A major distributor accounts for twenty-five percent of our sales, and the buyer wants to structure a massive clawback provision tied specifically to this account. How do we negotiate a joint transition plan or a commercial agreement to protect our valuation without taking on all the post-close risk?

Question

Tyler Smith · Accepted Answer

Customer concentration is a common valuation killer, but accepting a massive, open-ended clawback provision shifts all the post-close operational risk onto your shoulders. If the buyer mismanages the relationship after close, you lose your payout through no fault of your own.

Instead of a pure financial clawback, negotiate a structured customer transition plan. Clearly define the roles and responsibilities of both parties post-close. Use your Accountability Chart to identify who will own the relationship during the transition phase. This ensures that the buyer does not alienate the client through poor communication or sudden operational changes.

Next, propose a commercial agreement with the customer before close if possible. Lock in key terms, pricing, and volume commitments for the next twelve to twenty-four months. This direct contractual commitment mitigates the buyer's risk and reduces the need for a steep clawback.

If an earnout or clawback is unavoidable, tie the performance metrics to gross margin or volume targets rather than net income. This prevents the buyer from burying your payout in corporate overhead allocations or inefficient operating decisions. Ensure you retain veto power over any major changes to the customer's service level agreement or pricing structure during the transition period. This protects your hard-earned equity.