If you are preparing to sell your company, you will likely encounter terms that sound like they belong on Wall Street rather than in a boardroom. One of those terms is the put option.
Most sellers either ignore it or misunderstand it.
That can be expensive.
At Elkridge Advisors, we treat a put option as a strategic lever. When structured properly, it can protect your downside, increase certainty of proceeds, and strengthen your negotiating position.
When structured poorly, it can quietly transfer risk back to you after closing.
What Is a Put Option in Plain English?
A put option is the right, but not the obligation, to sell an asset at a predetermined price within a defined time period.
In public markets, that asset might be stock.
In M&A, the asset is usually your retained equity.
But for business sellers, it is even simpler than that.
A put option is leverage.
It is a contractual escape hatch that gives you the ability to convert ownership into cash on defined terms, instead of waiting for someone else to decide when and how that happens.
Imagine this scenario.
You sell 70 percent of your company for $14,000,000. You roll 30 percent into the new structure. The buyer wants you to stay for three years. As part of the agreement, you negotiate a put option that allows you to force the buyer to purchase your remaining 30 percent at a predefined formula after year three.
That formula might be:
• 6x EBITDA
• A minimum guaranteed floor of $5,000,000
• Or a valuation based on revenue growth metrics
The put option gives you control over your exit timeline and pricing mechanics.
Without it, you may be stuck as a minority shareholder indefinitely.
Now let’s go one layer deeper.
A put option typically answers four critical questions:
First, when can you exercise it. Is it exactly 36 months after closing, or any time between month 36 and month 60.
Second, how is the price calculated. Is it a fixed multiple, a trailing twelve month EBITDA calculation, or a blended formula.
Third, how is payment made. Is it lump sum cash, installment payments, or seller financing.
Fourth, what happens if there is a dispute over valuation.
These details determine whether the put option is real protection or just theoretical comfort.
From a strategic standpoint, the put option also changes negotiation psychology. When buyers know you have a defined liquidity path, it reduces their ability to delay or renegotiate from a position of control later.
In private equity backed transactions, this becomes even more important. If the sponsor plans to exit in five years, your put option timeline should not conflict with their fund horizon. Otherwise, you may find yourself misaligned at the worst possible moment.
A well structured put option aligns incentives.
A poorly structured one creates friction.
At Elkridge Advisors, we do not treat this clause as legal fine print. We model scenarios at different EBITDA levels, growth rates, and capital structures to see what your future equity is truly worth under the put option formula.
Why Buyers Propose Put Options
Buyers do not add complexity for fun.
They use put options to align incentives, reduce risk, and structure staged exits.
A buyer might propose a put option because they want you committed for a defined period. They may want to defer part of the cash payment. They may want performance visibility before acquiring 100 percent. They may want to smooth capital deployment.
In private equity transactions, put options are common when sellers roll equity. The buyer acquires control today but structures a mechanism for future buyout.
This is not inherently bad.
It simply means the negotiation shifts from price alone to structure plus timing.
But there is a deeper layer most sellers overlook.
Buyers often use put options as part of capital stack planning. If a fund is targeting a 5 year hold, they want clarity on when minority interests will be consolidated. A clearly defined put option gives them visibility into future cash requirements. That helps them plan refinancing, dividend recaps, or an eventual exit.
In other cases, buyers propose put options to reduce upfront purchase price pressure. Instead of paying $20,000,000 today, they may pay $15,000,000 now and structure the remaining value through a put option tied to performance. From their perspective, that spreads risk across time.
There is also an alignment argument. Buyers want you focused on growth during the transition. If you know your remaining 30 percent can be monetized at 6x EBITDA after three years, you are financially incentivized to drive EBITDA higher. The put option becomes a behavioral tool.
However, alignment only works if the metrics are fair and the control environment is balanced.
Here is where things can shift subtly in the buyer’s favor.
If valuation under the put option depends on EBITDA and the buyer controls hiring, capital expenditures, pricing strategy, or integration decisions, then your future payout may depend on variables you no longer control. Buyers understand this dynamic very well.
Sophisticated buyers also think about downside protection. A put option with a floating multiple and no valuation floor protects them in weaker performance scenarios. They gain flexibility, while you absorb variability.
