Working on the Partnership Agreement

Areeda

Areeda

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Areeda
Well it's not legally a partnership it's a corporation but that doesn't matter.

The most contentious part of the agreement is what happens when one of us gets out. This is invoked if one of us wants out, dies, or the rest of them vote me out for being too wierd.

I think we've got it well worked out except for the timing, here's where I'd like the advice of people with more experience buying and selling aircraft.

It works like this:
  • The person wanting/getting out pays for an appraisal and gives the rest of us notice in writing. This starts the clock.
  • For X days the rest of us have the option of buying that share or finding another partner. Also we can get another appraisal if we want.
  • If the we don't find a new partner (or buy him out) then for Y months the whole plane goes on the market at the appraised value. We can still find a partner or buy him out.
  • If that doesn't work then we accept any reasonable offer, or buy his share at the reduced price.
I first proposed that X be 90 days to find a new partner or buy him out at full value and then Y be 12 months to sell the plane at full value.

The 12 months seems long. How long do you think we should keep it on the market at full value? Remember during this time the departing member still has his monthly obligation and rights to fly the plane at the hourly cost.

All comments are welcome.

Joe

Also posted this on AOPA
 
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Make sure you write in a requirement that all appraisers involved be NAAA-certified -- that will save you from folks who really don't know what an airplane will bring on the current market. Also, if the partner is voted out, the remaining partners should pay for the appraisal.

As for the sell-the-airplane option, 12 months seems too long, espcially if the partner is dead -- ties up the estate a long time. I'd say 3-6 months.

Also, make sure you address issues of divorce and bankruptcy -- those could tie the partnership in knots for years or force the sale of the plane.
 
In our corporation, it is up the the selling party to find the buyer and accept the selling price. Could be more or less than an appraisal. It is his share until the share sells, and he continues to pay the fixed costs until it sells; which gives him an incentive to accept a reasonable offer. We also have a penalty system if someone just quits paying the fixed costs. The share value for 25% of the corporation inculded 25% or all corporation assets - including the maintenance fund and engine OH fund. No one who wants to get out fo the partnership can force the others to sell. That is unfair to them. Also, the remaining partners have to accept the new partner. So far it has not been a problem, but it is not just a matter of having the money for a share. They also have to have compatible plans for use. We have limits on that too, and a rotation schedule for which pilot is in-charge of scheduling each week. Your week, you fly anytime you want. Someone elses week, you call and ask if they have plans and then you can fly first-come-first-served. But, somoene wanted to buy in and needed to fly every week, sometimes twice a week, to Portland on business. The partners agreed that was more like full-time use and he ought to buy his own plane and not just a share of ours. We are also a Christian partnership, and he was not involved in any church. The seller kept looking for a buyer, and it sold a month later. We have a provision about the other partners having the option to buy first, when someone sells. We can also buy from a widow. We can create additional shares too, if we needed cash for an OH for example. Since it is a corporation, the proceeds from sale of another share stay in the corporation and get used as the majority directs - even as a cash dividend if that is approved. So if you have a $100,000 plane and cash assets, with 4 partners; each share is worth $25,000. If you sell another share to make it 5 partners that would be $20,000 each share. You could either sell it for $20,000 and spend it on an OH. Or perhaps sell it for $25,000 and then return $5,000 to each of the 5 partners. Or perhaps sell it for $20,000 and agree in advance that the $20,000 would be divided between the other 4 partners to keep things equal. We also have provisions for how long and how often someone can stay way from the base airport, for long trips; and limits for how far it can go (Panama) and that the person traveling needs to verify insurance will cover when in the country they are going to (or over). Much more. A partnership is a contract. Better to work all this out in advance.
 
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Dwight B. Van Zanen said:
In our corporation, it is up the the selling party to find the buyer and accept the selling price.
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Many partnerships do this, but they risk the chance of the departing (or "departed") partner (who no longer cares) selling to someone with whom the other partners can't live. Imagine your spouse wanting out of the marriage and having the choice of his/her replacement.:eek: If you're going to go this route, work out details in the partnership agreement to provide viable options.
 
Dwight,

So far the agreement is 46 Articles and 14 pages, the final product will be written/blessed by a lawyer, so I agree with you.

We also have the same weekly priority scheduling with trades that can allow one "partner" to take the plane for up to 4 weeks.

