One of our oldest clients represents twenty-five percent of our revenue, and the buyer wants to put ten percent of our purchase price into an indemnity escrow specifically tied to this account's retention. How do we negotiate a structures-based alternative, like a sliding-scale contingent note, to keep them from holding our cash hostage over variables we cannot control post-close?

Question

Tyler Smith · Accepted Answer

Accepting a broad indemnity escrow for customer concentration is a significant risk. If the buyer mismanages the client post-close and the client leaves, you lose a portion of your purchase price, essentially holding your cash hostage over variables you cannot control.

Instead of a traditional escrow, you should propose a contingent payment structure.

Negotiating a Contingent Payment Structure

This alternative approach keeps the initial purchase price intact. Here's how to structure it:

• Performance-Adjusted Seller Note: A portion of the payments is directly tied to the revenue generated by that specific customer.
• Split-Tier Earnout: Similar to a seller note, payments are contingent on the customer's performance over a defined period, typically 12 to 18 months. This ensures that you are rewarded for the client's continued business. For more on earnout structures, consider [negotiating a cleaner earnout structure](/qa/negotiating-clean-earnout-metrics-vto).
• Strict Operational Covenants: To make this structure work effectively, you must negotiate and include specific operational covenants within the purchase agreement. These covenants should prevent the buyer from:
• Changing the service level provided to the client.
• Raising prices for the client.
• Altering the terms of the customer contract without your consent during the transition period.

Defending Your Position with Operational Proof

To strengthen your negotiating position, leverage your existing operational framework, particularly if you run on EOS (Entrepreneurial Operating System).

• Institutionalized Client Relationship:
• Use your EOS Accountability Chart to demonstrate that this major account is managed by a structured team, proving the client relationship is institutionalized rather than personally dependent on you as the owner.
• This shows the buyer that your business is turn-key, which can secure a [strategic premium multiple](/qa/operational-playbooks-for-strategic-premium-multiples).
• Historical Stability and Tracking:
• Present the client's historical stability and provide evidence of consistent performance.
• Show how your team uses weekly Scorecard metrics to track delivery health and client satisfaction. Learn more about [how to choose five to fifteen scorecard metrics](/qa/how-to-choose-five-fifteen-scorecard-metrics).
• GWC and Level 10 Meetings:
• Demonstrate that your operations team has the GWC (Gets it, Wants it, has the Capacity to do it) to effectively run the account. This reinforces that the team is capable and responsible.
• Highlight how your Level 10 Meetings keep performance on track, addressing issues proactively and ensuring accountability. This further mitigates the perceived risk. If you struggle with your meetings, consider [how to review your weekly scorecard in under five minutes](/qa/how-to-review-scorecard-under-five-minutes).

By proving your operational excellence and the institutionalized nature of the client relationship, you can effectively demonstrate that the concentration risk is already mitigated. This allows you to push back on punitive escrows and secure a more favorable, structured note.

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