When renewing a contract for services, suppliers often insist on the right of first refusal – giving them a chance to be first in line at the time of contract renewal if the buyer decides to invite competitive bids. Rights of first refusal can also give you a competitive advantage if the customer chooses to use additional services similar to what you offer. You could expand your customer presence by supplying these services to protect against the risk of a competitor breaking into your customer company.
One type of first-refusal right allows the former contractual supplier to renew the agreement by matching competing bids. Rights holders must match the highest bid without responding to a new RFP (Request for Proposal).
Another form of rights of first refusal requires the right holder to accept or reject the buyer’s demand before other potential suppliers are offered the same deal. Suppose the right holder refuses to meet the new specification, for example, a new price. In that case, she forfeits the chance to match other offers.
As an illustration, you hold the first refusal right to supply analytical services valued at $1000,000. Suppose you only have to match the best new bids at the time of renewal. In that case, you may renew the contract if the other suppliers exceed 1000,000. Suppose you must respond before the supply side is tested, and the buyer demands a lower price of $800,000. You may be pushed close to your limit yet feel reluctant to risk losing the business to a lower bidder. In essence, the second type of right leaves you bidding against yourself.
When negotiating with the right of first refusal on the table, make sure the specific terms will be okay for you in the longer term. Even perfectly negotiated agreements rarely become perfectly executed agreements. Therefore, negotiate the best terms for the deal while also thinking about implementation and the long-term viability of the contract.
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Satish Mehta
Author, Speaker, Coach
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