Clawback provision in purchase agreement

March 21, 2021

by a searcher from The University of Chicago - Booth School of Business in Carmel, IN, USA

Im looking to see if there is a good way to 'claw back' some of that purchase price if a certain event occurs (customer concentration concern) without putting the $ in escrow and slowly distributing to the seller as he wants a certain amount of cash at closing. There is already an earn out in the deal. Is my best be here just to word the purchase agreement in a way that the seller owes me a portion of the purchase price if event happens and go to court if needed? Or is there a better way?
Thanks for the help!

6 Likes

10 Replies

270 Views

Replies

Reply by a searcher
from London School of Economics and Political Science, University of London in London, UK

We are currently looking at a deal with a high level of customer concentration (top 3 are 75% of revenue) and facing the same discussions. The problem seems to be, if you try and structure around it, your day 1 payment to the seller has to be pretty low (as % of total consideration) and the deferred element would be highly uncertain to the Seller so it almost makes more sense for them to keep the business, take the cash flow and get the concentration level down and then bring it back to market for sale. The other question I'm asking myself - does a seller note/earnout really solve the issue? Both instruments would have to be pegged to customer concentration in some way and why would the seller take on this risk when he/she will likely not be in control post-acquisition. There is a risk the buyer could mess up the relationship with the customer and the seller would then suffer. Maybe I'm overthinking it but overall it feels like meaningful customer concentration risk puts most deals in the too hard pile unless you have significant experience in the industry and can manage that customer relationship (i.e. you're a trade buyer).

Reply by a searcher
from Harvard University in Milwaukee, WI, USA

I had structured an LOI with forgiveness terms to counteract high customer concentration. This company had one customer accounting for 70% of 2020 revenue and the forgiveness clause was based on the historical customer base hitting a modest revenue target for###-###-#### If they missed, then the purchase price would effectively be reduced by a sliding scale. The owner did not like that at all and would not accept the LOI. Makes me think that they were not confident in their big customer coming back. In summary, it's worth a shot but most owners may not go for it.

+8 more replies.

Join the discussion