Aircraft Purchase, Ownership and Operation: Protecting the Interests of a Family Business Owner – Part 1 Access to private aircraft can provide productivity and other benefits for a family-operated business and improve the quality of life for the business owner and his family. However, purchasing, owning and operating a private aircraft requires careful consideration of a number of business, legal, tax and regulatory issues. These issues make it imperative that a small business owner consult with legal and tax counsel to ensure that the owner’s interests are properly represented in the purchase of the aircraft, that the owner purchases and operates the aircraft in a tax-advantaged structure, and that the owner operates the aircraft in strict accordance with the rules and regulations of the Federal Aviation Administration (FAA). This blog post provides an overview of several of the numerous issues that should be considered when purchasing, owning and operating a private aircraft and will be followed by additional blog posts providing a more detailed discussion on each of the issues raised below.

Initial Purchase of Aircraft

The first step in purchasing a private aircraft is often the preparation of a letter of intent (LOI) or other similar non-binding document setting forth the proposed terms for the purchase and sale of the aircraft.  The LOI is typically prepared by the purchaser and presented to the seller for consideration. Once the parties reach agreement on the general terms for the purchase and sale of the aircraft, the LOI is signed and legal counsel for the parties will prepare the aircraft purchase agreement (APA). The APA is particularly important to the purchaser as it provides the purchaser with rights to perform a thorough pre-purchase inspection and to perform other due diligence to ensure that the aircraft is in the condition represented by the seller or the seller’s broker.

Compliance with FAA Regulatory Requirements (Parts 91 and 135 Operations)

Privately owned aircraft are operated under either Part 91 or Part 135 of the FAA rules. Part 91 governs the operation of private aircraft for non-commercial, private carriage uses (e.g., flights for business and personal and family flights). Part 135 governs the use of private aircraft for charter flights and other commercial uses. Failure to comply with the FAA rules for the operation of a private aircraft can result in significant fines and liabilities, including the loss of insurance coverage for the owner and operator of the aircraft.

Liability of Owner/Operator of Aircraft

Owning and operating a private aircraft have the potential to expose an owner/operator to catastrophic loss. Many owners and operators are surprised to learn that they can be held liable for incidents of loss even when they are not piloting—or even onboard—the aircraft. Most risks associated with the ownership and operation of a private aircraft are not mitigated simply by titling the aircraft in the name of a separate legal entity, such as a corporation or limited liability company. Rather, the FAA extends legal and regulatory responsibility for flight operations to anyone who has “operational control” of the aircraft.

Sharing an Aircraft

Owners of private aircraft may enter into various types of arrangements to share ownership and/or use of an aircraft with others. Examples of such arrangements are leases, time sharing agreements, joint ownership, and charters. Each arrangement presents certain FAA regulatory compliance issues, risk allocation issues, and federal and state tax issues. This is true irrespective of whether the owner is sharing the aircraft with related parties (e.g., a subsidiary company, family members, etc.).

This is Part 1 in a series of blog posts by Wood Herren addressing various issues pertaining to the purchase, ownership and operation of private aircraft by family business owners. Stay tuned for Wood’s next post in this series, which will address other protections that an aircraft purchase agreement may provide a purchaser.

Transitions in the Family Business: Hope Is Not a StrategyIf last week’s post summarizing the third panel from the Transitions in the Family Business: A Conversation with Family Business Owners and Leaders event piqued your interest in selling a family-owned business, you may have more questions about the sale process. As part of the Transitioning to a New Owner panel, Frank A. McGrew IV, managing partner of McNally Capital, shared his top 10 questions that family business owners and leaders should ask before pursuing a sale of their business.

