A concession is a selling group's take as per 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 of per-bond basis. Included in the underwriting spread is the management fee, selling concession, and underwriter's compensation.
Breaking Down Concession
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. An underwriter is not always responsible for the securities it does not sell, as 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.
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.
Various Definitions 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 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. Most commonly, these concessions require the vendor to pay the building owner a certain percentage of all sales that take place within the facility.