Thanks for the discussion of selling another share. We have a provision that allows for that but have not discussed the scenarios.

The reason we are structuring the buy-out this way is as Ron said. I had a friend who was going through a nasty divorce and came up with a plan to hang out by the county jail for a month, select the biggest, meanest, ugliest person to come out of there and sell him her half of the house for $1. It was just a joke (at least she didn't do it) but as far letting someone else choose my partners goes, I'm against it.

Forcing the sale of the aircraft especially at below the appraised value is the last option. It gives the remaining partners plenty of time to find a replacement or come up the money to buy the share. But if we can't do either I don't think the partnership would be viable anyway.

I really do appreciate the discussion.
 
You might add a clause that allows the sale of the partnership assets and dissolution of the club if a sufficient percentage of the members wish to terminate (1/2? 2/3?). The idea is to prevent a small number from imposing their desire to continue operation against the wishes of the majority.
 
lancefisher said:
You might add a clause that allows the sale of the partnership assets and dissolution of the club if a sufficient percentage of the members wish to terminate (1/2? 2/3?). The idea is to prevent a small number from imposing their desire to continue operation against the wishes of the majority.
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Got that one in there. Now I see why lawyers charge so much to write things up.

Joe
 
Ron Levy said:
Many partnerships do this, but they risk the chance of the departing (or "departed") partner (who no longer cares) selling to someone with whom the other partners can't live. Imagine your spouse wanting out of the marriage and having the choice of his/her replacement.:eek: If you're going to go this route, work out details in the partnership agreement to provide viable options.
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We have a twist on this -- the selling partner is responsible for finding a buyer, and the price is strictly between he and the buyer. BUT. A majority of the remaing partners has to approve the sale to that particular buyer.
 
RotaryWingBob said:
We have a twist on this -- the selling partner is responsible for finding a buyer, and the price is strictly between he and the buyer. BUT. A majority of the remaing partners has to approve the sale to that particular buyer.
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This is how the partnership I was in worked. The seller had to find someone to buy, then bring the buyer to a meeting amongst the rest of the owners so they could evaluate the new guy.

Worked pretty good that way, everyone winds up happy.
 
Ron Levy said:
Many partnerships do this, but they risk the chance of the departing (or "departed") partner (who no longer cares) selling to someone with whom the other partners can't live. Imagine your spouse wanting out of the marriage and having the choice of his/her replacement.:eek: If you're going to go this route, work out details in the partnership agreement to provide viable options.
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We have the provision that the remaining partners have to approve of the buyer. See my original post about how we rejected a buyer.
 
In my LLC , that is exactly how it works. The departing member must get approval of the remaining partners of the new partner...

We also wrote in what the departing partner might take with him/her in the way of any engine reserve funds and such...
 
Areeda said:
Got that one in there. Now I see why lawyers charge so much to write things up.

Joe
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AOPA has a sample partnership agreement, that can be used as a guide for common and viable provisions. At least check it to be sure nothing has been overlooked. Might be good to post the finished product here when you are done, for the same purpose.

About the maintenance and OH reserve, that is why we sell a share of the corporation. Not a share of the plane. The reserves are corporation assets, and you are selling your share of all of that. The new buyer would otherwise have to buy-in to be an equal partner in the reserves as well as the plane. Makes more sense to just sell your share of everything and be done.

We also had a case where a departing guy just did not pay his fixed costs for a few months. Moved out of state and left it to the partners to sell his share. What he owed came out of the proceeds of the sale before the residual amount was sent to him. No deal until the seller is up-to-date on the monthly expenses.
 
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Dwight B. Van Zanen said:
AOPA has a sample partnership agreement, that can be used as a guide for common and viable provisions. At least check it to be sure nothing has been overlooked. Might be good to post the finished product here when you are done, for the same purpose.
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I actually started with the AOPA agreement. It's got a good list of things that need to be discussed. We took some things out added others in.

I like the idea of a new partner negotiating the price with the outgoing one subject to the approval of the remaining ones.

We do have clear definitions of what funds are equity of the shareholders like funds for new equipment and what funds are not like engine reserves.

