THE SUNDAY TIMES - BUSINESS DOCTOR
08 August 2010

LP writes: I would like to sell equity in my business to a friend with a proviso written into the contract to say that I have the option to buy it back at an agreed price in five years' time. Is such a thing possible?

It is certainly possible to enter into an agreement whereby you have the option to purchase an asset (in this case the equity stake in your business) at an agreed price in the future writes Maebh Gavin, Corporate Finance Manager with Horwath Bastow Charleton in Limerick.  This type of agreement is commonly captured in a separate document, An Option Agreement, and can take many different forms.

A Put Option, gives the holder of the option the right to sell the shares in a company, at a specified price, at any time during the Option Period.  The Option Period is the period specified in the contract (which in your circumstance will commence in 5 years time and possible run for 3 months) during which time the option can be exercised. This period is at the discretion of the parties. After the Option Period the Option Agreement is void.

A Call Option, gives the holder of the option, the right to buy the shares in the company, at a specified price, at any time during the Option Period.

In many circumstances parties enter into a Put & Call Option Agreement which combines both a Put and a Call, therefore giving certainty to both the buyer and seller. If the Put Option is exercised than the Call Option is suspended, and vice-versa,

The Option Price can be pre-determined at the outset by both parties or can by set at the market value at that option date.  If the parties want to set a price at what they believe the value of shares will be at the option date then careful consideration should be given to the valuation as the option must be honoured at the price. There is a risk for both parties as the shares could be worth significantly more or less leading to a profit for one party and a loss for the other.  If you are attempting to predict the value of the shares based on the projected performance of the company you should seek the advice of a corporate finance expert to assist with the valuation.    

An Option Agreement can certainly assist in meeting your requirements and giving certainty for the future however care should be taken when agreeing the terms as this is a legally enforceable contract and can have serious implications if it cannot be honoured.