We have one client that accounts for thirty five percent of our gross margin, and the buyer wants to structure a massive earnout to offset this risk. How do we negotiate a structured holdback instead of an earnout to protect our deal terms?

Question

Tyler Smith · Accepted Answer

Customer concentration is a legitimate risk, but a massive earnout is a dangerous way to solve it because it gives the buyer post-close operational control over your payout. Instead of accepting an earnout based on future performance, negotiate a structured holdback or indemnity escrow tied strictly to customer retention.

A structured holdback keeps the purchase price fixed but places a portion of the cash in escrow, to be released on specific, objective milestones. To make this work, you must prove that the customer relationship is institutionalized and not dependent on you as the owner. Use your Accountability Chart to show the buyer that dedicated managers, running on your established operating system, own the day-to-day delivery and client satisfaction.

Structure the holdback with the following parameters:

- Tie the release of funds solely to the customer renewing their contract or maintaining a specific revenue threshold, rather than overall EBITDA targets that the buyer can manipulate.
- Define a clear, accelerated release timeline, such as twelve months post-close, rather than a multi-year performance period.
- Ensure the buyer is contractually obligated to maintain the service levels and resource allocation required to support that customer during the holdback period.

This structures the risk as a binary retention event rather than an ongoing operational hurdle, protecting your enterprise value while giving the buyer the downside protection they require.