What is it?
An option agreement grants one party the exclusive right to purchase a specific asset or property at a set price for a designated period of time. During this time period, no one else will be entitled to purchase the property or asset. The sale price of the property cannot be changed during the term set out in the agreement. Once the term expires, the potential purchaser’s rights are terminated and the owner may do what he or she chooses with the property.
Application for small business people
Option agreements are inherently flexible in nature. The potential purchaser has the right to make the purchase, but they are not obliged to do so. There are no negative consequences if they change their mind or are unable to raise the necessary capital. This flexibility is one of the major benefits of option agreements for small business people. Small business people may need time before making a significant purchase, but they also want to ensure that they don’t miss out on a good opportunity.
Option agreements enable a potential purchaser to lock in a set price for an asset while he or she assesses whether to go ahead with the purchase. The purchaser can use this time to carry out due diligence into the sale, or to obtain finance. The option agreement takes the property off the market for this time, so no one else is able to buy it. It also eliminates the risk of market price fluctuations.
Option agreements are commonly used in real estate and stock trading.
6 key things to consider
Before entering into an option agreement, the following issues should be carefully considered:
- Does the potential purchaser have to pay a fee to enter into the option agreement?
- Is the fee refundable or deductable from the price should they go ahead with the purchase?
- What is the term of the option agreement?
- What asset or property is covered by the agreement?
- What are the obligations of the seller?
- What happens if the property is damaged during the term of the option agreement?