At Elkridge Advisors, we look at buyer motivation first. Is the put option designed to truly align interests, or primarily to defer risk and cash?
That distinction changes how we negotiate.
If you are reviewing a term sheet with a put option, let us evaluate the economics before you move forward.
Structure determines outcomes, and small details inside a put option can materially affect your final proceeds.
How a Put Option Impacts Your Total Proceeds
Most sellers fixate on the headline number.
That is a mistake.
Your actual proceeds depend on valuation formula, timing, performance conditions, discounting mechanics, and risk allocation.
Let’s say your put option allows you to sell remaining equity at 5x EBITDA three years from now. If EBITDA declines from $3,000,000 to $2,200,000, your exit value drops from $15,000,000 to $11,000,000 enterprise value equivalent.
That delta materially affects your final take home.
Now imagine a structured floor of $4,500,000 regardless of performance. That changes risk dramatically.
The difference between a well designed put option and a vague formula can be millions.
But the impact goes beyond simple multiple math.
First, timing affects value. A $6,000,000 payment received three years from now is not equivalent to $6,000,000 today. The time value of money matters. If your agreement does not include interest accrual or an agreed return component, inflation and opportunity cost quietly erode real proceeds.
Second, capital structure changes can alter outcomes. If the buyer adds debt to the business during the hold period, enterprise value might remain stable while equity value compresses. If your put option pricing references equity value rather than enterprise value, leverage decisions can materially change your payout.
Third, working capital definitions matter. If EBITDA is adjusted aggressively or normalized differently at the time you exercise your put option, valuation can shift by hundreds of thousands or even millions. Small accounting interpretation differences have large financial consequences.
Fourth, payment mechanics affect risk. If the buyer is allowed to pay your put option in installments over 24 months, your exposure extends beyond the exercise date. If financing is required and not guaranteed, execution risk reenters the picture.
Consider two simplified scenarios.
Scenario A: You sell 70 percent for $14,000,000 and hold 30 percent. Three years later EBITDA grows from $3,000,000 to $4,000,000. At 6x, enterprise value equals $24,000,000. Your 30 percent equals $7,200,000. That is a powerful second outcome.
Scenario B: EBITDA remains flat at $3,000,000 but leverage increases. Equity value compresses. Your 30 percent might be worth $4,500,000 instead of the $5,400,000 you initially modeled. The structure, not just performance, changed your proceeds.
This is why we model multiple cases at Elkridge Advisors. Base case. Downside case. Upside case. Capital structure shifts. Timing delays. We calculate internal rates of return on the rolled equity so you understand whether the second bite of the apple compensates you for the risk you are taking.
Your total proceeds are not just initial cash plus future equity.
They are a function of control, formula design, financing certainty, and time.
Put Option Versus Call Option: Why It Matters
In many deals, there is both a put option and a call option.
A call option gives the buyer the right to purchase your remaining equity.
A put option gives you the right to force the sale.
If only the buyer has a call option, control sits entirely with them.
If only you have a put option, you control timing.
If both exist, the trigger mechanics determine leverage.
This is where sophisticated negotiation happens.
We frequently see sellers accept asymmetric structures where buyers have flexibility and sellers have constraints. That imbalance can compress your negotiating power later.
But the real issue is sequencing.
If the buyer’s call option activates earlier than your put option, they effectively control the exit clock. They can wait until performance is strong and exercise their call at a formula that benefits them. Or they can time it strategically around refinancing or a larger recap.
If your put option activates first, you hold the timing advantage. You can evaluate performance, market conditions, and personal goals before triggering liquidity.
Another critical issue is pricing symmetry.
Are both the put option and call option based on the same valuation formula?
Or is the buyer’s call option priced at 5x EBITDA while your put option is priced at 4.5x EBITDA?
Even a 0.5x difference on $4,000,000 EBITDA equals $2,000,000 in enterprise value. On a 30 percent stake, that gap can materially reduce your proceeds.
There is also the question of caps and floors.
Does the buyer’s call option include a valuation cap that limits your upside?
Does your put option include a floor that protects your downside?
Without thoughtful drafting, the buyer may hold optionality in both directions while you absorb variability.
Control provisions matter too.
