Use of the “first right of refusal.”
In negotiation, including a “first right of refusal” in an agreement can deliver a win-win outcome.
Suppose you are a marketing analytics company negotiating with a QSR (Quick Service Restaurant). You want a commitment to provide analytical services for as long as you want. However, the large QSR wants the ability to change the provider to save costs.
Solution?
The solution might be for you to have the “first right of refusal” – the right to match the price and terms of any legitimate third-party offer. This way, the QSR maintains flexibility, and the marketing analytics services company avoids losing an established customer and relationship.
The first right of refusal also creates value through tradeoffs on negotiators’ varying expectations. Let’s say that an employee buys a 10% ownership stake in a private company, assuring the company her intent to hold the stake for a long time. It is easy for the employee to give and valuable for the company to receive. If the company is not as sure about her plan, the first right of refusal offers an ideal solution.
The first right of refusal allows the employee/investor to signal her commitment to the company by making it more difficult to exit. Of course, there is a downside. The first right of refusal can deter third-party bidders, which will work against the grantor’s interests.
When considering granting a first right of refusal, a skilled negotiator balances the benefit of value creation against the potential cost of scaring away high bidders.
In the acquisitions industry, most deals require the seller to let the buyer know if a better proposal comes. Often the buyers insist on receiving an exclusive negotiating period during which they could decide to exercise their first right of refusal and meet or beat the other bid.
Most first rights of refusals have an underlying structure. The grantor gives the right holder the right to buy an asset on the same terms that the grantor would receive from any other bona fide prospective bidder.
