Utlising Put & Call Options in M&A

Put & Call options are contracts that can give either a seller an option to sell at a later date or a buyer an option to purchase at a later date for a given price or under certain circumstances. The contracts generally expire after an agreed upon date. These contracts are highly common on the stock market, increasingly so for real estate, and are becoming more utilised in M&A.

Buyer Call Option

When a buyer has a call option, the buyer has the rights to force the vendor to sell to them under certain circumstances.

Historically when purchasing a small company the buyer will assume a 100% ownership post transaction and pay  100% of the price at the transfer of ownership. The previous owner or top managers are then contracted to assist with the transition, which can result in numerous complications. Using a call option when acquiring a company can positively impact a transaction in a number of ways, some of which are outlined below:

  • Incentivising the previous owner: If a controlling stake in a company is initially purchased, the remaining shares can be held by the owner and be placed under a call option. If certain contracts are retained, or profit margins met, the owner can the receive a set price for the remaining shares in the business, at some point after the initial transfer of ownership. This is a great alternative to a higher risk transaction for the buyer, and a lower price for the seller, which would have been the outcome without the call option.
  • Tax Benefits: There can be tax reasons why a buyer may need to acquire a company in a certain time period. Using a call option may enable a buyer to disperse the purchase price over a period of time, ensuring tax benefits can be realised, and a fair price is still paid.
  • Structuring: Spreading the payment over a certain period, or subject to certain targets may enable a safer and greater use of debt to increase the equity growth and tax concessions with acquiring the company that could be achieved by an agreed upon upfront payment.

Vendor Put Option

Alternatively a vendor may have a put option that can force the purchaser to buy for a certain price under certain triggers.

Benefits for vendors can include:

  • Realising the full value of the business: Often if selling contracts and tenders are pending the owner will want to receive a price that takes into account the future profitability of the business. Without a put option, the owner may choose to postpone the sale of their business. If a put option is put in place for a portion of the business, the option may ensure the value of tenders that are currently being processed are fairly included or not included depending on the outcome. This ensures a faster and more profitable transaction for both parties.
  • Owners maintaining their legacy: Often business owners want their legacy and years of hard ork not to be lost when transferring the ownership of their business. Ensuring certain staff are kept and other performance metrics are met can be part of a put option for owners when selling the remaining stake in their business.

There are numerous factors that can be placed in put and call options for mergers and acquisitions. An informed business owner or buyer can combine these to generate useful options that ensure the best outcomes for both parties are achieved.

If you require advice on put and call options for an M&A transaction please call us on 1300 QUINNS (784 667) or submit an Express Enquiry to arrange a confidential, no cost consultation with one of our Directors