Introduction

When you hear “right of first refusalˮ (ROFR), it might sound like something that gives you power. After all, who wouldnʼt want the first crack at a deal? But, in reality, this type of clause can sometimes be more of a headache than a helpful tool, especially if youʼre the one trying to sell or expand your business. Letʼs explore why a right of refusal option can be a bad for your business.

Read: What are tag along rights?

What is the right of refusal?

Before we get into the nitty gritty, letʼs define just what exactly a right of first refusal is. A right of first refusal gives someone the chance to step in and match an offer you receive on something youʼre selling—whether itʼs property, shares, or even a product license. This person, often a current stakeholder like a tenant, shareholder, or partner, gets first dibs before you can sell to someone else.

So, instead of freely selling to the highest bidder or someone who offers great terms, you have to turn to the holder of the ROFR and say, “Hey, want to match this?ˮ

Sounds simple, right? Well, itʼs not always as great as it seems.

Why can the right of first refusal be bad?

It slows everything down

Imagine youʼve finally got a good offer on that piece of property or business stake youʼve been looking to sell. But wait—before you pop the champagne, you have to ask the person with the right of first refusal if they want to match it. And hereʼs where things can get dicey.

The right of first refusal holder has time to think it over, dragging out your sale process. During this period, the initial buyer might get cold feet or find another deal, leaving you with nothing but a wasted opportunity and a bruised ego.

Why itʼs bad: Delays mean lost deals, and as any business owner knows, time is money.

It scares away potential buyers

Speaking of buyers with cold feet, many potential investors or buyers hate the idea of being second in line. Why go through all the hassle of making an offer, negotiating, and preparing contracts when someone else can just swoop in and steal the deal?

For example, if youʼre selling shares in your company and a shareholder has a right of first refusal, outside investors might be turned off. They donʼt want to go through the process of making an offer, only to have the current shareholder say, “Thanks for the legwork, weʼll take it from here.ˮ

Why itʼs bad: Fewer offers and less competition can result in lower prices or missed opportunities.

You could miss out on a better deal

Hereʼs a fun one: what if someone with the right of refusal decides to match the offer, but they werenʼt your first choice for a reason? Maybe the third-party buyer came with better financing terms, a stronger reputation, or future partnership potential. Unfortunately, with a right of first refusal in place, youʼre stuck with whoever holds the right, even if they donʼt offer the non-monetary benefits you were hoping for.

Letʼs say youʼre selling your company to a strategic buyer who can bring extra value beyond cash, like industry expertise or expanded networks. If your right of first refusal holder matches the cash offer, you lose out on the “extras.ˮ

Why itʼs bad: You might get the same price but lose out on valuable perks that couldʼve taken your business to the next level.

The right of first refusal holder might not be prepared

Not everyone who holds the right of first refusal is actually ready to exercise it. If the holder is an individual or small company, they may not have the financial resources or ability to move quickly on the deal. But, guess what? You still have to give them the chance to try. And if they fail to come through, you're back at square one, chasing other buyers or investors.

Why itʼs bad: Time wasted on unqualified buyers equals lost opportunities. Plus, it can damage your relationship with potential serious buyers who don't appreciate being in limbo.

Read: What is a letter of intent to purchase a business?

An example of a right of first refusal in action

Letʼs say you own a small manufacturing company that produces eco-friendly packaging. Youʼve built a solid client base and recently attracted a major retailer that wants to partner with you. They make an offer to buy a 30% stake in your business and help expand your production capacity, which would open doors to larger contracts and growth opportunities.

However, one of your original investors—who holds a right of first refusal—now has the option to match the retailerʼs offer. While this investor provided crucial funding when you were just starting, they donʼt have the industry connections or resources to help you grow your manufacturing operations.

In this case, the investor could choose to match the financial offer, but youʼd miss out on the additional value that the retailer brings—like industry expertise, larger distribution channels, and credibility in the market. The right of first refusal has limited your ability to choose the best long-term partner for your business. Ouch.

Legal and financial implications of a right of first refusal

When you include a right of first refusal clause in your contract, youʼre giving the holder more than just the first chance at an offer. Youʼre giving them leverage over your decisions. This can affect the value of your assets or the flexibility you need to grow your business.

Letʼs take real estate, for example. If you're selling property with a right of refusal clause, your potential buyers might be deterred, knowing that the tenant can match their offer and block the sale. This lowers the perceived value of the property because it reduces the competitive market.

From a legal perspective, right of first refusal clauses need to be airtight, and if they're vague or poorly written, they can lead to disputes. If the right of first refusal holder feels like they werenʼt properly informed or that the offer details werenʼt clear, you could be heading for a legal battle. At best, this means delays; at worst, itʼs a costly court case.

