A $7M R&D tax credit consulting firm for sale (ft. Andrew Gazdecki) - Acquisitions Anonymous 305

In this episode, we review an R&D tax credit business in Idaho for sale at $6.5 million, with Andrew Gazdecki from acquire.com as a special guest. It's not every day we come across a business that makes us dive into such a fun and detailed discussion.

Here's the listing in case you want to check it yourself: R&D tax credits business.

Business Overview

The business specializes in helping companies claim R&D tax credits. It's been growing rapidly, boasting impressive financials with around $3 million in cash flow. The asking price is $6.5 million, which translates to a relatively low multiple of 2.2 times earnings. This low multiple intrigued us, as it implies a potential for high returns on equity.

Challenges and Considerations

Despite the promising financials, we identified several key challenges:

1. Political and Regulatory Risk: Heather pointed out the "political risk" associated with the R&D tax credit system, referring to it as "stroke of the pen risk." She explained, "Somebody could just change the R&D tax credit system and maybe your revenue gets cut in half or something."
2. Sustainability of Growth:The rapid, "hockey stick" growth of the business is another point of concern. Banks might view this growth skeptically, preferring to size the debt based on historical performance rather than recent spikes. Heather remarked, "Hockey stick growth is hard to finance. Every bank will look at it very skeptically."
3. Recurring Revenue and Client Retention:The firm operates on a contingent basis, raising questions about the stability and recurrence of its revenue. Banks would likely scrutinize client churn rates and the actual recurring nature of the income. As Heather noted, "They would ask a lot of questions about that...if they came back positive answers, I think that a lender could get on board with it potentially."

Financing Options

Given the business's financial profile and growth trajectory, we explored various financing options. Heather noted that while an SBA loan might be difficult due to the required rapid closing, other lenders could be interested. Andrew Gazdecki mentioned alternatives like Boopos, which offers loans at higher interest rates but without personal guarantees.

Gazdecki explained, "Boopos and other providers are a good way to get in the door on one of these. It's always easier to refinance into an SBA loan on something like this two years down the road when there's some performance history."

Strategic Considerations

One of the unique aspects we discussed was the potential need for proximity to Idaho. The state-specific tax credits could mean that being based in Idaho provides strategic advantages. Michael Girdley speculated, "If they're doing state tax credits, which I suspect they are, then being in Idaho is potentially a good thing."

Overall Sentiment

We were largely positive about the deal, each giving it a thumbs up:

• Heather Endresen: "Definitely a thumbs up. The financials are strong, and despite the risks, it's a solid opportunity."
• Bill D'Alessandro: "It's a thumbs up from me. The low multiple makes it very attractive."
• Andrew Gazdecki: "I'm a thumbs up, albeit biased. This is a compelling listing on our platform."
• Michael Girdley: "I like this one. The potential returns are impressive."
• Mills Snell: "Thumbs up. The recurring revenue and growth prospects make it a great deal."

So, the episode highlights a promising yet complex acquisition opportunity. The business's robust financials and low acquisition multiple are appealing, but potential buyers need to navigate significant political and regulatory risks, validate the sustainability of the business's growth, and carefully consider their financing options. Despite these challenges, our overall sentiment was positive, making this R&D tax credit consulting firm a noteworthy prospect for potential buyers.