We have a solid business, but our top customer accounts for twenty-five percent of our revenue, and the buyer wants to structure a special indemnity escrow specifically for this account. How do we negotiate terms that protect our upside without letting them lock up our cash indefinitely?

Question

Tyler Smith · Accepted Answer

Customer concentration is a common valuation drag, but you do not have to accept a massive upfront discount or let the buyer lock up a quarter of your purchase price in escrow forever. You need to negotiate a structural solution that balances their risk with your performance. First, propose a tiered release schedule for the specific indemnity escrow. Instead of locking the funds up for several years, structure the agreement so that a portion of the escrowed cash is released every six months, provided the major customer remains active and continues to generate revenue at an agreed baseline. This keeps the incentives aligned without permanently starving you of your liquidity. Second, use your operational track record as leverage. Show the buyer your history with this client, highlighting the depth of integration between your systems and theirs. If your daily operations are deeply embedded in their workflow, the cost of switching away from your business is incredibly high. Finally, ensure that any indemnity claim against this escrow is strictly limited to actual loss of revenue resulting from a breach of contract or service failure on your part, rather than general market movements or the client going out of business due to their own internal issues. This protects your cash from macro factors beyond your control while satisfying the buyer's need for downside protection.