Loading please wait....
Login

If you are a registered, please log in. If not, please click here to register.

PRICE NEGOTIATIONS

Having delved into the psychology of pricing (see “Make Offer: Will it help or hurt your re-sale strategy?” – World Aircraft Sales Magazine, November 2010 Issue), let’s explore what happens once a sell-price has been determined, and contract negotiations along with the aircraft inspection and delivery processes begin.

AvBuyer   |   1st January 2011
print
Back to articles
AvBuyer AvBuyer

The AvBuyer editorial team includes Matt Harris and Sean O'Farrell who contribute to a...
Read More

We’ve agreed on the price - or have we?

Having delved into the psychology of pricing (see “Make Offer: Will it help or hurt your re-sale strategy?” – World Aircraft Sales Magazine, November 2010 Issue), let’s explore what happens once a sell-price has been determined, and contract negotiations along with the aircraft inspection and delivery processes begin.

First, it is important to understand the possible reasons for a particular buyer’s motives. On occasion, the personality of the buyer is such that negotiating – and re-negotiating – compels them (regardless of how the initial agreement was reached), while occasionally cultural factors might influence behavior.

In many cases, the basic perceptions of the buyer as to how the price was initially established will set the stage for negotiations continuing throughout the contracting, inspection and delivery phases of the transaction.

With these thoughts in mind, let’s take a look at an entirely hypothetical transaction in which the buyer decides that there’s an opportunity to continue price negotiations after the Offer Letter has been issued and accepted. For this analysis, our assumption will, of course, be that the aircraft being purchased was marketed using the ‘make offer’ strategy, and that the seller and the buyer both relied on the experience of the broker(s) involved to validate that the price quoted and accepted was fair.

If a specific ‘ask’ price was not identified by the seller due to either a perceived shortage of prospective buyers or a perceived excess of similar aircraft, the buyer may - at any time - surmise that competition for the aircraft was very likely stilted and take the position that the price set out in the offer letter was simply the starting point for ‘real’ negotiations. In this case, the buyer would come to the negotiating table looking for price flexibility and/or other concessions.

Is that fair? Probably not, but ultimately the final outcome is going to depend on a number of factors, including whether the buyer believes that: (i) there wasn’t a lot of competition from other prospective buyers; (ii) the price to which the parties [initially] agreed had some ‘padding’ in it; and (iii) the condition of the aircraft (does it provide the grounds for altering the price).

As to the first issue, a savvy broker/ consultant will have a pretty good idea before the buyer first attempts to re-negotiate if it’s a game he’s willing to play – either because he knows it’s a game and has factored that into his overall strategy, or because he has sufficient interest from other prospects to believe that he will be able to sell it to another buyer if the initial buyer demands too much during re-negotiation – and he will proceed accordingly.

Similarly, whether the price is ‘padded’ or not will be known prior to the beginning of price discussions, so the broker/consultant will likely have a worst case or walk-away threshold defined.

The remaining potential factor – that of whether unknown technical issues (discrepancies or ‘squawks’) are likely to provide grounds for price negotiation – is typically much less predictable. The aircraft’s age and maintenance history will, obviously, provide an indication of how likely it is that problems will be found once the aircraft enters the pre-buy inspection; the aircraft make and model may also be a contributing factor: not all aircraft are built, operated or maintained the same!

Accordingly, it serves the savvy broker/consultant well to have seen, or to have had someone view the aircraft and its logbooks before representing it for sale. While this may not always be practicable, the risk shifts to the broker/consultant (as well as the seller) if there is not a clear understanding about the condition of the aircraft and its history.

MANAGING RE-NEGOTIATION
With these potential challenges identified, we can now discuss ways to deal with them as contract negotiations (and price re-negotiations) unfold. As mentioned, the buyer’s perception(s) as to the existence or absence of competition for the aircraft prior to the initial offer and agreement on price is frequently a key factor in their decision to attempt re-negotiation of the purchase price.

If the fee or commission due the broker/consultant when the transaction is consummated is either a percentage of the purchase price, or is the difference between the purchase price and the re-sale purchase price in a ‘back-to-back’ arrangement (where the broker/consultant contracts to buy the aircraft from the seller and simultaneously contracts to sell the aircraft to a buyer for a profit), every dollar conceded in a price re-negotiation is, in effect, a dollar out of the broker/consultant’s pocket.