Joe
 
Areeda said:
It works like this:
  • The person wanting/getting out pays for an appraisal and gives the rest of us notice in writing. This starts the clock.
  • For X days the rest of us have the option of buying that share or finding another partner. Also we can get another appraisal if we want.
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  • Joe, makes sure the "event" that "starts the clock" in step 1 is very well defined... "X" days starts WHEN? When he sends the rest of you notice in writing? Does that notice have to include the results of his certified appraisal so you have numbers to work with? Is it when he SENDS IT (Postmark date), or when you receive it?

    If it gets down to the wire on "x" days before one of you tries to buy the other out, this could get critical.
 
Sounds like you have a good handle on it Joe. We did a simple buy/sell agreement, but there are only two of us. I do it in all my RE partnerships and have only had to "seem" like I was going to use it once. The person who wants out offers to sell his share for X; remaining partner has time to evaluate; then, can either purchase the share for the price it is offered or sell his share to the first partner for the same amount. Seems to make people think closely about the price at which they offer their share.

I've seen what you are doing work to. If everything is going well between all parties, it all seems to get worked out amicably. It's when the parties disagree that the written document becomes important. Please address bankruptcy, insolvency and default. Had a friend with a Baron who had a partner that got into financial distress and just quit meeting his obligations. Because the PS agreement was silent on the matter, they had to go to court; took them two years to get the guy out. In the meantime, he was still technically a partner and they had to cover all his bills. They couldn't sell his interest without his permission and he wouldn't agree to anything. In addition to operating expenses, they had a bunch of legal cost.

Best,

Dave
 
Troy,

We have that. All notices may be served personally or by mail. If mailed the date received is considered to be 3 days after it's postmarked.

Dave,

I've known all 3 partners for years and don't expect problems they are all good people. I started this agreement with the one drawn up for the T28. My partner there and I discussed it over lunch, had a lawyer write it up, signed it and neither of us havelooked at it until I started on this one.

If things go as I hope this one will work the same. But as my daddy used to say "If you don't trust em don't play cards with em, if you do trust em it's OK to play but cut the cards every time it's your turn." The agreement is for when things don't work out as planned.

Joe
 
I am probably not qualified to comment too much on your agreement to be, as the partnerships I've had [only two] were simpler though I agree anything can go wrong even between or among great friends. Things can go wrong outside the jist of the partnership [divorce...lawsuits...], so I don't blame you for getting every "t" crossed like this. My first partnership had a six-page agreement [eventually an S corp as we had some income in it]. My current one has no written agreement.

So, what do I add? Only that I'll second or third the advice to have control over who a new, buying-in partner will be. My first partnership, we agreed ahead of time if anyone wanted out, we'd just sell, period. My current one, we remaining partners buy out the leaving partner at his share of the initial purchase and his share of the improvements, nothing for "increased value" [and there won't be, it's a recip' twin...], nothing for the maintenance and repairs that have gone on.

In our case, we have a small group that has already bought out two original members. We've decided, so far, not to sell a share but have just increased our own percentage. It costs us more now, each, but we don't really know anyone at present we want in. Just be sure you have a solid way to control who buys in. This isn't a popularity club, it's a group of two or more pilots sharing a plane and I've seen some really, really, really bad and unfortunate situations arise when someone in a partnership is a total jerk and other descriptions I cannot write in the forum. In each case, the partners' hands were tied and I know of two partnerships right this moment who are so screwed up that neither of them is flying the planes they own. One has had their plane sitting on a ramp for over two years, hasn't flown a single second in that time. The person I know from that partnership says they are beginning to realize they are gonna pretty much lose their shirts, never fly the plane again. Very sad.
 
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Areeda said:
We do have clear definitions of what funds are equity of the shareholders like funds for new equipment and what funds are not like engine reserves.
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Not sure why you would consider the engine reserve as not an equity fund. Look at it this way:

1. The engine reserve is built up over the years to OH the engine, based on engine time, right? So it essentially provides equity between the high hour users and and low hour users, since the high hour guys pay more into the engine reserve because they are using up the engine and getting you to an OH faster than the low hour guys. So with an engine reserve you are all kept equal.

2. When someone sells, if they can take part of the engine reserve with them - even if it is an equal share and not what they put in - it will result in an inequity with the new guy. The new guy will have paid nothing into the engine reserve, and the part paid by the guy he bought from is gone. So the remaining partners have cash in the partnership that the new guy did not match. Unless you make him "buy-in" to the engine reserve to make him equal, which would work but is unnecessarilly complicated.

