Adapted from “Create Value with Matching Rights,” first published in the Negotiation newsletter.
The problem: You and your counterpart have different ideas about how much freedom you should have to negotiate with others and/or how long your agreement should last.
The tool: Matching rights (sometimes known as rights of first refusal) are a contractual guarantee between negotiators that one party can match any offer the other party later receives for a given asset. Once the exclusive domain of high-flying mergers and acquisitions specialists, matching rights are now common in many contexts, including procurement, real estate, and investment deals.
How it works: Suppose that a small-business owner is negotiating with a landlord over office space. The business owner wants the stability of a long-term lease, and the landlord wants greater flexibility. They can both meet their goals by adding a matching right to a short-term lease. When the lease expires, the landlord (the “grantor”) will be able to negotiate with other prospective tenants, and the business owner (the “right holder”) will have the chance to match the best offer from a third party.
What it can do: Inexpensive to give and valuable to receive, matching rights can be a negotiation no-brainer. By granting a matching right, you demonstrate your flexibility and goodwill. When you hold a matching right, you gain the opportunity to outbid a future competitor.
Operating instructions: If your counterpart offers you a matching right, negotiate these three important issues prior to acceptance:
1. If you match a third party’s bid, will your bid call off the contest or launch a bidding war?
2. How long would you have to decide whether to match a bid? Ensure that you won’t be rushed by a third party’s “exploding offer.”
3. Do you have to match a bid only on price, or on other terms as well (such as service terms and delivery in a purchasing contract)?
Safety warning: If you are a potential grantor, keep in mind that matching rights sometimes scare away third-party bidders who may be nervous about triggering a competing bid. Weigh the costs and benefits of offering a matching right one deal at a time.
If you’re a third party considering a bid that would trigger a matching right, remember that the right holder probably knows more than you do about the asset’s true worth. If the right holder doesn’t match your bid, you may have overpaid. If she does match, she’ll get the deal, and you’ve wasted valuable time. You can bid with greater confidence if you know that: (1) the right holder can’t match your offer due to outside factors, such as financial difficulties; (2) you actually have better information about the asset than the right holder does; or (3) you bring unbeatable value to the table.