If the buyer controls board composition, dividend policy, executive hiring, and capital expenditures, and simultaneously holds a call option, they can influence performance metrics that affect valuation. That creates structural imbalance.
At Elkridge Advisors, we analyze option language not just legally, but economically. We map timelines, valuation formulas, and governance rights together. Options do not exist in isolation. They interact with control rights, earnouts, financing covenants, and rollover equity terms.
If risk is shared, control should be shared.
If upside is capped, downside should be protected.
If your draft agreement includes option language, do not assume it is boilerplate. It rarely is.
When a Put Option Strengthens Your Position
A put option can be powerful when you want liquidity certainty, a defined timeline, downside protection, or when you are rolling significant equity.
In growth oriented deals, it can function as insurance.
In recapitalizations, it can create a clean transition plan.
In family owned businesses, it can provide retirement clarity.
But the real strength of a put option shows up in specific strategic situations.
First, when you are taking chips off the table but still believe strongly in upside. If you sell 60 percent today and retain 40 percent, your wealth remains materially exposed to future performance. A properly structured put option ensures that even if growth slows, you are not indefinitely tied to a minority stake with limited influence.
Second, when control shifts dramatically at closing. Once you are no longer the majority owner, your ability to influence strategic direction declines. A put option restores balance by giving you an enforceable path to liquidity rather than relying on goodwill or future negotiations.
Third, when your personal timeline matters. If you are 58 and planning retirement at 62, an undefined minority position may create stress. A put option tied to a fixed window such as month 36 to month 48 provides clarity. That clarity has value beyond dollars. It reduces uncertainty and allows for financial planning.
Fourth, when market cycles are uncertain. If you sell during a strong valuation environment but macro conditions weaken two years later, your put option can protect you from waiting for a future liquidity event that may never come. It creates a contractual exit, independent of broader market timing.
A put option also strengthens your negotiating position before closing.
When buyers know you have insisted on a clearly defined second liquidity event, it signals sophistication. It communicates that you are not just focused on the upfront check, but on total lifetime proceeds. That often shifts negotiations from aggressive risk transfer to more balanced structures.
There is another subtle advantage.
If structured with a valuation floor, a put option can serve as a minimum guaranteed second payout. For example, if your remaining stake is subject to a floor of $4,000,000 regardless of performance, that acts as embedded protection. It transforms uncertain equity into something closer to a structured payout.
At Elkridge Advisors, we evaluate whether the put option genuinely strengthens your position or simply creates the illusion of protection. We analyze governance rights, capital structure flexibility, performance metrics, and financing obligations together. A strong put option works in harmony with those elements.
The key principle is simple.
If you are taking risk by rolling equity, you should have defined mechanisms to control your exit.
If you are staying involved operationally, your time horizon should be contractually aligned with your liquidity horizon.
If you are selling your life’s work, uncertainty should not dominate your second payout.
Final Thoughts
A put option is not just a technical clause.
It is a lever of power.
In the right structure, it creates certainty, protects downside, and enhances long term value.
In the wrong structure, it shifts risk back to you after you believe you have exited.
Selling your business is likely a once in a lifetime liquidity event. The difference between a well negotiated put option and a poorly drafted one can mean $2,000,000, $5,000,000, or more in ultimate proceeds.
But here is the bigger truth.
Most value in M&A is created or lost in structure, not in headline multiples.
Two sellers can both announce a $20,000,000 deal. One walks away with clean liquidity and a protected second payout. The other spends three years navigating disputes over EBITDA definitions, financing obligations, and timing windows tied to a loosely drafted put option.
Same headline number.
Very different outcome.
A put option forces you to think long term. It requires clarity around control, governance, capital allocation, debt policy, and performance metrics. It requires discipline in modeling both upside and downside scenarios. It requires alignment between your personal timeline and the buyer’s investment horizon.
At Elkridge Advisors, we do not treat deal terms as isolated clauses. We integrate valuation modeling, tax considerations, governance rights, and option mechanics into one cohesive strategy. Our goal is simple: maximize certainty of proceeds while preserving upside.
If you are considering selling your company, rolling equity, or entering into a minority recapitalization, do not evaluate the put option in isolation.
Evaluate the entire architecture of the deal.
The sellers who achieve exceptional outcomes are not just negotiating price. They are negotiating structure with intention.
