What Is a Negotiated Sale?

A negotiated sale is the sale of a financial instrument in which the issuer of that instrument and the underwriter work out the terms of the sale between them, without engaging in any type of bidding process involving several different underwriters. With this approach, the issuer and the selected underwriter come to terms on every provision related to the issue of the instrument, a process that can often hasten the issue date of the instrument and allow the issuer to begin enjoying benefits as the instrument is purchased by investors.

One of the easiest ways to understand how a negotiated sale comes about is to consider officers of a municipality who wish to issue a bond in order to fund some sort of improvement or expansion project for that city or town. Rather than putting the underwriting out for bidding to several different potential underwriters, the officers will select a single underwriter and work closely to determine the terms and provisions related to the bond, such as the duration of the issue, whether the bond will pay based on a fixed or variable rate of interest, and even which circumstances must be present before the bond can be called prior to the maturity date. Once the underwriter and the issuer have come to terms on the structure of the bond issue, then the bond can be offered for sale to investors.

Since the underwriter is essentially backing the issue of the financial instrument, arriving at consensus on issues such as the public offering price is crucial. As part of the process, both parties will typically present their ideas of how the instrument should be structured in order to provide the best possible benefits to everyone concerned, then work together to come to some sort of agreement on each provision related to the sale of that instrument. Under the best of circumstances, the process involved with the negotiated sale is accomplished with relatively few delays, making it possible to introduce the instrument into the appropriate market or markets quickly and easily.

There are benefits and potential liabilities with the use of a negotiated sale strategy. Choosing a single underwriter rather than going through a bidding process will often save time and money over putting the underwriting out for bids, allowing the bond or other instrument to be issued sooner rather than later. At the same time, choosing to not allow multiple underwriters to bid on the issue of the instrument may also mean that the issuer misses the chance to work with an underwriter who ultimately would have brought additional expertise to the task. For this reason, using a negotiated sale works best when the selected underwriter and the issuer have worked together in the past and found the relationship to be mutually beneficial.