Understanding Put and Call Options in a Business Sale

Put & Call Options are normally associated with the purchase of shares in a company when the current owner agrees to sell a portion of the shareholding in the business to a new Buyer, while agreeing to remain as a working shareholder in the business for an agreed period of time and on agreed terms. The main reason for such an arrangement is to provide the Buyer with comfort and confidence to learn from the current owner and to gain experience whilst the previous owner still “has skin in the game”.

Such an arrangement is documented in a Shareholders Agreement in which the terms are carefully stated. In order to provide the Seller with a guaranteed exit strategy, the agreement will contain provisions that allow the Buyer to ‘call’ on the Seller to sell the balance of his shares and allow for the Seller to ‘put’ his shares to the Buyer after the agreed period – allowing certainty for both parties.

The formula to calculate the sale price at that time is normally stipulated in the agreement so that there are no arguments.  This is an incredibly useful tool used when creating an exit strategy. A ‘Put and Call Option’ in a Shareholders Agreement could prove beneficial to you as a small business owner.

Let us explain how…

1.   What is a ‘Call’ Option?

A Call option allows the Buyer to ‘call’ for the balance of the shares to be sold to them at an agreed time in the future. This can sometimes be set at a significant event’s occurrence, as opposed to a specific date.

Alongside this, the Buyer can also include a ‘nomination’ in their Call Option Agreement, nominating a third party as a Buyer if they choose to do so.

2.   What is a ‘Put’ Option?

A Put option allows the Seller to prompt the Buyer to buy their remaining shares at a specific price on a specific future date.

Put & Call options in a Shareholder’s Agreement therefore create a similar outcome to a conventional Business Sale Agreement. However, the parties agree that the Seller remain engaged in the business for a longer period.

Why bother?

Mainly used in a business where the current owner of the business has played a major role and is perceived to be attached to the goodwill of the business. This strategy may allow the owner to sell his business as opposed to the business not being profitable and the owner closing it down for Nil value.

However, Put & Call Options need to be incorporated in a Shareholders Agreement, which can be more complex and intricate than a standard Business Sale Agreement. They usually require more time in preparation and potentially more legal expense in the process of creation. Alongside this, additional time may need to be added to the negotiation phase of the sale, allowing both parties to negotiate the terms of the Option Agreement.

If you are interested in exploring your options and discussing the finer details of a Put & Call Option Agreement in the lead up to your Business Sale, contact Core Business Brokers today on (02) 9413 2977 or contact us via email: [email protected]

Our team are more than happy to assist in your situation, answering any questions you may have about the process.