R&D - Asset or Expense?
January 10, 2023
by a searcher from University of Tampa in United States
Hello all,
A quick question about the R&D expense.
I am working at an early-stage BioTech company that has not yet generated any revenue. Right now we are trying to find investors of our series A.
When conducting the valuation, how to treat the R&D expense? Can we capitalize them as assets instead of expenses, then boost the EBITDA? Or it is not allowed to do so under regulation.
Thanks for any advise in advance!!
from The University of Chicago in Chicago, IL, USA
1) I agree with Juan Ocano answer.
2) Using EBITDA multiple is just a shortcut to determine value. In reality, value depends on cash flow, not on EBITDA. Hence, whether you expense R&D or not is irrelevant. If anything, if you capitalize R&D, your taxable income will go up. You will pay taxes and hence you will have less cash (of course most startups do not have taxable income). For start-ups you want to preserve cash.
3) Having said all of this theory, if buyer/investor is a public company, or wants to go public, they often want to see "earnings". In that case you want to capitalize and maximize the optics of earnings. Another variable to keep in mind is to use what others do in your industry. Meaning, the financials (or at least your presentation) should be consistent with the normal accounting expectations for investors in your vertical.
from Bentley University in St. Petersburg, FL, United States
Also, I would be interested in learning more about the Company, I am local in St. Pete.