Biotech / Life Sciences Distribution Company - Product Concentration Risk

June 11, 2024

by a searcher from University of Illinois at Urbana-Champaign in St. Louis, MO, USA

Looking for advice on how to handle a deal that involves heavy product concentration and hedging that risk in the deal structure.. Happy to connect directly!

I'm under LOI with a distributor of Biotech / Life Sciences research products (i.e. proteins, antibodies, reagents, etc. used by biological researchers). Owner is retiring. Company has seen impressive revenue growth of 30% CAGR over the past few years. However, this is primarily due to the success of 1 product, which now makes up about 70% of the company's revenue.

The company has exclusivity with the supplier of that product to be the exclusive distributor in North America. This exclusivity lasts for another 2 years, and then auto renews yearly thereafter if they decide not to terminate. Seller has a long relationship with the supplier and did not foresee any reason why the supplier would terminate exclusivity since revenue continues to grow year over year. Also, the revenue generated is small potatoes compared to what the supplier earns in licensing agreements for clinical research, so there is some aspect of flying under the radar.

I recently learned the supplier was acquired by a very large company last year. They have a massive sales force and distribution network, so now my fear is that they choose to bring that distribution in-house once the exclusivity expires. We will have a meeting with the supplier before close to notify them of the change in ownership and get comfortable with each other, but it still leaves the door open for them to terminate exclusivity a couple years down the road.

Any advice on how to hedge my risk of that exclusivity terminating and wiping out 70% of my revenue? Current structure has 10% cash injection, 20% seller financing, 70% SBA financing. Should I try to shift to more to seller financing with contingencies based on yearly renewals of the exclusivity, revenue targets, etc?

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

From a lending standpoint I would say shifting as much risk to a seller note and preferably a seller note that has some forgiveness factored into it would make since. That way if you lose the product you may not have to pay on the note. However, from a risk perspective, it sounds like this transaction is very high risk due to that product concentration. With only a two year contract and a change in ownership at the supplier, you are at an elevated risk of losing the large product. If that product is lost and it is 70% of revenue, I would highly suspect you would not be able to support the loan. Unless you can find a way to mitigate that risk that would allow the company to survive post closing if that product is lost, it is a high risk to take, especially when you have to put a personal guarantee on the line. Just a thought. Happy to discuss from the lending perspective if of value. You can reach me here or directly at redacted Good luck with the decision on how to move forward.

Reply by a professional
from Tulane University in Portland, ME, USA

As a CPA and ex-PwC pro, I bring top-tier QoE/FDD service. My mission has been to bring that same level of quality and sophistication but tailored to meet the needs of the lower middle market. Let me know if you want to chat.

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