Why itʼs bad: Legal ambiguities create risks. Any misunderstanding about the terms can land you in legal hot water and slow down your business dealings.

Can you waive a right of first refusal?

Yes, a right of first refusal can be waived, but it needs to be done in a clear and formal manner. If the holder decides theyʼre not interested in matching the offer, they can waive their right to step in.

This can speed up the sale process and avoid delays, but itʼs important that this waiver is done properly to prevent future legal complications.

Read: Caught with a cross border contract? Here's the fix

How to waive a right of first refusal

Hereʼs how to waive a right of first refusal smoothly, without any bumps along the way.

Written waiver

First things first, put it in writing. The waiver needs to be documented and signed by the holder of the right. This way, thereʼs a clear record that theyʼve formally given up their chance to match the offer—no take-backsies allowed.

Timing is everything

Most contracts come with a deadline for exercising the right of first refusal. If the right holder doesnʼt act within that timeframe, they risk losing their chance—like missing the last slice of pizza at a party. To be on the safe side, itʼs smart to get a signed waiver even if the deadline has passed. This helps avoid any future "Wait, I thought I could still do that" moments.

Release of liability

When waiving the right of first refusal, itʼs also a good idea to include a release of liability. This means the holder agrees to absolve themselves of any future claims related to the sale. Itʼs like signing a peace treaty: both parties walk away knowing there are no hard feelings or lingering disputes.

Why waiving the right of first refusal can be beneficial

Waiving the right of first refusal can actually be a win-win for everyone involved. Hereʼs why it might be a smart move.

Avoid delays

Getting a waiver allows the transaction to move forward without waiting for the holderʼs decision.

Protects the seller

A written waiver acts like a shield for the seller, preventing the holder from disputing the sale later on. Who wants to deal with a messy legal battle down the road? Itʼs much easier to avoid potential drama by having everything clearly documented upfront.

Keep relationships intact

Waiving the right of first refusal can keep goodwill, as it shows that the right of first refusal holder is voluntarily stepping aside without forcing legal action or delaying the deal.

Read: What you should do if a client refuses to sign your contract

Common misconceptions about a right of first refusal

It always benefits the rights of first refusal holder

Many think having a right of first refusal is always a win for the holder, but that's not always the case. If the holder isnʼt prepared to match an offer, it can put them in a tight spot, forcing them to scramble to gather resources or miss out altogether.

It guarantees a sale

Just because someone has the right to match an offer doesnʼt mean the deal is automatically sealed. The right of first refusal holder can still turn down the offer, leaving the seller to find another buyer, which could take additional time and effort.

Itʼs only for real estate deals

While ROFR is common in real estate, itʼs used in various industries, from business partnerships to intellectual property licensing. Itʼs a versatile clause, which is why it can sneak into different kinds of contracts.

Are there better alternatives?

So, if the right of first refusal is so problematic, what can you do instead? Here are a few alternatives that might protect you while still giving the other party some rights:

Right of first offer (ROFO)

Instead of giving someone the power to match an offer, a right of first offer means they get the chance to make an offer before you open up to the market. If you donʼt like their offer, youʼre free to shop around for better deals.

Buy-sell agreements

These are pre-agreed terms for how assets will be sold if a specific event (like an ownership change or sale) happens. Everyone knows what to expect, and thereʼs less room for surprises.

Exclusivity periods

You can give the interested party an exclusive window to make an offer, but if they donʼt act within that time, youʼre free to negotiate with others. This prevents unnecessary delays.

Read: How long do NDAs last?

Conclusion

While the right of first refusal sounds like a good way to keep control or offer an opportunity to a trusted partner, it can cause significant delays, scare off buyers, and limit your options.

For some businesses, it creates more headaches than it solves. By exploring alternatives like the right of first offer or more structured buy-sell agreements, you can protect your business interests without getting bogged down by the limitations of a right of first refusal clause.

So, if you're considering adding this clause to a contract—or if you're already stuck with one—make sure to understand the risks involved and explore your other options. In many cases, silence really is golden.

How Cobrief can help with contract review

Reading your business contracts can feel overwhelming as an owner-manager of a small to medium-sized business. Thatʼs where Cobrief comes in. Cobrief helps business owners and operators review their business-to-business contracts for legal risks.

Upload your contract to Cobrief's AI contract review software, click review and youʼll get a list of all the risks, in plain English. This helps you decide whether to sign, negotiate or reject the terms of your contract, or hire a lawyer. Think of it as a heat map for your contracts.

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