What is Right of First Refusal (ROFR)?
The Short Answer
Right of First Refusal (ROFR) explained simply
A Right of First Refusal (ROFR) is a legal clause. It gives a specific person or entity the first option to buy an asset. This happens before the owner can sell it to someone else. If the owner gets an offer from a third party, they must first offer it to the ROFR holder. The ROFR holder can then choose to buy it under the same terms. If they pass, the owner can sell to the third party.
Real-World Example
Selling a Business with a ROFR
Imagine a business owner, Sarah, wants to sell her company. Her operating agreement includes a ROFR clause. This clause states that her business partner, Tom, has the right of first refusal. Sarah receives an offer from an outside buyer for $1 million. Before accepting, Sarah must offer the business to Tom for $1 million. Tom can either match the offer and buy the business, or decline. If Tom declines, Sarah can then sell to the outside buyer.
Why this matters
ROFRs are important in business sales. They can affect who buys the business. They also impact the sale process. For sellers, it means they might have to offer the business to a specific party first. For buyers, it means they might lose out on a deal if a ROFR holder steps in.
Always check for ROFR clauses in any agreements. They can significantly impact your ability to sell or buy a business. Understand who holds the right and what triggers it.
Always check for ROFR clauses in any agreements. They can significantly impact your ability to sell or buy a business. Understand who holds the right and what triggers it.
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