A buyer wants to hold back twenty percent of our purchase price because our third-largest client represents eighteen percent of revenue and recently hired a new procurement director. How can we ring-fence this customer concentration risk without losing cash at close?

Question

Tyler Smith · Accepted Answer

Customer concentration combined with leadership turnover at the client is a legitimate red flag for any acquirer. However, accepting a twenty percent broad holdback leaves your capital at the mercy of buyer performance post-closing. You must ring-fence the specific risk rather than accepting a generalized valuation haircut.

Reject an open-ended purchase price reduction or multi-year earnout. Instead, propose a short-term, dedicated indemnity escrow tied exclusively to the gross margin generated by that single customer. Calculate the trailing twelve-month gross profit produced by the account. Place that exact dollar amount into a third-party escrow account for nine to twelve months, leaving the rest of your closing cash intact.

Establish explicit, objective release triggers. The agreement should state that as long as the account generates at least eighty percent of its historical gross margin run rate over the four quarters following closing, the escrowed funds release directly to you. Furthermore, insert operational covenants specifying that the buyer must maintain historical service levels, staff the account appropriately, and refrain from unilateral price increases that could alienate the client. This shifts the risk back to performance and keeps the rest of your deal proceeds secure.