How Can You Use The Right of First Refusal In A Negotiation?

Including a right of first refusal in a negotiation can create value
Including a right of first refusal in a negotiation can create value
Image Credit: Daniel X. O’Neil

Negotiators are always looking for ways that they can get more value out of their next negotiation. Although there may be many different ways to accomplish this such as using different negotiation styles and negotiating techniques, one way that we tend to overlook too often is by negotiating a right of first refusal. Just in case anyone doesn’t remember what the right of first refusal is, also known as a matching right or right of first offer, it is defined as being a guarantee that one side to a business deal can match any offer that the other side later receives for what is being negotiated. As negotiators we need to realize that the rights of first refusal could be a win-win tool that can enhance your negotiation skills, but to ensure that it is mutually beneficial, it needs to be negotiated with care.

Make Sure To Not Forget the Details

It turns out, that just like everything in a negotiation, the right of first refusal requires you to get the details correct. A problem that negotiators seem to always be running into is that deals that guarantee a right of first refusal are too vague about what will happen when one side exercises that right. A good example of this kind of vagueness happens when right holders fail to negotiate what will happen if they choose to match a competing bid. The question is when you match a competitor’s bid, does this end the competition or will it launch a bidding war?

A key point that you always want to include when you are creating a right of first refusal agreement is to specify how long you have to decide whether to match an offer. Time pressure could keep you from successfully matching an offer. So, make sure that you negotiate ample time to respond to a competing offer.

Make Sure That You Clearly State The Type of First Refusal

Just because things are always better if they are more complicated, it turns out that there is more than one version of a right of first refusal. What this means for you as a negotiator is that you are going to have to explain the type of deal that you want very clearly.

Generally, the holder of the right of first refusal only has to match the high bid that that seller receives without actually having to engage in the auction. However, there is another type of right of first refusal in which the right holder must accept or reject the seller’s specified price before other potential buyers are offered the same deal. In this case, if the right holder refuses the price, they forfeit the chance to match other offers.

Some Words Of Wisdom For Negotiators Acting As Third Parties

So one of the things that any negotiator needs to keep in mind is that our actions may cause the other side to decide to work a right of first refusal into a deal that we are working on with them. If we run into this situation, then we will be facing a dilemma. If the other side exercises its right of first refusal, you might waste time conducting due diligence and negotiating. But if the other side doesn’t exercise its right of first refusal, you likely have overpaid. Why? Because the other side probably has better information about the true value of the purchase than you do. For this reason, it is common for negotiators to try to avoid deals that trigger a right of first refusal.

What All Of This Means For You

As negotiators what we know is that the more negotiating tools that we have at our disposal, the better the chances are of us being able to reach a deal with the other side. This can be very important if we run into a situation in which the other side is hesitant to do a deal with us because they think that someone else may come along and offer them a better deal. If we find ourselves dealing with this, then perhaps it will be time to offer the other side a right of first refusal?

A right of first refusal gives us the right to counter any offer that the other side might receive from another party. If we decide to include one of these in our next deal, we’re going to have to be careful to make sure that we don’t forget any of the details. We’re also going to have to realize that there are a number of different types of rights of first refusal and so we’re going to have to clearly spell out which one we want to execute as a part of this negotiation. We also have to be careful that our offers to the other side don’t suddenly cause them to decide to work a right of first refusal into the agreement that we are working on with them.

The goal of any principled negotiation is to find a way to reach a deal with the other side. In those cases that the other side believes that we may not be the only person who wants what they have to offer, the negotiations can drag out and reaching a deal may become elusive. However, with a tool like the right of first refusal we can get the other side to concentrate on striking a deal with us without having to focus on what other people may offer them. Next time you are in a negotiation, make sure that you consider using the right of first refusal as a powerful tool to get the deal that you want.

– Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World Negotiating Skills™

Question For You: If the other side offers you a right of first refusal, under what circumstances do you think you should refuse it?

Click here to get automatic updates when The Accidental Negotiator Blog is updated.

P.S.: Free subscriptions to The Accidental Negotiator Newsletter are now available. Learn what you need to know to do the job. Subscribe now: Click Here!

What We’ll Be Talking About Next Time

Negotiating is hard. Negotiating when you are a woman is even harder. Historically women have not been as aggressive as men. They have been willing to settle for what is offered to them. However, to truly be successful negotiators women need to start to think about what a man would be able to achieve in their position. What women need to start to do in negotiations is to start to employ more assertive behavior.

Leave a Comment