What is a 'Counterbid'

A counterbid is a response to an offer or bid that is more favorable than a previous bid. A bid is an offer made by a purchaser to a seller to buy an asset. During a bargaining process, it is not uncommon for each side to issue multiple counterbids as part of the negotiation. Either the purchaser or the seller may make counterbids opposing the other party's offer in order to reach an agreed price which more closely suits their goals. The term is often used in discussing the acquisition of one business, the seller, by another, the purchaser. Counterbids may also come from a third party outside of the original parties involved in an offer. For example, if company A submits a bid to buy company B, company C can submit a counterbid with more favorable terms than that of company A's offer to company B.

BREAKING DOWN 'Counterbid'

During a sale negotiation, the purchaser makes an initial bid to buy an asset. If the seller does not approve of this initial bid, the seller will give the purchaser a counterbid, indicating a purchase price or terms that are more favorable than the purchaser's initial bid. The purchaser can choose to accept the seller's counterbid, or can submit his own counterbid back to the seller at terms that were more favorable than his initial bid, but less favorable than the seller's counterbid. Negotiations go back and forth in this manner until a final purchase price is agreed on between both parties.

Examples of a Counterbid

In July 2014, discount retailer Dollar Tree (DLTR) made an offer to purchase competitor Family Dollar Stores. However, a third competitor, Dollar General (DG), made its own offer to Family Dollar shareholders in August 2014. Dollar General's offer for Family Dollar is a counterbid to Dollar Tree's original offer.

As another example, assume Aaron is selling his home. Susan makes a bid for the home to Aaron that is $10,000 less than the asking price Aaron published. Aaron can go back to Susan with a counterbid that is $5000 less than his original asking price. The terms of Aaron's counterbid are more favorable to him than the terms of Susan's first counterbid. Susan can choose to accept the counterbid, or issue another counterbid back to Aaron.

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