What it means
When a company raises money by issuing shares or bonds, the banks running the deal charge a gross spread, the difference between what investors pay and what the issuer receives. That spread is split three ways: a management fee for structuring the deal, an underwriting fee for taking the risk, and a selling concession for distribution.
The selling concession is normally the largest of the three, often around 60% of the spread, because placing paper with real buyers is the hardest part of the job. Syndicate members earn it per unit sold, so a bank that shifts more shares takes home more whatever its formal position in the deal.
In municipal bonds and some retail offerings the concession is quoted in points or fractions of a point, which is simply a percentage of face value. Half a point on a $1,000 bond is $5 to the selling dealer, and dealers who buy for their own book at a further reduction are said to receive the deal net of concession.
Outside the securities world, finance teams meet concessions in ordinary commercial negotiation, and the discipline is to price them. A 2% early settlement discount, thirty extra days of credit or a free implementation month all cost real money, and treating them as goodwill rather than as a number is how margin leaks away quietly.
The useful habit is to trade concessions rather than give them, matching every price reduction with a longer contract, a larger volume commitment or faster payment. Sales teams that log the cash value of each concession granted usually find the annual total is far larger than anyone assumed.
In practice
Real-world examples.
Example
A mid sized manufacturer issues $50,000,000 of bonds with a 1.5% gross spread. The lead bank keeps the management and underwriting portions and passes a 0.9% concession to four smaller dealers who place the paper with pension funds.
Example
A commercial landlord agrees a rent concession of six months free on a ten year lease at $400,000 a year. The accounting team spreads the $200,000 given away across the full term rather than recognising a rent free period followed by a jump.
Example
A software sales director concedes a 15% discount to close a $600,000 renewal in the final week of the quarter. Finance later calculates the concession cost $90,000 of pure margin and introduces a rule that any discount above 10% must be matched by a two year commitment.
Think of it
“Concession is a sweetener from the landlord-discounts or perks to get you to sign.
Formula
Calculation
Selling concession earned = concession per unit x units placed
An invented software company floats 10,000,000 shares at $20 each, raising $200,000,000 at the offer price. The syndicate charges a gross spread of 5%, which is $1.00 per share or $10,000,000 in total, and that spread is split into a $0.20 management fee, a $0.20 underwriting fee and a $0.60 selling concession.
A regional broker in the syndicate places 500,000 shares with its clients, earning 500,000 x $0.60 = $300,000. The issuer receives $200,000,000 - $10,000,000 = $190,000,000 in net proceeds, and the $0.60 concession represents 60% of the $1.00 total spread.Case study
Seen in the real world.
The following is a fictional, illustrative scenario. Harborline Instruments, an invented laboratory equipment maker, listed on a public market and paid a 6% gross spread on a $120,000,000 raise, or $7,200,000 in fees. Its finance director never asked how the spread was divided and assumed the lead bank simply kept it.
When the company returned to the market two years later, a newly hired treasurer requested the breakdown and found the selling concession was $0.72 of a $1.20 per share spread. She negotiated a lower total spread of 5% in exchange for allowing a wider syndicate to share the concession, which meant more dealers had an incentive to sell and the book still filled comfortably.
On the fictional second raise of $150,000,000 the lower spread saved Harborline $1,500,000, money that went straight into the research budget. The lesson the illustrative treasurer drew was simple: a concession is a price, and prices are negotiable when you understand what is being bought.
Watch out
Common mistakes.
- Assuming the lead underwriter keeps the whole gross spread, when the selling concession is usually the largest single component and goes to distributors.
- Granting commercial concessions without recording their cash value, so nobody ever sees the cumulative margin given away in a year.
- Confusing a concession with a rebate, when a concession is agreed up front as part of the deal terms rather than paid back later against performance.
Questions
People also ask.
Does a bigger concession mean a better deal for the issuer?
No, it usually means a wider spread and higher total cost, though it can help a difficult offering find buyers.
Are concessions taxable or deductible for a business granting them?
A commercial concession simply reduces revenue or increases cost in the accounts, so it flows through profit in the normal way.
What is the single best way to control sales concessions?
Require approval above a set threshold and insist that each concession is exchanged for something measurable, such as term length or payment timing.
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