- 29 Sep 2022
- René Armas Maes
- Aircraft Ownership
While you may have agreed a price for the aircraft you’re selling, what elements of the pre-purchase agreement and subsequent inspections need negotiating, and how? René Armas Maes explores…Back to Articles
Having previously discussed the key elements of a successful negotiation strategy to sell your business aircraft, we established that market research, including arranging an aircraft appraisal and reviewing upcoming regulatory compliance requirements, were core to understanding the true value of your aircraft, and pricing it appropriately. After all, a well-priced business aircraft ultimately strengthens a seller’s negotiating position.
But there are other negotiation tools and strategies that an aircraft seller needs to have in their armory to optimize the value of their aircraft, and we’ll discuss these here.
Legal Documents and Contracts
Assuming your attractively priced aircraft has rendered a Letter of Intent (LOI) from an interested buyer, the moment you accept the LOI, the door opens to a deeper level of negotiations to ensure the sale can proceed in a satisfactory manner for both parties.
While a competent legal team with extensive experience in aircraft transactions will navigate the path ahead for you, a thorough understanding of the areas that require negotiation is still vital to the seller.
Even before the aircraft purchase agreement is negotiated and signed, a security deposit will need to be paid into an escrow account – and this needs to be negotiated by the parties. The security deposit should be paid by the buyer after the LOI has been negotiated and signed by both parties.
Following this, an aircraft purchase (or sales) agreement needs to be established, covering areas such as the deal’s terms, price, agreed conditions, penalties, remedies to any foreseeable problems, timeline for closing, aircraft relocation costs, applicable jurisdiction, delivery venue, and more.
Each of these elements will need to be carefully negotiated between the buyer and seller. Only after they have been agreed and signed can a successful transaction proceed.
In the event of a buyer exiting the deal without good cause, the seller should negotiate language into the contract that secures appropriate compensation. This may cover the costs incurred for legal fees, inspections, ferry flights, and more. Clear definitions should be agreed as to which circumstances constitute a ‘good reason’ for walking away from the deal at any stage, with no room for ambiguity.
The aircraft purchase agreements should be constructed in a way that favors the swift closing of the deal, with as few delays as possible. While this may seem obvious, there have been many occasions when this was not the case, either because the language built into the contract was too one-sided (the rights and obligations of both parties should be plainly laid out), or because the language is too ambiguous, leading to misunderstanding or, misinterpretation and disagreements.
The Flight Test
The buyer will require a flight test so they can check the aircraft’s systems and functionality, and physically inspect the aircraft’s exterior and interior to ensure everything looks and functions as represented.
The test flight will also provide the buyer with a good opportunity to identify any squawks or malfunctions, or other issues that need to be resolved before closing. Any matters arising during the flight test may well become subject to further price negotiations, and the cost of fixing them will, by default, be the responsibility of the seller unless something else has been specifically agreed.
An additional ‘conformity flight’ may be requested by the buyer in which the aircraft’s performance can be verified prior to delivery. If so, who will pay? Often, sellers refuse to cover the cost of a ‘conformity’ flight, though motivated sellers might agree to do so.
Nevertheless, efficient negotiations will leave no room for doubt – and could even smooth the process by rolling both flights into one. After all, there should be no reason why the flight test and conformity flight (when required) cannot be undertaken together, ultimately reducing cost and hassle.
Inspection and Delivery Location
The location for a pre-purchase inspection will need to be negotiated. The buyer will (rightly) insist that the inspection facility needs to be at a maintenance center that has not provided the aircraft’s maintenance upkeep in the past. An impartial inspection, with a fresh pair of eyes, is vital.
By the same token, sellers may insist on a facility that the buyer has no prior relationship with, again for reasons of impartiality. The alternative facility will need to be appropriately qualified to inspect the specific aircraft make/model and demonstrate extensive experience in providing pre-purchase inspections for the type.
Often the aircraft will need to be repositioned to another location for both the pre-purchase inspection and closing. While a potential buyer typically pays for those flights, negotiations could occur between the parties.
However, to save money for both sides of the negotiating table, the flight test and conformity flights discussed above could be undertaken while flying the aircraft to the pre-agreed pre-purchase inspection facility.
Additional Aircraft Equipment
As the seller, verify what standard and additional ground support equipment you have, along with its condition and functionality. Does any item need to be replaced? Is anything missing?
If so, buyers may seek to negotiate a discount or ask the seller to replace the missing item(s), or items where the condition is considered unacceptable. As such, be ready to counter-negotiate (for example, where a buyer may require the replacement equipment to be new, pre-owned may be perfectly adequate).
Competing with Other Sellers
So far, we’ve dealt with elements of negotiations that sellers have at least some control over. But the market itself will create complexities, depending on whether it favors buyers or sellers.
Essentially, a buyers’ market occurs when the ratio of sellers to buyers is higher – giving buyers a bigger pool of aircraft to shop from. Within that pool may be some sellers who are more motivated than others. These sellers may be offering special incentives to attract buyers, putting pressure on other sellers as would-be buyers’ heads are turned in other directions.
Whether those incentives come in the form of a price reduction, or elements of the process that the buyer would normally be expected to pay for being covered by the seller, in such times the seller will need to become more flexible in their negotiations.
So, essentially, the degree of negotiation required from sellers will usually come down to the marketplace at the time of sale.
Use a Dedicated Team of Advisors
Fortunately, you don’t need to face the complexities of negotiating the right terms of an aircraft sale by yourself. There are many excellent brokers and lawyers who are available, and who specialize in aircraft transactions, that will guide you through the process.
However professional you may intend to be when the time comes to sell your aircraft, sometimes it is very difficult to distance yourself from an emotional attachment to your aircraft. It has served you well over the years, and you have become very familiar with it. In your eyes, it will always be the best offering on the market – but in the buyer’s eyes, it is just another aircraft.
Your team of experts will help keep your perspective and focus on the market realities, with the end-goal of closing a satisfactory deal. Next time, we’ll conclude this series with some insights on sharpening your negotiation skills.
Read Part 1, Part 2 & Part 4 of this Seller Questions series:
Seller Questions Part 1: How to Market an Aircraft
Seller Questions Part 2: Tips for Negotiating Price
Seller Questions Part 4: Concluding a Jet Sale