What Is a Counterbid?

A counterbid is a response to an offer or bid that is more favorable for one party than a previously submitted bid. A bid is an offer from a purchaser to buy an asset from a seller. During the negotiation process, it is not uncommon for each side to issue multiple counterbids. Both purchaser and seller may issue counterbids to each other in the process of reaching a price they can agree upon.

Key Takeaways:

  • A counterbid is a response to an initial offer or bid.
  • Either purchaser or seller can make counterbids, revising their offers until both sides can agree upon a price.
  • Counterbids may also come from a third party not involved in the original offer.

Understanding a Counterbid

The term "counterbid" is often used when discussing the acquisition of a business. Counterbids may also come from a third party not involved in the original offer. For example, suppose Company A submits a bid to purchase Company B. Then Company C submits a counterbid to Company B offering more favorable terms. Company B can decide to submit a counterbid to either party, or accept one of the offers.

During a sale, the purchaser makes an initial bid to buy an asset. If the seller doesn't like the initial bid, they can offer a counterbid, indicating a price or terms they are willing to accept. The purchaser can accept the seller's counterbid, or submit their own counterbid at terms that are more favorable than the initial bid, but less favorable than the seller's counterbid. Negotiations may go back and forth in this manner until a final price is agreed upon.

Counterbids are common in property sales. Real estate agents attempt to obtain the best price for their clients and typically have a threshold at which they will not negotiate further. Each party may continue to counterbid until they reach that threshold, at which point the deal is either sealed or abandoned.

Examples of a Counterbid

In July 2014, discount retailer Dollar Tree (DLTR) offered to buy rival Family Dollar Stores. However, Dollar General (DG) made its own offer to Family Dollar shareholders in August 2014. Dollar General's offer for Family Dollar was a counterbid to Dollar Tree's original offer.

Here is another example. Aaron is selling his home. Susan makes a bid for Aaron's home that is $10,000 less than the asking price. Aaron can go back to Susan with a counterbid that is $5,000 less than his original asking price. The terms of Aaron's counterbid are more favorable to him than Susan's first counterbid. Susan can choose to accept the counterbid or submit another counterbid to Aaron.