What is a 'Concession'

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

BREAKING DOWN 'Concession'

When a publicly traded company wants to raise capital by issuing stocks or bonds, it hires an investment bank to handle the transaction. This process is called underwriting. The underwriter gets compensated for the securities it sells, but 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 any adjustments to the price in a transaction. This can include adjustments to the purchase price due to an initial inaccurate valuation, as well as compensation to a third party involved in administering the transaction. If an inaccuracy in the originally assumed value is responsible, it could be the result of faulty data or a change in the market in which the sale is based.

Concession Agreement

When a concession has been deemed a necessary part of the transaction, a concession agreement will become part of the deal. The document, similar to other forms of contracts, serves as a legally binding agreement between the two undersigned parties. The document contains the details upon which the concessions will or will not take place.

Examples 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 in question. Should this adjustment be agreed to, and become part of the official agreement surrounding the transaction, it would be considered a concession.

One common transaction, particularly at the consumer level, that often includes such concessions involves the purchase or sale of real estate, more commonly experienced with the housing market. In this scenario, both buyers and sellers may negotiate concessions, such as a change in the sale price of the home based on a change in valuation, such as a necessary repair being noted during the home inspection, or the addition of assets not previously listed in the negotiation, such as the inclusion of appliances that were previously not included in the deal.

A third example exists within the business model commonly referred to as concessions. This most notably occurs in locations similar to shopping centers 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.