

Well, you know, I'm glad you mentioned that because I'm leaving tomorrow to go skiing in Colorado. So I'm excited. Oh, nice. Where are you going? Beaver Creek. Oh, I love that Pever Creek. Yeah. One of my best days ever was snowboarding there.

It's great. Yeah. love it. Cool. All right. Well, we will post, hopefully post the link to this. If you want to see the teaser and stuff, it's off of Axiol. Again, I love this theme of what we're doing, digging into some of these bigger,

more interesting deals than our, you know, Houston Bar and Grills. And thanks to Axiol for being a service that provides these because I'm enjoying digging in there. Also, thank you. Thanks to them for giving us access to their database. So if anybody makes it run at this, definitely let us know. This is a good business. I agree.

Love it. All right. We'll end it there and we'll see everybody next week.