Concession: Meaning of the Fee an Underwriter Receives

What Is a Concession?

A concession—also known as a selling concession—is the compensation a selling group receives as part of a stock or bond underwriting agreement. The calculation of compensation is the difference between what the public pays for the securities and what the issuing company receives from the sale based on a per-share or a per-bond basis. Included in the underwriting spread is the management fee, selling concession, and underwriter's compensation.

In business, other types of concessions exist for the acquisition of assets, the purchase of real estate, and the leasing of buildings and other property.

Key Takeaways

  • In finance, a concession refers to the compensation an underwriter receives for managing the sale of stocks or bonds for a company.
  • The underwriter is generally an investment bank that assumes the risk of marketing and distributing the shares of a new issue for a publicly traded company.
  • Another type of concession is a real estate concession, which is an agreement between a buyer and a seller to adjust the price or other terms of the sale based on a new condition, such as a home inspection that reveals the need for costly repairs.
  • Governments, corporations, and individuals can grant vendors concessions to allow access to property or buildings for the purpose of running a business.

How a Concession Works

When a publicly traded company wishes to raise capital by issuing stocks or bonds, it hires an investment bank to act as an underwriter and handle the transaction. The underwriter receives compensation for the securities it sells. This compensation is called a selling concession.

The underwriter is responsible for assisting the issuing company to distribute their securities. The underwriter will help with the filing of the appropriate documents with the Securities and Exchange Commission (SEC) and works with the company to set a date for the sale of the securities.

The underwriter purchases the company's shares and then sells them through its distribution network to the public at a higher price. While underwriters assume the risk of managing and selling shares, they are not always responsible for the securities they are not able to sell. These conditions will be outlined in the underwriting agreement.

Concessions can be involved in a variety of other transactions based on adjustments to the price in a trade. Adjustments can include changes to the purchase price due to inaccurate valuation and compensation to a third party involved in administering the transaction. Market changes and faulty data may cause an inaccurate valuation.

Concession Agreement

A concession agreement will become part of the deal when concessions are a necessary part of the transaction. The document, like other forms of contracts, serves as a legally binding agreement between the two undersigned parties. The concession agreement contains the details upon which the concessions will or will not take place.

In the case where an underwriter is managing the sale of a new issue for a company, the amount of compensation the underwriter will receive will be detailed in the concession agreement. The underwriter's compensation is calculated as a discount from the price of the new issue.

For example, if the issuing company sells the underwriter a series of bonds at $4,900 per bond, the underwriter may sell the bonds to the public for $5,000 each. The $100 difference represents the underwriting company's profit or concession.

Types of Concessions

As it relates to the finance industry, a concession may be present during the sale or acquisition of assets. The purchasing company may attempt to adjust the price based on the resources required to maintain the assets. If the adjustment is permitted and becomes part of the transaction's official agreement, it is a concession.

One ordinary transaction that often includes such concessions involves the purchase or sale of real estate. Real estate concessions are typical in the residential marketplace. In this scenario, both buyers and sellers may negotiate concessions, such as a change in the sale price of the property based on a change in valuation (e.g., repairs identified by a home inspection) or the addition of assets not previously listed in the negotiation (e.g., the inclusion of appliances).

Lastly, concessions most notably occur in locations like shopping centers, theaters, and sporting arenas. The vendors, as part of the rental agreement, often owe concessions to the building owner that go beyond the traditional rental fee. Governments, corporations, and individuals can grant concessions to allow another party access to a property or building. Most commonly, these concessions require the vendor to pay the building owner a certain percentage of all sales that take place within the facility.

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