The buyer wants to discount our valuation because of a concentration issue with our major distributor. How can we use a specific post-closing covenant or customer clawback structure to protect our transaction proceeds?

Question

Tyler Smith · Accepted Answer

Distributor or customer concentration is a significant valuation discount driver, but you can protect your proceeds by proposing a targeted post-closing structure rather than accepting a flat price reduction. Suggest a structured clawback or a contingent note where a portion of the purchase price is tied directly to the continued performance of that specific distributor. If the distributor remains active and maintains certain volume thresholds for twelve to twenty-four months post-close, the withheld funds are released to you in full. To make this work, you must negotiate strict operational covenants in the purchase agreement. These covenants must prevent the buyer from making material changes to the distributor's pricing, service levels, or contract terms during the integration period. If the buyer mishandles the relationship and causes the distributor to leave, you should not be penalized. Back this up by showing the buyer that your distributor relationship is managed through your documented Account Management process on your Accountability Chart. Proving that your leadership team, not the founder, owns this operational relationship gives the buyer confidence that the account will remain stable, while the structural covenants protect your hard-earned transaction proceeds.