Share pricing in a club

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landon

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Landon
I'm curious what everyone's opinion is on how much one should pay for a share in a club. I would think a share in a club would be tied to the value of the club's assets but that doesn't seem to be the case where I live. I've got two local clubs that seem to be pricing well above what the planes are actually worth.

Club #1: based on the share asking price times the number of members they have priced their assets at $25-$30k higher than VREF.

Club #2: similar calculation except they are $50k higher. They have around 20 members and some rather dated planes (a 180 and a 172).

Both clubs bank engine time so I did the VREF's based on zero time engines knowing that I'm not paying for past member's usage.

What is everyone's experience here? Is it typical for a club to place a premium on share price? If so, is the assumption that the intangible aspects of a club are the source of the premium or is it just an opportunity cost? It's hard to believe that there is a premium for the opportunity given all the talk of aviation not being as strong as it once was.
 
One question for you so that we can frame our answers and input better:

Are the clubs you are investigating equity clubs (you are buying a piece of the business and an equal share of all assets and liabilities?)?

Or are they non-equity clubs? Where you are buying the priviledge of using the equipment for a specific rate? (sorta like a gym membership)
 
landon said:
I'm curious what everyone's opinion is on how much one should pay for a share in a club. I would think a share in a club would be tied to the value of the club's assets but that doesn't seem to be the case where I live. I've got two local clubs that seem to be pricing well above what the planes are actually worth.

Club #1: based on the share asking price times the number of members they have priced their assets at $25-$30k higher than VREF.

Club #2: similar calculation except they are $50k higher. They have around 20 members and some rather dated planes (a 180 and a 172).

Both clubs bank engine time so I did the VREF's based on zero time engines knowing that I'm not paying for past member's usage.

What is everyone's experience here? Is it typical for a club to place a premium on share price? If so, is the assumption that the intangible aspects of a club are the source of the premium or is it just an opportunity cost? It's hard to believe that there is a premium for the opportunity given all the talk of aviation not being as strong as it once was.
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Are either negotiable? Is the club selling the share or is a member selling the share? Is there a guaranteed buy-out provision? Do they have events that they sponsor and you pay for? Basically it depends. I've seen a lot that have a guaranteed 50% refund upon leaving the club. So your buy-in is a buy-in + deposit so it matters what you are actually buying.
 
Are the clubs you are investigating equity clubs (you are buying a piece of the business and an equal share of all assets and liabilities?)?
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They are equity clubs where you are a legal member of the business entity that owns the assets. I know one club is an s-corp and I am not sure what structure the other club is setup as.

Are either negotiable? Is the club selling the share or is a member selling the share? Is there a guaranteed buy-out provision? Do they have events that they sponsor and you pay for? Basically it depends. I've seen a lot that have a guaranteed 50% refund upon leaving the club. So your buy-in is a buy-in + deposit so it matters what you are actually buying.
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You "negotiate" the share price with the selling member. The club only advertises the share and sends you to the member that is selling to handle the negotiation. I'm concerned that offering what the assets are actually worth will be insulting since it's such a dramatic difference.

I'm not aware of either club having events beyond annual meet-ups to go over the status of the club. I don't know if you would consider them social in anyway.

The buy-in does not contain a deposit component and I there is not a guaranteed buy-out.
 
landon said:
They are equity clubs where you are a legal member of the business entity that owns the assets. I know one club is an s-corp and I am not sure what structure the other club is setup as.


You "negotiate" the share price with the selling member. The club only advertises the share and sends you to the member that is selling to handle the negotiation. I'm concerned that offering what the assets are actually worth will be insulting since it's such a dramatic difference.

I'm not aware of either club having events beyond annual meet-ups to go over the status of the club. I don't know if you would consider them social in anyway.

The buy-in does not contain a deposit component and I there is not a guaranteed buy-out.
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If it's the owner of the share setting the price, then it is likely what he or she paid for it a long time ago when the planes were worth more - offer what it's worth to you, there are a lot of planes on the market, fewer pilots to buy them, and a 20 member club with 2 planes appears to be high utilization of the airplanes, meaning you're probably not going to have the scheduling flexibility...all that should factor into the price
 
If it's the owner of the share setting the price, then it is likely what he or she paid for it a long time ago when the planes were worth more - offer what it's worth to you, there are a lot of planes on the market, fewer pilots to buy them, and a 20 member club with 2 planes appears to be high utilization of the airplanes, meaning you're probably not going to have the scheduling flexibility...all that should factor into the price
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Buying a share is a lot less than buying a whole airplane. Based on the amount of flying time I do and the non-flying expenses associated with an aircraft, buying one is not really an option.

