How To Use The Right of First Refusal To Create Better Deals

by drjim on November 16, 2018

Including a right of first refusal can enhance your negotiating skills

Including a right of first refusal can enhance your negotiating skills
Image Credit: danaspencer

There are some negotiating situations that we can find ourselves in that are trickier than other. For example, if you were negotiating the lease of a warehouse for yourself but you though that someone else might come along in the future and offer to pay more than you to the landlord, you wouldn’t want to get asked to move at a time that was inconvenient for you. In order to prevent this, you could have a right of first refusal baked into your contract that would allow you to match any higher offer that your landlord was offered so that you didn’t have to move. Just exactly how does this right of first refusal thing work?

It’s All About The Details

The good news about a right of first refusal is that it can be a win-win tool that can enhance your business negotiation skills, but to ensure that they are mutually beneficial, they need to be negotiated with care. One area that needs special attention from you has to do with the details of the deal. A good example of the details that you are going to have to work out includes situations in which things are overly vague about what will happen when a right holder exercises that right. The big question that you are going to want to make sure that you have an answer to includes what will happen if you choose to match a competing bid. When you match a competitor’s bid, will this end the competition or launch a bidding war?

Another detail that you have to worry about has to do with time. When someone else makes an offer to the other side, you are going to have to decide whether to match that offer. Where you can run into problems is if the duration of the right of first refusal that you’ve set up is ambiguous. In this case, a third party could short-circuit your right by making an offer with a short fuse. What could happen is that time pressure could keep you from being able to successfully match an offer. What this means for you is that you need to negotiate ample time in your right of first refusal for you to respond to a competing offer.

What Type Of First Refusal Do You Want?

It turns out that there are a number of different types of first refusal agreements that you can set up. In most cases, the holder of the right of first refusal only has to match the high bid that that seller receives without engaging in the auction. When we are setting a right of first refusal, this is pretty much what we want.

However, there is another type of right of first refusal that’s common in certain entertainment and real-estate markets. Under the terms of this type the right holder must accept or reject the seller’s specified price before other potential buyers are offered the same deal. If the right holder refuses the price, you will forfeit the chance to match other offers. This can can turn the apparent blessing of a right of first refusal into a curse. Not every right of first refusal is created equal. When negotiating one, you need to be careful that the specific terms won’t backfire on you later.

A Bit Of Advice

When dealing with a right of first refusal, you need to carefully plan out your actions. What if you’re thinking about making an offer that would trigger a right of first refusal between the other two parties? You face a dilemma. If your would-be competitor exercises its right of first refusal, you might waste time conducting due diligence and negotiating. But if the company doesn’t exercise its right of first refusal, you likely have overpaid. Why? Because the company probably has better information about the true value of the purchase than you do. For this reason, many negotiators avoid deals that trigger a right of first refusal.

This all seems to be cut and dried, but when negotiating business deals, some circumstances eliminate those concerns. First, the right holder might not be able to match your offer due to a lack of cash. Second, you may have just as much or better information about the value of the asset as the right holder. Third, you might bring some special value to the table that the right holder lacks. If any of these justifications apply, you should feel comfortable making a bid.

What All Of This Means For You

As negotiators it is important that we know and understand what options are available to us in addition to our negotiation styles and negotiating techniques when we sit down to a principled negotiation. An important tool that we can use in a negotiation is the right of first refusal. Adding this condition to a deal means that if the other side gets a better offer, we can keep our deal in play by matching the other offer. However, there are things about this tool that we need to be aware of.

One of the keys to using a right of first refusal correctly is to make sure that you work out all of the details early on. You need to fully understand what would happen if you chose to make a competing bid and how much time you would have to make that bid. You also have to work out when you would have to accept or reject the other side’s specified price – do they actually have another bidder? Finally, once you have a right of first refusal in place, you are going to have to very carefully decide if this is going to be something that you want to trigger. Make sure that you understand all of the circumstances.

The right of first refusal is a powerful tool that negotiators can use to ensure that the deal that they have been able to reach with the other side will remain in effect. However, as is always the case with powerful tools, you need to be very careful how you go about using it. Take your time when setting up a right of first refusal in order to ensure that the deal that you put in place will behave the way that you are going to want it to.

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

Question For You: How can you make sure that the other side really has another bidder when they tell you that you have to make a counter bid?

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What We’ll Be Talking About Next Time

In the world of negotiating no matter what negotiation styles or negotiating techniques are being used, there is one thing that we can all count on eventually encountering: threats. The threats that we’re going to run into can take on many different forms. The other side of the table may threaten to walk away, file a lawsuit, or damage your reputation. When this happens, we need to be ready for it. What action should you take as a negotiator in order to keep your negotiation on track?

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