Catalog revenue and custom work are not the same asset

In research tools and reagents, the headline financials tell an acquirer surprisingly little. Two businesses can report the same revenue, the same growth and the same EBITDA margin, and still be valued several turns apart. The difference is almost always the composition of that revenue, and specifically how much of it is catalog product against how much is custom or contract work.

Why catalog revenue is priced differently

Catalog revenue recurs without a salesperson. A researcher who has validated an antibody, a buffer, an enzyme or a kit into a published protocol reorders it because the alternative is revalidating the experiment. That revalidation costs weeks of bench time and introduces a variable into work that may already be under review. The switching cost is not created by the supplier. It is created by the customer’s own process, which is what makes it durable.

The consequence is a revenue line with high gross margin, minimal incremental selling cost, and retention that survives a change of ownership. Acquirers underwrite it accordingly, because they can model it forward without underwriting the commercial organisation that produced it.

Custom and contract work behaves differently. It is won project by project, it consumes scientific and project management capacity, and it carries the economics of a services business however sophisticated the underlying science. It can be excellent work at attractive margins. It is simply not an annuity, and it is not valued as one.

Why owners understate the difference

Most owner-managed tools businesses grew by doing both, often for the same customers, and report them together. The catalog started as a way to productise something a customer asked for, and the two lines were never separated because no internal decision required it.

An acquirer separates them in the first week of diligence. If the seller has not done it first, the buyer does the work, makes conservative assumptions wherever the data is ambiguous, and presents the result as a finding. Findings discovered by the buyer are repricing events. The same information presented by the seller is a valuation argument.

What follows from it

The separation is worth making before a process rather than during one, and it changes more than presentation. Once the two streams are reported separately, with their own margins and their own growth rates, it becomes obvious which one is worth investing in during the eighteen months before a transaction.

In practice that usually means productising the custom work that recurs. A protocol run repeatedly for several customers is a catalog item that has not been listed yet. Converting it changes both the margin profile and the multiple applied to it, and the conversion takes longer than a process allows.