I've had an ad on Craigslist for a few months now trying to find other individuals in my area to start a club. I've gotten one response. These two clubs are it in my area. It's difficult to get one going around here but that also makes it harder for these current clubs to sell their shares.

If they can't find a buyer then I should have some leverage in negotiating the share price. I posted on here wanting to find out everyone else's experience in what they typically see in the pricing. Is it based on the assets or the overall value the club offers...
 
Short answer:
A share is only worth what someone is willing to pay for it. If the seller is asking too much (and is unwilling to negotiate to a fair price), the share won't sell.

Long answer:
When I bought into my club I looked at all of the assets as well as the cash on hand and made a valuation based on that. It wasn't too far off from the seller's asking price, but if it had been I still would've had the same conversation. "From what I can tell, a share of the club is worth $X because of A, B and C. Is there anything I am missing or can we just agree that I'll buy your share for $X?" That at least gives the seller the ability to explain/justify the asking price. If, after that conversation, you can't come to an agreement it's likely the seller is trying to recoup some or all of the money they paid for the share when they bought into the club (presumably in better times). In that case, you'll probably either have to come to terms with something neither of you will be 100% happy with or walk away from the deal.

(I just spoke to someone yesterday about our club and a few other local clubs. Any chance you're that person?)
 
I would assume the price is for more than just the value of the aircraft. You to take into account repairs reserves, hangar, insurance, registration, business operating costs, etc. I'm not suggesting all of that adds up to an additional $50k. Just that there is more to a business than the asset it owns.
 
When I bought into my club I looked at all of the assets as well as the cash on hand and made a valuation based on that.
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The one club I am really interested in pays quarterly dues for the insurance and hangar. I assume some business expenses are included as well. I know that they have a loan for a past engine overhaul so I don't know if they are actually banking money for the future engine overhaul, I assume they'd just get another loan.

To me the cash reserves are a sunk cost. I would think if you are getting a loan to pay for past overhauls and paying for other expenses quarterly or annually then the cash reserves should be at a minimum (at least in my opinion).

"From what I can tell, a share of the club is worth $X because of A, B and C. Is there anything I am missing or can we just agree that I'll buy your share for $X?" That at least gives the seller the ability to explain/justify the asking price.
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I really like that angle. I had planned to do something similar as far as showing him how I arrived at my offer (via the VREF calculation) but I like your phrasing to open it up and allow him to justify his asking.

(I just spoke to someone yesterday about our club and a few other local clubs. Any chance you're that person?)
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No :) I'm not in your area.
 
Pedals2Paddles said:
I would assume the price is for more than just the value of the aircraft. You to take into account repairs reserves, hangar, insurance, registration, business operating costs, etc. I'm not suggesting all of that adds up to an additional $50k. Just that there is more to a business than the asset it owns.
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:yeahthat: Without knowing cash in reserves it's not possible to adequately value the assets of the club.
 
pilot_dude said:
:yeahthat: Without knowing cash in reserves it's not possible to adequately value the assets of the club.
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Yep, you need to look at the entire picture. Reserves are often the basis of higher valuations, plus due to the economics of having partners, they do not have to be the cheapest assessment to be the cheapest buy in.
 
If cash reserves is a sunk cost, then so are the planes. No one gets cash reserves back when they sell their share of the partnership. Although, if they did, then I would agree that it shouldn't factor into the value of the enterprise.

Edited to add - If the club has liabilities, the value probably needs to be adjusted for that. Net assets would be all cash, receivables, property, and other assets less the liabilities.
 
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It seems like you'd have to know what the reserves are intended for. If they are for the usage (wear and tear) on the aircraft then shouldn't those be sunk costs and not used to calculate share price? As a buyer you why pay for someone else's past usage?
 
The previous usage is accounted for in the fair value of the plane. Think of it this way, what would happen if the club ceased existence tomorrow and sold the assets? It would distribute the cash received to all the owners pro-rata. Assuming you own 1 of 10 shares, you would get 10% of all the original cash plus the cash received when the planes sold (which is the fair value).

