Option to Purchase Business Agreement
An option to purchase business agreement is made between a seller and a buyer that includes the option for the buyer to sell or buy an asset later.3 min read
Updated November 19, 2020:
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 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.
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).
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.
If you need help with an option to purchase business agreement, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.