Collar Agreement

Think of a dog collar. The goal is to rein your dog in...to control how far he can get. He can pull and twist and bark and jump, but he can never get more than the length of the leash away from you.

A collar agreement works much the same way. It limits the number of outcomes, keeping a deal within a leash length of a certain point. Typically, it involves setting a floor and a ceiling for a price.

You own a fleet of food trucks specializing in the cuisine of Denmark (you know, like Smørrebrød). There's another food truck in town that sells Danishes. Like...the pastries. You're tired of all your customers getting confused, so you decide to buy the Danish truck (the pastry one).

They agree to sell, but they want to hang on for three more months. They want the price to be based on the number of pastries they sell between now and then. You don't want to take a chance that they'll find a way to run up the price by selling a surprising number in the interim, so you ask for a price ceiling. No matter what, you won't pay more than $60,000 for the food truck. They say that's fine, but only if you agree not to pay any less than $40,000.

Now you have a collar agreement in place. The price won't be higher than $60,000 or less than $40,000 and will be set somewhere in the middle, based on the number of sales. The collar agreement keeps the price between two set bounds.