Right of First Refusal? No, It's a Trap For the Unwary

Sounds reasonable, gives an inside advantage to a favored manager, employee group, supplier, competitor, whoever may be asking for it, but does it really make any sense? Should you honor the request?

I think not.

It is a huge interference with a potential sale to another bona fide buyer and thus I question the viability of such an agreement to the seller. What possible benefit does the seller experience for such an arrangement and what are the detriments?

Follow the mechanism, as this is where the problems originate. First let's say you have given a right of first refusal to a manager who wants to someday buy your business. You like the man, trust him, he has worked hard for you for years and you believe he wants to buy and someday will, so you give him the right of first refusal to protect his opportunity.

Then a bona fide real buyer enters the picture, or perhaps you put the business up for sale telling your manager his time has come. The real buyer makes an offer. Then what? You must inform the holder of the right of first refusal that an offer has been made and now the holder must act. He then must submit his offer, and arrange for financing. This will take 90 - 120 days maybe longer and in the meanwhile the real buyer has gone elsewhere not interested in waiting to see if his offer will be accepted and believing it probably will not.

Worse yet, what if the holder of the right of first refusal cannot get financing after months of trying? Two losses now: the original buyer and the holder of the right. It's an awful situation and likely to cause long term problems between all the involved parties.

What benefit did the owner/seller receive by giving out the right of first refusal? None at all, it was an emotional decision that gave him no advantage or benefit whatsoever.

In fact many business brokers will not even accept a Contract To Sell A Business if a right of first refusal has been granted, too messy, it never works and not worth the investment in time should he find a real buyer.

Resist the temptation; it serves no viable purpose other than interfering with a business opportunity. If your manager wants to buy the business tell him to produce an offer and get it financed, you will be glad to entertain the offer. Do not give out the right of first refusal, you will regret it.

Donald Todrin is the CEO and Founder of Second Wind Consultants, Inc. who specializes in SBA Loan Workouts, business debt forgiveness and solving difficult business problems in general. Don has authored dozens of articles on SBA loan default and debt workouts. Follow Don on Twitter and join his Facebook fan page.

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