3. Lets assume you let a guy take his 25% of the engine reserve when he sells. The other way to keep things equal is if the other 3 partners also take their 25% each out as a dividend, and you start over building an engine reserve with all 4 partners starting with nothing in the fund. That way at least they all have the same assets invested in the corporation, but you don't have an engine fund.

4. On the other hand, if you are buy/selling 25% of the corporation, and not just 25% of a plane, you buy/sell 25% of all corporate assets - including all cash in any accounts for anything, including the engine reserve. Simple. The selling price is 25% of the plane value plus 25% of all cash assets. The seller gets 25% of what is in the accounts as part of the deal, but the corporation does not lose it out of the corporation accounts. The new guy buys-in at what his share of the corporation is worth, and this results in no inequity between partners.

Lets make it an extreme example to make the point. The plane is worth $100,000 and the 4 partners have built up an engine reserve of $20,000. One partner sells. The buyer pays $25,000 and the seller gets his 25% of the engine reserve, which is $20,000 so his share is $5000. His net is $30,000, which is right. It is 25% of the total corporate asset value ($120,000). But after the sale what is the situation? The other 3 partners still each have $30,000 invested in the corporation, but the new guy only has $25,000 invested. The total corporate asset value is now just $115,000 and the engine fund only has $15,000 in it. The three remaining partners just got hosed.

My way, the buyer pays $30,000 which is 25% of everthing for his share of the corporation. The seller still gets $30,000 as sale price. The engine fund still has $20,000 in it. After the sale each partner has the same investment value of $30,000 each. The corporation is worth $120,000 before and after the sale.

Any other cash fund works the same way. If your maintenance fund is positive by $8,000 you keep the funds in the corporate account and the share value is $2,000 more. It keeps things simple, and it keeps all partners equally invested and the accounts adequate for their intended purpose.
 
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Dwight,

I may have been unclear in my use of the term equity, because as you say they don't get to take their share of the engine reserve fund when they leave.

Based on what I've learned since I posed this question the terms have been modified a bit and if the remaining partners don't buy out the share of the selling partner in the first period, he is free to sell to anyone at any price as long as the rest of us agree to the new guy. No funds are returned.

The purpose of this complicated formula is what happens when a partner dies and we're dealing with his estate's attorney or, in the case Baron 55 brought up, we invoke the clause that says we can vote out a shareholder for being incompatible?

The plane is coming up on its 3rd birthday this fall so it's still depreciating pretty fast. We appraise the plane and we owe him 25% of that. That's pretty clear.

Now we have money in the bank for certain accounts on our books, cash on hand, engine reserves, unscheduled maintenance reserves, new equipment purchases. Some of them we should pay out, some we shouldn't.

The ones we should pay out I consider part of his equity in the corporation. For example if we've been saving up for a WAAS upgrade by increasing the monthly payments but haven't committed to it yet, then yes I think that should be returned, I see no reason for him to pay for part of an upgrade that happens after he leaves. But as you said per hour charges for engine overhaul and payment of wear items we dont consider part of his equity, I consider that money already spent.


Joe
 
I see. Different when the existing partners buy out one of their own. In that case whatever you do you do not have a new guy with an unequal share, so whatever you think is fair works. He gets back the WAAS upgrade money and the remainiing partners eventually have to make up the loss. Sounds right to me. Thanks for the clarification. I think I was the one who got the equity and non-equity thing turned around, and mis-understood your meaning.

Three year old plane? I would guess my example $100,000 AC value was off a little bit.
 
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Areeda said:
I like the idea of a new partner negotiating the price with the outgoing one subject to the approval of the remaining ones.
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If you go that way, you'll still need a method to establish a value should a partner leave (quit paying his share) without supplying a replacement, as well as if/when a partner is ousted.
 
lancefisher said:
If you go that way, you'll still need a method to establish a value should a partner leave (quit paying his share) without supplying a replacement, as well as if/when a partner is ousted.
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Definetly. The way it's worded now after the initial period where the remaining partners decide if they want to buyout his share the partner leaving can sell his share to anyone the rest approve and no accounts change in the corporation (except the name on them). If he doesn't all the terms remain the same.

Joe
 
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