What Is a Right of First Refusal?

Definition: Gives a specific party the right to enter into a business transaction before anyone else can.

Often abbreviated ROFR. Easily confused with a right of first offer (ROFO), a right of first negotiation, and a matching right — which cost you very different amounts.

Four different rights with similar names

Contracts use these labels loosely, so read the mechanism rather than the heading:

• Right of first refusal (ROFR) — you must first agree a deal with a third party, then bring it to the holder and let them match it.
• Right of first offer (ROFO) — you must offer it to the holder before going to the market. If they pass, you are free.
• Right of first negotiation — you must talk to them first, for a stated period, before approaching anyone else.
• Matching right or last look — they can beat a third-party offer after seeing its terms.

These are not variations on a theme. A ROFR is the most expensive of the four for the party granting it, and a right of first negotiation is by far the cheapest. If a document is headed “right of first refusal” but the mechanism is a first offer, the heading is not what binds you.

The effect most people do not anticipate

A ROFR makes you less attractive to third parties, and that is usually the real cost.

Consider it from a serious buyer's side: they must spend weeks and real money on diligence, legal fees and internal approvals, knowing that at the end the incumbent can simply match their price and take the deal. Many will not bid at all, and those who do may bid lower to compensate for the risk of wasted cost. So a ROFR can reduce what you receive without the holder ever exercising it.

Where it bites

• Long response windows. A holder with a generous period to decide can stall a transaction until the third party loses interest.
• “Substantially similar terms.” This is where the disputes live. If the third-party deal includes non-cash elements — shares, an earn-out, a commercial commitment, a role for the founders — what does matching actually mean? Without a valuation mechanism, the answer is argument.
• A trigger drafted too widely. Internal reorganisations, transfers to a holding company, transfers to family members, or a change of control at a parent may all count as a “transfer” if the definition is broad.
• No expiry. A perpetual right over an asset is an encumbrance that travels with it and shows up in every future diligence exercise.
• Silence is not waiver. If the clause does not deem non-response to be a waiver, you may be unable to close without an express written answer — and a holder who simply does not reply becomes a veto.
• It revives. Some rights apply afresh to every transaction, so waiving once buys you nothing next time.
• Forced disclosure to a competitor. If the holder is a competitor, an obligation to reveal the third party's identity and full terms is a commercial problem quite apart from the transaction.
• It is assignable. A transferable right can end up held by someone you would never have granted it to.

What to negotiate

• Prefer a ROFO, or a first-negotiation right, over a ROFR. This is the single largest lever available.
• A short, hard response deadline, with silence deemed a waiver.
• One bite. A waiver on one transaction ends the right, or suspends it for a stated period.
• Carve-outs for transfers to affiliates, to family, on death, in an internal reorganisation, and for transactions below a stated value.
• An expiry date.
• A mechanism for non-cash consideration — an agreed valuation method, or a right for you to require an all-cash match at an equivalent value.
• Limit disclosure to the economic terms needed to match, not the third party's identity or its confidential information.
• A cost contribution if the right is exercised after a third party has incurred diligence expense, or after you have incurred transaction costs.
• Make it non-assignable.
• Add a process, with dates. Notice, response window, deemed waiver, completion deadline for the holder if it exercises — including what happens if the holder exercises and then fails to complete.

What a reasonable version looks like

A ROFO or first-negotiation right rather than a full ROFR; a short defined window with deemed waiver on silence; carve-outs for internal, affiliate and family transfers and for small transactions; a stated expiry; a defined method for handling non-cash terms or an all-cash alternative; limited disclosure; non-assignable; and a completion deadline with consequences if the holder exercises and does not close.

What to push back on hardest

• A perpetual, assignable ROFR with no expiry.
• A long or open-ended response window.
• “Substantially similar terms” with no valuation mechanism and no all-cash alternative.
• A trigger that catches internal and family transfers.
• A right that revives after each waiver.
• An obligation to disclose a competitor's confidential offer terms in full.
• No consequence if the holder exercises and then fails to complete.

Questions worth asking before you sign

• Is this a right of first refusal, a right of first offer, or something else? Describe the sequence.
• What exactly triggers it?
• How long do you have to respond, and what happens if you do not?
• How do we value non-cash consideration?
• Does the right expire?
• Can you transfer the right to someone else?
• Are internal, affiliate and family transfers excluded?
• What must I show you about the other offer?
• What happens if you exercise and then do not complete?

Related clauses

• Exclusivity clause
• Governing law clause
• Integration clause

Not legal advice. What's My Contract is not a law firm, and this page is general information about how a clause of this type is usually written — not advice about your contract, and not a statement of the law in any particular place. How a clause is read, and whether it can be relied on, depends on where you are, what the rest of the agreement says, and facts a general explainer cannot know. Before you sign, refuse, or act on any clause, have a lawyer licensed in your jurisdiction read your actual document.