That being the case, the price upon which the parties initially agree has to, by definition, result in an acceptable selling price for the seller, as well as an acceptable pay-day for the broker/consultant. In this case, a buyer’s attempt to re-negotiate is not a welcome development.

In many cases, the initial re-negotiation gambit the buyer will attempt is to simply revise the purchase price when drafting or ‘red-lining’ the Aircraft Sales & Purchase Agreement (ASPA). The broker/consultant will miss this at his or her peril. Maintaining vigilance and control from the beginning is the best defense. A firm, but professional response that the price reflected in the executed offer letter is not open to re-negotiation should be given.

But then what? Will ‘pushing back’ against such an attempt poison or kill your deal? Probably not initially, but it is critical to take care in reading the reaction of the buyer/buyer’s representative.

• The buyer may have told his friends and/or business associates that he had [already] purchased an aircraft.
• The buyer, or the buyer’s agent/consultant may have promised that he was sure he could get a few dollars knocked off the price.
• The broker/consultant may have told the seller than the deal was ‘as good as done.’

Any of the above influences on a deal could potentially create havoc. The key is to realize that they might exist, and address them appropriately as soon as possible. Price re-negotiation can, for instance, be avoided by providing other considerations: [I was once able to avert a price re-negotiation by committing to provide each of the buyer’s family members with desk models of the aircraft as ‘thank you gifts’ for the transaction. In another instance, a deal was saved by arranging for an inspection/test flight to be routed through the cities the buyer’s agent had promised his wife they would visit ‘ some day’ (with the nominal extra cost being netted out of the agent’s and the broker/consultant’s respective commissions)].

IMPORTANCE OF REPUTATION
Creativity and non-deal concessions, however, do not always win the day - so alternate strategies to ensure that the deal is preserved should almost always be readied (especially if there wasn’t a lot of interest by other prospects prior to reaching the initial agreement).

Obviously, if the broker/consultant is earning his or her commission via ‘upside’ in a back-to-back transaction, he/she alone knows the amount of upside needed to make the deal financially acceptable. How to protect the upside is the critical question: can/should the broker/consultant refuse to re-negotiate in order to protect their reputation?

Should he or she be willing to give away some of their upside (i.e. commission) just to avoid losing the deal? Each deal is unique, so there is no single or best answer. The industry – including both se
llers and buyers – tends to treat those who are willing to find solutions to difficult situations better than those who stand on principal, regardless of what the principal may be!

Simply put, a seller trusting the reputation, skill, experience and word of a broker/ consultant isn’t going to care why a deal falls apart – they’ll just know that it fell apart. And a buyer who agreed to buy ‘your’ airplane is going to assume that ‘you,’ not himself or his representative(s), are being unreasonable if a deal doesn’t come together. The bottom line is that a good reputation has value to it, and the broker/consultant needs to take that value into consideration when alternative strategies are considered.

Finally, the condition of the aircraft can play a part in the final price paid for it, so it is incumbent on the savvy broker/agent/ consultant/representative (on both sides of the transaction) to do everything reasonably possible to learn about the actual condition of the aircraft before getting deep into a transaction.

Hiring a third-party appraiser to conduct a review of the logbooks/maintenance records and perform a physical walk-through of the aircraft itself will obviate a number of potential surprises that could otherwise emerge later in the transaction. No buyer wants to learn – especially late in the transaction, and even if they have the right to walk away – that they’ve agreed to buy an aircraft whose condition (even if rectified by the seller prior to delivery) was not what they had expected it to be. So anyone planning to re-negotiate the price by finding problems with the condition of the aircraft is on a fool’s errand!

We conclude by reiterating that a buyer and seller’s emotions, as well as a broker/agent/consultant’s industry reputation are intangible aspects of every deal and must be anticipated.

Price re-negotiation after the offer letter is executed is not the norm, but it can, and does occur - so managing expectations, anticipating challenges and knowing how to deal effectively with surprises will counter-act the risk that can be created by advertising an aircraft using the “Make Offer” marketing approach.

Related Articles

linkedin Print

Other Articles