Looking for ways to get more value out of your sales negotiations? You may be able to do so by negotiating a right of first refusal.
A right of first refusal—sometimes called a matching right or right of first offer—is a contractual guarantee that allows one party to match any offer the other side later receives for the asset or issue being negotiated, explains Harvard Business School and Harvard Law School professor Guhan Subramanian.
Here’s how a right of first refusal might work in practice. Imagine you’re a landlord negotiating a lease with a prospective tenant. You want to preserve the flexibility to sell the apartment someday. Your tenant, meanwhile, wants long-term stability and hopes to avoid being forced to move.
A right of first refusal can bridge this gap. By giving the tenant the right to match any legitimate third-party offer for the apartment, the tenant gains protection against displacement, while you retain the ability to sell to the highest bidder. Properly structured, the arrangement can create value for both sides.
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Rights of first refusal can be powerful, win-win tools in business negotiation—but only if they’re negotiated carefully. Poorly designed rights can easily undermine the very benefits they’re meant to provide.
Don’t Forget the Details
Too often, agreements that include a right of first refusal are vague about what actually happens when the right is triggered, Subramanian cautions. For example, parties frequently fail to clarify what occurs after a right holder chooses to match a competing bid.
Does matching the offer end the process—or does it initiate a bidding war?
It’s also essential to specify how much time the right holder has to decide whether to match an offer. “If the duration of the right of first refusal is ambiguous,” warns Subramanian, “a third party could short-circuit your right by making an exploding offer with a short fuse.”
In other words, time pressure can effectively nullify your right. To protect yourself, negotiate clear timelines that provide sufficient opportunity to evaluate and respond to competing offers.
Negotiate the Type of First Refusal
In the most common version of a right of first refusal, the right holder is allowed to match the highest offer the seller receives—without participating in an auction.
However, a different version is common in certain real estate, media, and entertainment markets. In this arrangement, the right holder must either accept or reject the seller’s stated price before the asset is offered to others. If the right holder declines, she forfeits the ability to match any future offers.
Research by Brit Grosskopf of Texas A&M University and Alvin Roth of Harvard University shows how this structure can turn an apparent advantage into a liability.
Suppose you hold a right of first refusal on a property you value at $500,000. If you’re allowed to match competing bids, you might benefit from weak market conditions and acquire the property for $400,000. But if you must respond before the market is tested—and the seller names a price of $475,000—you’re forced dangerously close to your limit, with little information to guide your decision.
In effect, this second type of right of first refusal leaves you bidding against yourself.
The lesson is clear: not all rights of first refusal are created equal. When negotiating one, pay close attention to the mechanics. The wrong structure can quietly erode your bargaining power.
Advice for Third Parties
What if you’re a third party considering an offer that would trigger a right of first refusal? According to Subramanian, you face a classic dilemma.
If the right holder exercises its matching right, you may waste time and resources conducting due diligence and negotiating a deal you can’t close. But if the right holder declines, you may have overpaid—because the right holder likely had superior information about the asset’s true value.
For these reasons, many negotiators are wary of deals involving a right of first refusal.
That said, certain conditions can make such negotiations worthwhile. You may want to proceed if:
- The right holder lacks the liquidity to match your offer.
- You have information that is equal to—or better than—the right holder’s.
- You bring unique value to the transaction that the right holder cannot replicate.
When one or more of these factors apply, making an offer that triggers a right of first refusal can still be a rational—and potentially profitable—move.
Have you ever negotiated a right of first refusal, and if so, how did it turn out?
Claim your FREE copy: Business Negotiation Strategies: How to Negotiate Better Business Deals
Discover step-by-step techniques for avoiding common business negotiation pitfalls when you download a copy of the FREE special report, Business Negotiation Strategies: How to Negotiate Better Business Deals, from the Program on Negotiation at Harvard Law School.
