Key Takeaways

  • An option to purchase business agreement allows a buyer to acquire a business at a predetermined price within a specified period.
  • Essential elements include option fee, exercise period, purchase terms, and termination clauses.
  • These agreements provide flexibility for buyers and financial certainty for sellers, but they require careful drafting to avoid legal pitfalls.
  • Differences between an option to purchase and a right of first refusal impact how and when a sale may proceed.
  • The agreement can be used strategically in business succession planning, franchising, or gradual ownership transitions.

An option to purchase business agreement is a contract that is made between a seller and a buyer that includes the option for the buyer to sell or buy an asset later on at a price agreed to in the options contract. Options to purchase can be used in commodities and securities transactions, for example.

Options Contract

Options contracts come in a variety of forms. For example, an exchange-traded option is a guaranteed standardized contract settled through a clearing house, which includes:

  • Commodity options.
  • Cover stock options.
  • Futures options.
  • Index options.
  • Bond and interest rate options.

Another example — the over-the-counter option — is a trade that occurs between two parties. This type of option includes currency exchange rate options, interest rate options, and more.

The key provision of this type of option is the opportunity to purchase one hundred shares of a security by a preset date at a given price. A premium, or a market-based fee, is charged by the options contract. A strike price is the stock price that is named in the contract.

A put options contract allows the buyer the option to sell the shares at the preset price by an agreed-upon date. The option expires if the purchases do not move to buy or sell by the set date.

An options contract allows traders the opportunity to hedge their stock positions. Simply put, options contracts allow a trader to take a leveraged position on a stock, while at the same time mitigating the risk that the full purchase would entail.

In real estate, options contracts could similarly be used to mitigate risk: for example, a buyer could secure options contracts on multiple parcels before executing a purchase on any one parcel; this ensures that the buyer will be able to assemble all of the parcels before moving on with the project.

Key Elements in an Option to Purchase Business Agreement

An option to purchase business agreement should include clearly defined terms to avoid disputes and protect both parties’ interests. Important elements include:

  • Option Fee: A non-refundable payment granting the buyer the exclusive right to purchase the business. This fee is typically credited toward the purchase price if the option is exercised.
  • Exercise Period: The specific timeframe during which the buyer can exercise their right to purchase.
  • Purchase Price and Terms: The agreed-upon price and any contingencies, such as financing or inspections, must be detailed.
  • Option Consideration: Additional terms or value (such as future services or premiums) that may influence the buyer’s ability to exercise the option.
  • Exercise Notice: The formal written notice the buyer must submit to trigger the purchase.
  • Termination Conditions: Events or actions that can void the agreement, such as failure to secure financing or due diligence issues​.

Options Contract Example

Here's a straightforward example: say a trader expects that a company's stock price will rise to $100 within the following month. The trader also realizes that she can purchase an options contract from the company at $5, at a strike price that is set at $85 per share. She pays the cost of the option, which is $5 x 100, or $500.

In the following month, the stock price rises to $110. At this point, before the expiration date in the contract, she uses the call option to purchase one hundred shares of the company at the strike price on the options contract. If the strike price is $80 per share, she pays $8,000 for the stock (or 100 x the strike price of $80). She may then turn around and sell that stock for $11,000 (100 x the market value of $110), at a profit of $2,500 (or $3,000 minus $500).

Benefits and Risks of an Option to Purchase Agreement

For Buyers:

  • Flexibility: Buyers can assess the business’s value and market conditions before committing.
  • Locked-In Pricing: Offers protection against market fluctuations by fixing the purchase price in advance.
  • Due Diligence Time: Allows time for financial, legal, and operational reviews before a full commitment.

For Sellers:

  • Income Security: Option fees can provide immediate cash flow and signal serious buyer interest.
  • Control Over Terms: Sellers can pre-negotiate purchase terms and timelines to suit business goals.

Risks to Consider:

  • For Buyers: The option fee is usually non-refundable, and there is no guarantee of successful financing or favorable business conditions.
  • For Sellers: Tying up the business for the option period may deter other buyers, and the buyer may ultimately not proceed​.

Why Negotiate a Put-and-Call Agreement When Selling Your Business?

You may be considering selling your business in order to get a quick payout and then retire.

However, buyers today typically want the original person who built up the business to play an important role even after the sale, leaving you with a stake in the company. Everyone benefits when this type of arrangement works out. However, sellers often have a difficult time adjusting to their new role where they aren't in charge any more.

This type of deal may also raise concerns for you as the seller: if you sell to a larger corporation, will you really be in control or will the corporation be pulling the strings? The buyer will often have the final say on major matters like capital improvements, expansion, and so forth.

As the seller in this situation, you should attempt to negotiate an option called a put-and-call, either for the buyer to exercise their right to purchase the remaining shares from you as the seller, or for you as the seller to require the buyer to purchase your remaining shares, either staged out or all at one time.

This option gives you as the seller the opportunity to part ways if you disagree with corporate headquarters or become uncomfortable with the arrangement. It also gives you another advantage: the buyer may think twice about vetoing management's plans knowing that you can always exercise the option if the disagreement goes too far for your liking.

Option to Purchase vs. Right of First Refusal

While both tools are used to control future business transactions, there are key distinctions:

  • Option to Purchase: Grants the buyer the exclusive right to buy at a set price during a specified period. The seller cannot sell to others during this time.
  • Right of First Refusal: Requires the seller to offer the property or business to the holder first if they receive another offer. This does not guarantee a future sale but gives the holder a matching opportunity.

Strategic Use:An option to purchase is typically used when a buyer wants assurance and exclusive negotiating rights, while a right of first refusal is used when a party wants to maintain a secondary interest without full commitment​.

Frequently Asked Questions

1. What is the purpose of an option to purchase business agreement? It gives a buyer the right—but not the obligation—to buy a business at a predetermined price within a set timeframe.

2. Is the option fee refundable? Typically, no. The fee is a non-refundable consideration for the seller granting the option, though it may be credited toward the purchase price if exercised.

3. Can a seller accept other offers during the option period? No, once the agreement is in place, the seller cannot sell to another party during the exercise window.

4. How is this different from a right of first refusal? A right of first refusal allows a party to match another offer rather than initiating the purchase under pre-set terms like an option agreement.

5. What happens if the buyer doesn’t exercise the option? The agreement expires, and the seller retains the business. The buyer typically forfeits the option fee.

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