Two common frameworks exist for structuring call and put options in SMB deals: Time-based and return-based. Time-based structures activate after a set period, typically 5 to 7 years from the initial investment. Return-based structures trigger when specific performance metrics are met, such as achieving a certain multiple on invested capital (MOIC) or internal rate of return (IRR).

Many deals combine these approaches to align incentives. For example, options might become exercisable only after investors receive a 2x return and 5 years have elapsed. This ensures investors participate in the business's growth phase while also giving operators a clear path to full ownership.

The valuation mechanism plays an equally important role. Most structures will start by a negotiation between the company and investors, using an EBITDA multiple or analysis of comparable companies to value the business. If those sides do not reach an agreement, then a certified business appraisal will be commissioned to determine the fair market value. This is quite similar to how negotiations are approached with real estate deals.

Legal considerations play a key role, too. Options need to align with broader corporate governance documents and comply with relevant regulations. This often requires experienced legal counsel to ensure enforceability and to avoid potential conflicts with other shareholder rights. For operators who have used SBA loans to acquire a business, oftentimes an equity call or put may require consent from the SBA lender.

Market size influences option structures significantly. For deals under $5 million, simpler frameworks often suffice. Larger transactions typically require more sophisticated mechanisms, including detailed provisions for partial exercises and staged buyouts. Understanding your deal's place in the market helps determine appropriate complexity levels.

The risk profile of the business can also shape option design. For instance, a software as a service (SaaS) company with recurring revenue might use a straightforward EBITDA multiple, while a construction company with significant equipment assets might require both asset valuation and earnings metrics. In that same vein, companies with high customer concentration or regulatory exposure may need additional provisions to account for these risks — like a medical device manufacturer where a single hospital system accounts for 40 percent of revenue.

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