If there had been liabilities in that example, cash would pay those first, then remaining cash would be distributed.
 
landon said:
It seems like you'd have to know what the reserves are intended for. If they are for the usage (wear and tear) on the aircraft then shouldn't those be sunk costs and not used to calculate share price? As a buyer you why pay for someone else's past usage?
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Just my thoughts - You're not paying for their past usage, you're paying for the cash reserves that were built up based on their past usage.

If the plane was worth $30K on day 1, and the co-owners flew it enough to depreciate its value to $20K while building up the cash reserves to 10K, then you're still buying into assets worth $30K.

The cash reserves are still part of what you're buying into even though they were paid in for usage (wear and tear). If that cash wasn't there, and you bought in for only $20K, the partnership would have to make a special cash call for $10K when it came time to rebuild the engine. With the cash reserve on hand, no need for a special call.
 
The way I see it, you're paying for access to several planes, and that ticket to access the planes will have a residual value of some sort when you no longer want access to the planes. Either the immediate deal to buy in works for you or it doesn't. Are you buying this membership to make money on, or are you buying it to go flying? I would be more concerned with the qualities and equipment of the aircraft, not their Vref value.
 
The way I see it, you're paying for access to several planes, and that ticket to access the planes will have a residual value of some sort when you no longer want access to the planes. Either the immediate deal to buy in works for you or it doesn't. Are you buying this membership to make money on, or are you buying it to go flying? I would be more concerned with the qualities and equipment of the aircraft, not their Vref value.
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To fly, not to make money. I am concerned about paying an inflated price at this point knowing that one day I will sell my share. I'd prefer to not eat it on the back-end of this membership.
 
landon said:
I really like that angle. I had planned to do something similar as far as showing him how I arrived at my offer (via the VREF calculation) but I like your phrasing to open it up and allow him to justify his asking.
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His hands may be tied on share price by the club. In the sailing club I'm a member of, sales prices are re-calculated quarterly based on asset values. A member may sell his/her own share, but at the club price. Not above, not below.
 
landon said:
To fly, not to make money. I am concerned about paying an inflated price at this point knowing that one day I will sell my share. I'd prefer to not eat it on the back-end of this membership.
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Stay away from equity in flying, you will always eat it on the back end, if that bothers you flying will only cause you stress. You pay an inflated value into most equity clubs because it's cheaper than sole ownership.

There is only one way not to eat it on the back end of airplane deals and that is fly the full value out of your money. The best way to do that is to buy your last plane first and fly it until you can't anymore.
 
Stay away from equity in flying, you will always eat it on the back end, if that bothers you flying will only cause you stress. You pay an inflated value into most equity clubs because it's cheaper than sole ownership.
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That's what I was trying to determine, is it standard for their to be a premium on the shares of a club because it is a discount on owning a plane outright.

I reached out to the club I am most interested in to find out what the cash reserve situation is. The main theme in the thread seems to be that I need to take into account the cash reserves so I need to know what those are.
 
landon said:
That's what I was trying to determine, is it standard for their to be a premium on the shares of a club because it is a discount on owning a plane outright.

I reached out to the club I am most interested in to find out what the cash reserve situation is. The main theme in the thread seems to be that I need to take into account the cash reserves so I need to know what those are.
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Yes, clubs get a per plane premium for their equipment because the market can bear it, it's still the cheapest way to fly good equipment. This would be my major concern with membership, the quality of the equipment and how it is maintained. Is there adequate equipment? Is there a variety in equipment?

I would also look at how financially stable they are and what the record of assessments has been. Paying a premium to buy into a club that had the variety of equipment I want access to that is kept in good condition by an organization that is financially stable enough to maintain and upgrade it without assessments is a much better deal to me than getting in a club at or below Vref that has a couple crappy planes for cheap that need an assessment at every annual to keep flying.

If I lived in San Diego I would just join Plus 1 Flyers.
 
landon said:
That's what I was trying to determine, is it standard for their to be a premium on the shares of a club because it is a discount on owning a plane outright.

I reached out to the club I am most interested in to find out what the cash reserve situation is. The main theme in the thread seems to be that I need to take into account the cash reserves so I need to know what those are.
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I think a slight premium is fair, though how much of one is something you'll need to decide. It is totally legitimate, whether purchasing a share of a plane or buying one outright, to approach the seller and politely explain to the best of your understanding the aircraft is worth X, could they help you understand how they value it at Y. If they balk at that, they may not be folks you want to be in a club with.

Keep in mind that Vref, though a useful tool, is not perfect. A pristine airplane that has been maintained by a respected A&P with well organized logs and records is going to command a premium beyond what VREF projects. Likewise, sometimes Vref may be optimistic and more than one airplane has sat a long time because an owner treated Vref as gospel.

