Structuring Put and Call Rights to Finance a Hamilton Merger

The situation

Niloufar had spent a decade building an industrial testing and calibration business in Hamilton, the kind of company that manufacturers and logistics operators call when equipment needs to be certified against regulatory standards before it goes back into service. Before starting the business, she had worked as an air traffic controller, a career that left her with a low tolerance for anything left to chance. Her closest competitor for that entire decade was a firm run by Reza, a former software developer who had built his own testing and calibration company around a set of proprietary scheduling tools, with a smaller ownership stake held by his longtime business partner, Marco.

The two companies had spent years bidding against each other for the same regional contracts, occasionally losing work to each other and occasionally losing it to larger out-of-province competitors who could offer both scale and price. By the time Niloufar and Reza sat down together in early 2026, both had reached the same conclusion independently: combined, the two businesses could bid on contracts neither could win alone. Apart, they would keep grinding each other down while bigger players ate the market from above.

They agreed in principle to merge, with Niloufar's company as the surviving entity and Reza's company folding into it. The combined business would be valued at roughly $42 million, with Reza and Marco receiving a mix of cash and equity in the merged company for their ownership stake. Niloufar's team had lender financing lined up to cover most of the cash portion. The complication was the rest.

The financing problem

Niloufar's lender was willing to finance a significant cash payment at closing, but not the full $42 million. To close the gap, the deal was structured so that Reza and Marco would "roll over" a portion of their proceeds — roughly $9 million combined — into equity in the merged company rather than taking it in cash. This is a common financing tool in mid-market mergers: it reduces the buyer's upfront cash need, and it keeps the sellers financially invested in the success of the business they just sold, which buyers generally like.

But rollover equity creates a problem that does not show up until later. Reza and Marco would now hold a minority stake in a private company with no ready market to sell it in. Eventually, someone needed a mechanism to convert that equity back into cash — whether because Reza wanted to retire, because Niloufar wanted to consolidate full ownership, or because the relationship between the parties simply reached its natural end. That mechanism is usually a pair of contractual rights: a put right, which lets the minority holder force the company (or Niloufar personally) to buy their shares at a set future point, and a call right, which lets the majority owner force a buy-out of the minority holder on similar terms.

The trouble is that put and call rights are, in effect, a second acquisition scheduled for a future date — and a future acquisition needs to be financeable when it comes due, not just fair on paper. If the buy-back price formula was too aggressive, or the exercise window landed at a bad moment for the company's cash flow, Niloufar could end up owing Reza and Marco a large sum with no financing in place to pay it, years after the original deal had closed and long after anyone was still thinking about it. A put right that cannot actually be paid is not protection for the seller — it is a lawsuit waiting to happen.

What we did

1. Tied the buy-back price to a transparent formula, not a fixed number. Rather than setting a dollar figure for what the rollover equity would be worth years later, the purchase agreement used a formula based on a multiple of the merged company's trailing earnings at the time the right was exercised. This meant the buy-back price would rise or fall with how the business actually performed, rather than locking in an amount that might bear no relationship to reality by the time it mattered.
2. Staggered the exercise windows. Instead of allowing Reza and Marco to exercise their put rights on the same date, or all at once, the rights were structured to open in different years and in tranches — a portion after three years, the remainder after five. This meant the merged company would never face a single cliff-edge obligation to fund the entire buy-back in one year, which is precisely the scenario that turns a well-intentioned exit mechanism into a cash crisis.
3. Built financing coordination into the agreement itself. We required that any exercise of a put right trigger a defined notice period before payment was due — long enough for Niloufar to arrange financing through her existing lender relationship rather than being forced into a fire sale of other assets or an emergency loan on unfavourable terms. We also confirmed with her lender's counsel, before signing, that the buy-back structure would not trip any covenants in the original acquisition financing — a step that is easy to skip and expensive to skip badly.
4. Capped Niloufar's call right so it could not be used to squeeze out a minority holder unfairly. Call rights can be used defensively, but they can also be used aggressively — to force a minority owner out at a low point in the business cycle before their equity has had a chance to appreciate. We negotiated a minimum holding period before Niloufar could call the shares, and tied the call price to the same earnings-based formula used for the put right, so neither side had an incentive to time their move around the other's disadvantage.
5. Addressed what happens if Reza or Marco left the business. Both were expected to stay on for a transition period after closing. The agreement set out separate, lower valuation terms if either departed voluntarily before an agreed date, distinct from the terms that would apply if the merged company terminated them without cause — a distinction that protects the company from someone taking the rollover deal and walking out the following month, while still protecting the individual from being pushed out to avoid paying full value.
6. Documented dispute resolution for the valuation formula itself. Earnings-based formulas sound objective until the parties disagree about how to calculate earnings — what gets added back, what counts as an unusual expense, how shared costs across the merged business get allocated. We built in an independent accountant's determination as a binding tie-breaker, so a dispute over the formula would not turn into years of litigation.

The outcome

The merger closed in mid-2026 at the agreed valuation of roughly $42 million, with Reza and Marco receiving the majority of their proceeds in cash and rolling over approximately $9 million combined into equity in the merged company under the structure above. Niloufar's lender financed the cash portion without issue once the buy-back terms were confirmed not to conflict with the loan covenants — a review that took a few extra weeks but avoided a much larger problem down the line.

The combined company has since gone on to bid successfully on two regional contracts that neither predecessor firm could have won independently, which was the entire strategic point of the merger. Reza has stayed on through the transition period as planned, and the staggered put rights mean the company is not facing a single large repurchase obligation in any one year — the earliest tranche will not open for several years yet, by which point the merged business's earnings, and therefore the buy-back price, should reflect whatever the combined company has actually achieved rather than a number frozen at the moment of the original deal.

This was a clear win for the client: the financing gap that could have stalled or unravelled the merger was closed without straining Niloufar's cash position, and the mechanism that will eventually convert Reza's and Marco's equity back to cash is one the company can actually afford to honour when the time comes.

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