We have a major customer representing twenty-five percent of our sales, and the buyer wants to hold back a massive portion of the purchase price in a special indemnity escrow for two years to cover the risk of them leaving. How do we structure a customer retention escrow that is fair to both sides?

Question

Tyler Smith · Accepted Answer

A customer retention escrow is a practical way to bridge the valuation gap when a major client represents a significant portion of your revenue. The key is to structure it so that the release of the funds is tied to realistic operational milestones, not just the arbitrary whims of the client.

To structure this fairly, negotiate a specific customer retention escrow agreement. Instead of holding back the money for two years with no recourse, set up quarterly milestone releases. For example, twenty-five percent of the escrowed funds should be released every six months as long as the key customer continues to place orders at a minimum agreed-upon volume.

Define what constitutes a loss of the customer. It should only be triggered if the customer terminates the contract for convenience or if they fail to renew. It should not be triggered if the buyer takes over post-close and destroys the relationship through poor service or operational neglect.

You must retain some control. Specify that the buyer must maintain the same service-level agreements and pricing structures for that customer during the escrow period. If they fail to do so, the escrow should release to you immediately. This keeps the buyer honest and ensures they do not use the escrow as a safety net for their own operational failures.