  1. Is your business ready to sell? Any buyer’s due diligence process requires a thorough evaluation of the seller and the seller’s business. Is your business ready for this examination?
  2. Are you personally and mentally ready to sell your business? It is easy to be consumed by the immediacy of the sale process. Before exploring a sale, ask yourself: What would I do next and for how long? How much money do I truly need to live on if I sell my business?
  3. When is the right time to sell? How will you know when the time is right? What are the trigger points to watch for, and how do you measure those?
  4. How much is your business worth to you? How much will another buyer want to pay? What is the likely range of these values?
  5. Who is the best and/or the right buyer? Are there certain buyers you do not want to approach or sell the business to? This could include competitors.
  6. How can you increase the odds of success in your favor during a sale and transition process?
  7. How can you maximize the purchase price and net proceeds from the sale?
  8. How can you quantify and better understand the principal risks for your business and a transaction process before you begin?
  9. What issues must be addressed before beginning a sale process?  For example, these could include legal, environmental or customer/supplier issues.
  10. Who and what are the most appropriate outside experts and resources you need to utilize for a successful outcome? Frequent players include a transactional attorney, a banker, a wealth management advisor, and a trustee. Perhaps most importantly, who will “quarterback” this process as your client consigliere?

After reflecting on and answering the questions above, potential sellers will be better equipped to succeed in a sale transaction.

This blog post was co-authored by Frank A. McGrew IV of McNally Capital. Frank is a Managing Partner and leads the Merchant Banking efforts at McNally.

Transitions in the Family Business, Part III: A Successful Sale This post is Part III in a three-part series summarizing and exploring Transitions in the Family Business: A Conversation with Family Business Owners and Leaders, a recent event for family-owned-business leaders that Bradley’s Family Business Advocates team co-hosted with Warren Averett. The event consisted of three panel discussions: Transitioning to the Next Generation, Transitioning to Nonfamily Executive Management, and Transitioning to a New Owner. See Part I of this series on Transitioning to the Next Generation, and Part II on Transitioning to Nonfamily Executive Management.

This post highlights the third and final panel’s discussion on Transitioning to a New Owner. In this panel, our speakers discuss their families’ experiences in selling their businesses. Selling a family-owned business is at the same time a complex business decision and a complex emotional decision. Depending on how ownership and control of the business are held within the family, realizing the rewards of a multigenerational effort through a sale will likely require the approval of multiple family members. Any number of factors may play a role in a family’s decision to sell its business — a new generation may be unavailable to take over, the family may want to pursue a new or different venture, or an offer may be too good to refuse.

Whatever the motivating factor, selling a business, especially a family-owned business, is almost always a once-in-a-lifetime experience. What may have taken several generations to build can easily be squandered in a bungled sales process. For this reason, families should engage competent advisors as soon as possible. A typical transaction requires input from a transactional lawyer, investment banker and accountant, among others. This team should add value by working together to structure a deal that accomplishes the family’s goals, whether that is protecting the family’s legacy, maximizing sales proceeds, facilitating a tax-efficient transfer, or limiting the family’s post-closing liabilities. When the time comes, experienced advisors help families analyze competing offers, which can include comparing different kinds of buyers (e.g., private equity versus strategic buyers) or different types of considerations (e.g., cash versus shares of the buyer’s equity).

Sellers have a natural tendency to underestimate the time and resources that will be required to successfully close a transaction. Although the due diligence required for every transaction varies, with few exceptions, buyers require a thorough evaluation of the seller and the seller’s business prior to signing on the dotted line and wiring funds. Throughout this process, families are challenged to maintain their business’ value, while negotiating and executing a handoff to the new owner. Deal fatigue is a serious threat not only to the proposed transaction, but also to a family’s existing business operations. A terminated sales process may disrupt existing relationships with customers and suppliers, open the door for competitors, and frustrate future opportunities to sell the business. Families aware of these challenges at the outset are better able to prepare for them as they may arise.

 

For related discussions, see ESOPs: An Alternative Exit Strategy for Family-Owned Business, a post on using an ESOP transaction as alternative to the traditional sales process, and Should You Hire An Investment Banker To Sell Your Family-Owned Business?, a post on the benefits of engaging an investment banker.