Business, Legal & Accounting Glossary
Bait and switch is a deceptive means of sales where a product is advertised at an attractive price (bait) then the price or product is altered to the advantage of the advertiser (switch). The bait and switch tactic is often fraudulent and illegal, but sometimes a bait and switch can be performed in a more subtle and therefore technically legal manner. Often the consumer will grudgingly accept the bait and switch offer after investing considerable time and money on a particular purchase. For example, the bait and switch tactic may be used in mortgage sales when one interest rate is promised, but a higher rate is offered at closing. Not every counter-offer should be construed as a bait and switch.
n. a dishonest sales practice in which a business advertises a bargain price for an item in order to draw customers into the store and then tells the prospective buyer that the advertised item is of poor quality or no longer available and attempts to switch the customer to a more expensive product. Electronic items such as stereos, televisions, or telephones are favourites, but there are also loan interest rates which turn out to be only for short term or low maximums, and then the switch is to a more expensive loan. In most US states, this practice is a crime and can also be the basis for a personal lawsuit if damages can be proved. The business using “bait and switch” is an apt target for a class action since there are many customers but each transaction scarcely warrants the costs of a separate suit.
A bait and switch negotiation strategy occurs when a prospective buyer (strategic or private equity) bids the highest price during a competitive auction process and then dramatically cuts the purchase price after obtaining exclusive negotiating rights with the company. The price reduction is justified by issues discovered after more extensive due diligence on the business being sold.
Due diligence frequently reveals flaws that necessitate renegotiation of the purchase price or parameters of the initial transaction given prior to exclusivity. However, for a variety of reasons, private equity firms and corporate buyers are discouraged from using bait and switch techniques. If a prospective buyer develops a reputation for frequently bidding high and then dramatically lowering the value during exclusivity periods, they risk losing future dealflow or being employed purely as stalking horses to inflate the offer values of other favoured bidders. Prospective buyers also want to preserve a close relationship with the firm they are purchasing’s current management. A bait-and-switch tactic could jeopardise this working relationship in the future.
Competitive Bid Process
Controlled Auction
Exclusivity
Due Diligence
Auction Process
Strategic Buyer
Private Equity
Stalking Horse Bidder
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This glossary post was last updated: 21st January, 2022 | 0 Views.