Put & Call Options in Business Transactions – Essential Information

Business deals and transactions don’t always align perfectly with what both the buyer and seller want to see. In fact, friction and uncertainty are quite common.

For instance, a buyer may want time to integrate, raise funding, or de-risk. Meanwhile a seller might want a clear exit but not immediately.

Put and call options can be very effective at bridging these gaps and de-risking business deals. In this blog I’ll explain what they are, and how they work

What are put and call options?

Put and call options in business transactions are essentially a kind of “deal insurance”.

A call option gives a buyer the right to force the other party to sell at an agreed price or formula.
A put option flips it, giving the seller the right to force the other party to buy.

It is common to see “cross-options” (including both a put and call) drafted together. This provides greater certainty that, at some future point, ownership will change hands on pre-agreed terms.

Essentially, put and call options provide a contractual bridge and binding mechanism to make the outcome more predictable.

Why are put and call options used in transactions?

The main attraction of put and call options is that they create certainty in otherwise uncertain deals. Business relationships change, markets change, and priorities change too.

By building these rights into deals, both parties can prepare for different outcomes.

Exit Strategies

Investors or minority shareholders often negotiate put options to ensure they can exit at a fair value after a certain period.

Control Mechanisms

Majority stakeholders may use call options to secure the ability to acquire full ownership once milestones are met.

Risk Management

Start ups and joint ventures carry inherent risks. Options help balance risk between investors and founders.

Succession Planning

Family businesses or partnerships may use options to provide clarity on ownership transfer.

Practical applications and examples

Let’s make it less abstract with a few ways we see them used in real deals:

Succession in a family business

A founder hands day-to-day control to their children but isn’t ready for a full exit.
The family agrees a call option allowing the children to buy more shares over time, while the founder has a put option to force a buyout if they want to step back completely.

Private equity investment

A fund acquires a majority stake in a growing company.
The management team gets a call option to buy back shares if performance targets are smashed, while the fund retains a put option to sell its stake back to founders or co-investors if it needs an exit in a set timeframe.

Minority protection

An investor takes a 25% minority stake.
To avoid being trapped indefinitely, they negotiate a put option to sell out to the majority after, say, five years at an agreed formula price.

Joint ventures

One partner is given a put option to sell their stake if the partnership no longer aligns with their goals.
The other partner may hold a call option to buy out the exiting party and maintain continuity.

Employee Share Schemes

Senior executives granted equity may receive put options to sell their shares back if they leave the company.

Key considerations you need to make

Put and call options are an attractive option for both parties in a deal, but they must be very carefully and precisely structured to be effective.

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Issue	Considerations
Valuation	Agreeing a pricing mechanism is the key challenge. Common methods: fixed price, fair market value, earnings-based formula.
Timing	Options exercisable after milestones. Examples: 5 years, profitability targets.
Compliance	Jurisdictions differ under corporate/securities law. Regulatory approvals may be required before exercise.
Funding	Exercising party must have sufficient funds. Put options may create large cash obligations for counterparty.
Tax	Options can trigger tax liabilities. Must be considered early in negotiations.

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Pros and cons of put and call options

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Pros / Benefits	Cons / Risks
Predictability in future ownership outcomes	Potential cash flow strain when options are triggered
Flexibility to adapt to changing circumstances	Risk of disputes over valuation methods
Enhanced investor confidence	Regulatory or tax complications if poorly drafted
Balanced risk allocation	—

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Our tips when negotiating

Have clear triggers: You should spell out clearly when an option can actually be exercised, such as death, retirement, poor performance, insolvency, etc.
Decide the valuation mechanics early: Do you want a fixed price, EBITDA multiple or independent valuation? You should include tie break rules if valuations differ.
Think cashflow, not just price: If consideration is deferred, secure it. Use escrows, bank guarantees or share pledges to protect the seller.
Beware the wording: An option is not an unconditional sale. Drafting that reads like a guaranteed transfer risks HMRC treating it as a disposal today, not in future.
Plan for tax early: Who picks up tax on the premium? How is the exercise taxed? Both of these require modelling.
Keep resolutions practical: Disputes are common. Consider expert determination clauses for valuation help to avoid potential litigation later.

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Final considerations

Put and call options are not “off the shelf” clauses. While they can be highly effective in bridging gaps and de-risking deals, they do carry plenty of technical tax consequences and require careful planning throughout.

If you’re considering them, you should get the commercial triggers, valuation formula and tax treatment nailed down before signing. Otherwise, intended flexibility can turn into an expensive headache.

If you’d like any advice on put and call options, send me a message and I’ll be happy to help.