We have high customer concentration with our top three accounts bringing in forty percent of our revenue, but they are under multi-year agreements. How do we structure our deal to prevent a major valuation haircut while ensuring we do not carry all the post-close transition risk?

Question

Tyler Smith · Accepted Answer

Buyers view customer concentration as a ticking time bomb. Multi-year agreements help, but they do not eliminate the risk of a post-close exit. To protect your valuation multiple without absorbing all the risk via a massive earnout, you must structure a tiered closing mechanism or a joint pre-closing consent process. First, use your Accountability Chart to demonstrate that the relationships with these top three accounts are owned by your key accounts team, not by you personally. This proves the accounts are institutionalized and will not walk when you do. Next, structure the deal with a targeted customer retention escrow. Instead of accepting a flat two-turn haircut on your EBITDA multiple, agree to place a percentage of the purchase price into an escrow account that is released in installments over twelve to eighteen months, contingent solely on those three customers remaining active. Ensure the purchase agreement specifies that if a customer leaves due to the buyer's post-close operational failures or changes in product quality, the escrow still releases to you. This structure shifts the risk back to the buyer's execution while providing them the downside protection they require to pay a premium multiple today.