For example, though Vref accounts for time since major overhaul it does not adjust for the date of the overhaul, what type of overhaul was completed, and who did the overhaul. All of these can have an impact on the price.
 
landon said:
That's what I was trying to determine, is it standard for their to be a premium on the shares of a club because it is a discount on owning a plane outright.

I reached out to the club I am most interested in to find out what the cash reserve situation is. The main theme in the thread seems to be that I need to take into account the cash reserves so I need to know what those are.
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The ownership club that I'm in always keeps current engine and maintenance reserves, so that has to figure into the value of a share.

It think there is considerable value in joining a long established club that has good infrastructure.

For example, what value to you attach to having airplanes in T-hangers, in a place where vacant T-hangers do not exist? Like Austin Texas.

What value is there in having all the various plane ownership chores shared by others? There's got to be some.

But at least in my club, share sales are private transactions between seller and buyer, so supply and demand rules.

I guess a formula like

(Total Vrefs of all planes + cash reserves)/number of members

can be a starting point for negotiations, but that may not reflect the true value of a share in a well run ownership club.
 
I think it depends on your location and local market. When I bought in on my plane I thought it was a steal. I figured the plane was worth 40k easily plus the checking account balance for the club. 9 partners should result in over $4500 of equity per partner. I got mine for less than 4k. Now that I have been in it for a while, I have seen some of the other partners try to get out of their shares and they can't give it away. Sunk cost at this point.
 
kujo806 said:
I think it depends on your location and local market. When I bought in on my plane I thought it was a steal. I figured the plane was worth 40k easily plus the checking account balance for the club. 9 partners should result in over $4500 of equity per partner. I got mine for less than 4k. Now that I have been in it for a while, I have seen some of the other partners try to get out of their shares and they can't give it away. Sunk cost at this point.
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Thing, individual ownership leaves you in the exact same state of having to give away the plane, only you have the full stake, not a fraction. The question is "When done with the asset and it's disposed of and that loss is divided total hours flown, were your hourly costs within reason?"
 
At the end of the day, economics are in force here. If there is a surplus of buyers, a seller can demand a premium over book value. If there are more sellers than buyers, the next share is going to be sold for the price of the most motivated seller. Lastly, you're negotiating with someone who wants out of the club, so you don't need to worry as much about offending anyone.
 
Several good points can be distilled from the posts here:


  • Price is where a willing buyer and a willing seller meet. It may have nothing to do with the owners' equity in the club.
  • It is a good idea to estimate in detail the theoretical liquidation value of what you are buying. Start with the owners' equity and adjust based on estimates of real asset value: Vref using current engine times, local assessor's estimated market value of hangars, etc. Assets like spare parts and tools are not worth much in a liquidation but cash is cash and it is part of what you're buying. If you know someone with accounting experience, ask for help. Analyzing and adjusting the balance sheet is not hard but it can be a little arcane at times. Bring pizza and beer, expect to spend two hours including getting the Vref numbers. If your accountant-experienced friend has flying club accounting experience, bring steak and a good cabernet. He'll be worth it.
  • Look hard at dues, history of assessments, rates, etc. If the club's dues + assessments are out of line with other clubs and/or if the airplane rates are out of line, it is probably because something is wrong. This stuff costs everyone more or less the same, so all clubs' numbers in your area should be similar. If there is a defendable difference, at least make them defend it.

If the club is organized as a 501(c)7 nonprofit, which it should be, and is any size at all you can get its tax returns at guidestar.org. These have income statements, balance sheets and may reveal unexpected things like self-dealing between one or more members and the club. You'll have to register at guidestar, but it is free and without follow-on hassles. If people are vague about the form of organization, tax status, or whether required returns (including possibly state sales tax) have been filed, this would be a good time to leave the table.
 
There's a non-equity club around me that looks fairly reasonable. They cap at 60 members, it's a $1000 buy in and $125 a month. They have two 172s and a 182 running $32 - $44/hr dry... Now when I looked at it about 6 months ago it was capped at 45 members and was a $500 buy in... I guess they had some changes recently. Some quick calculations is if you fly about 2-3 hours a month it's break even vs the traditional hourly wet rental I trained on.

I ended up buying in on a 50/50 co-ownership with a friend. For me having a nicer plane, open schedule, own hangar ect was worth it.
 
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