Put Options in Deal Terms

October 29, 2024

by a searcher from The University of North Carolina at Chapel Hill - Kenan-Flagler Business School in Raleigh, NC, USA

My second attempt at posting this as I'm sure the first failed attempt was user error.

I recently listened to an episode of the podcast "Acquiring Minds" where the host was interviewing investors in self-funded search. It was a great listen btw but there was a topic discussed I wanted to bring to the group. One investor brought the idea of adding a put option into the deal terms to essentially force the a liquidity event for the equity position in years 5 or 7. It didn't require the sale of the entire company, and there were several other conditions around the specific option, but it did require a force buy back of the equity. After listening to the podcast the idea sounded reasonable to me, but I wanted to bring it to the group and ask if: any self-funded searchers had seen investors push for a put option in their deal terms, if any searchers had any strong opinions against this idea, or if any (now) owner/operators had actually executed on this put option in their business.

Thanks!

Reply by a professional
from Villanova University in West Chester, PA, USA

Hi ^redacted‌, put options are typically in deals higher up market with more sophisticated and seasoned professionals but you do see them in the ETA space as well, particularly with more seasoned investors. They're not controversial if structured fairly to both parties. It provides certainty to the investor and searcher of when the investor's exit will be. The greatest challenge is funding the liquidity event. So, I always recommend thinking through not only the timing, buyout terms, but also financing and payout terms. It could be negotiated in a lump sum or as a note to be paid out over time that may be with fixed payments, or variable payments depending on the performance of the company. As long as its negotiated in a way that is fair to both parties and doesn't cause significant cash flow issues for the company, it can be a great tool for both parties.

Reply by an investor
from New York University in New York, NY, USA

Hi Austin - I push for put options in my ETA investments, though I definitely try to keep it fair to both sides as ^redacted‌ notes above. It's on a "best efforts" (commercially reasonable) basis starting in year X and if the company cannot make a cash payment then we will negotiate a mutually agreeable note. Part of the reasoning to include a put is that I want it documented that there is an expectation of a liquidity option at some point. Without this, the sponsor can just stay in the deal forever - which isn't an issue at all, but I at least want the option to exit down the road and if the company is in position to do it.

+4 more replies.

Join the discussion