What is a Break Price?

Malcolm Tatum

A break price is the price that is most likely to lead to the occurrence of a transaction. Sometimes known as the breaking price, identifying this ideal price often involved engaging in some negotiations that continue until a price is determined that is acceptable to all parties concerned. Activity of this type can take place as part of many different types of financial situations, including the purchase of assets for investments.

Man climbing a rope
Man climbing a rope

One of the easiest ways to understand the concept of a break price is to consider the purchase of a new home. Realtors typically list properties at offering prices that are determined with the approval of their clients. At the same time, these prices represent what the owners hope to get for the property, not necessarily what they are willing to accept in the way of offers. Should a prospective buyer express interest, he or she may submit a bid or price that is lower than the posted asking or offering price. At that juncture, the two parties may begin to negotiate offers, with the owners offering deals lower than the original asking price and the buyers incrementally increasing their bids. Assuming the two parties finally arrive at a purchase price that everyone considers acceptable, that figure is known as the break price.

A break price does not have to be associated with the sale of a major asset. Even a transaction that takes place at a neighborhood yard sale may involve a breaking price. This occurs when a shopper notices an item that is marked with a certain price, then approaches the seller with an offer of a different price. If the seller chooses to accept the offer, that amount can rightly be referred to as the break price.

The same general approach can be applied to equities. Here, the idea is to adjust the bid prices so that all parties involved consider them to be more realistic in the current market situation. Ideally, the current holder of the equities will find an offer from the investor to be sufficient, accept that offer, and the sale takes place. Unless the two parties can come to some sort of agreement on the price for the equities, no break price is identified and the sale does not occur.

It is important to note that a break price is achieved only when all parties involved agree on the cost associated with a given transaction. This means that if there is no willingness on the part of all parties to negotiate, then a break price will not emerge. For this reason, the term is not normally used to identify the price or cost of transactions in which the owner posts a set price and is not willing to entertain any counter-offers from potential buyers.

Readers Also Love

Discuss this Article

Post your comments
Forgot password?