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Structuring a Partnership


Conrad

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Here's one for you guys. I'm the sole owner (just kidding, the bank owns most of it) of my aircraft, and had not considered a partnership on it. I've just discovered potentially a good partner in the venture though, and thinking about what a good partnership could do for me it does seem attractive. There's much much more to discuss with this potential partner (who would be a first time owner) to identify whether a Mooney fits his mission, how much he wants to fly, how much he is willing to spend on upgrades and maintenance, and all that jazz. Any further action would be predicated on very positive results of these talks. I am not considering adding more than one partner.

When I break down the effects this might have, here's what I've got:

Pros:
For the same budget, could spend more time actually flying.
For the same budget, could equip better avionics come upgrade time.
The plane itself would stay healthier with steadier use.
My partner's down payment would be applied to the principal with the bank (?), reducing interest costs.

Cons:
We're both likely to see the plane as an XC tool, so scheduling conflicts are more likely to occur over entire weekends or holidays or Oshkosh.
I'm not married, I don't own a house, and I might want to live somewhere else in a handful of years.
Thus I would want to retain the right to buy my partner out in an equitable manner.
There's little incentive for a partner to invest in gadgets if he can be bought out at market rate given that I'm guessing an M20E will retain at most 30% of an fancy avionics install's cost.

Does anyone -- Have insight into additional issues I may not have thought of at all? Think I may be misestimating a particular pro or con? Have experience structuring an agreement so that it is equitable even given the circumstances outlined above?

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@peevee I also thought I'd steal their car for good measure.

In seriousness though, a contract is there to establish/protect some rights, which implies treating the potential partner as an adversary for the purposes of creating the terms, and of course expecting him to do the same of me. If I maintained extra rights in a situation in which I wanted to exit the partnership, it would be sensible for the mx/upgrade cost breakdown to not be 50/50.

Edited by Conrad
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It sounds like you don't want a partner that buys in, per se. Have you thought about just letting the partner start paying half of all time-based fixed costs? You would also come up with an hourly rate that covers use-based costs. An "entry" fee would be reasonable as well.

That helps make your flying a little cheaper (mostly by sharing fixed costs) and leaves you both with an easy exit plan.

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Contract or no contract, I would not want to be in a partnership with anyone I had to have an adversarial relationship with at any point. Of course I'd want a contract, but negotiations would start over a couple of beers to determine compatibility. If I didn't think I could see eye to eye on everything, there would be no need for the contract as there wouldn't be a partnership.

Maybe that's why I've never had a partnership in my plane.

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4 hours ago, Conrad said:

@peevee I also thought I'd steal their car for good measure.

In seriousness though, a contract is there to establish/protect some rights, which implies treating the potential partner as an adversary for the purposes of creating the terms, and of course expecting him to do the same of me. If I maintained extra rights in a situation in which I wanted to exit the partnership, it would be sensible for the mx/upgrade cost breakdown to not be 50/50.

Basically you create an llc, the llc owns the plane. The operating agreement outlines the ownership percentages and how members come in and out of the group. That is your contract. I can send you a copy of ours, it's quite comprehensive. 

Edited by peevee
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I was in a 4 owner partnership for 6 years in a Piper Archer.  For all practical purposes it was very enjoyable.  The hourly flying costs were lower, nice plane, almost no time conflicts, and flew to a lot of beautiful places in the plane.  I've now owned a 1978 J as sole owner for over a year.  I can say that the intangible benefits far far outweigh the financial benefits of the partnership.  The plane in a partnership is just not treated quite as well as if it is your own.  We seemed to have a lot of unnecessary mx issues and would often buy new vs overhauled this or that etc..  We spent a lot of time keeping track of billing issues, mx decisions, upgrade decisions, scheduling, and other issues that may crop up. If  this were just one of my hobbies rather than my primary hobby then a partnership might be a great long term option.  Another phenomenon is that the overall cost to run the Mooney has been just a little over double than the 25% ownership in the Archer while the plane is being maintained with a higher level of scrutiny.  My vote is stay single owner.  I'm interested to see others thoughts.

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You might set up a non-equity partner, with a small buy in, pro-rated maintenance expenses and a predetermined hourly rental rate. Then when the partner wants out, there's no big deal, they can just walk away. 

But single ownership has many intangible benefits, as described above.

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4 hours ago, AaronDC8402 said:

It sounds like you don't want a partner that buys in, per se. Have you thought about just letting the partner start paying half of all time-based fixed costs? You would also come up with an hourly rate that covers use-based costs. An "entry" fee would be reasonable as well.

That helps make your flying a little cheaper (mostly by sharing fixed costs) and leaves you both with an easy exit plan.

+1.  This is also an excellent chance to experience ownership without risk for the other guy.

Also:

-He should pay the additional cost for insurance (if any) by himself.

-Scheduling is first-come, first served up to 15 days and 2 weekends in a month.  After 15 days, the other person has priority.

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It sounds like you would be more comfortable just renting to him/her by the hour and having an annual fee to cover any extra insurance cost.  I would also have a "you broke it, you fix it" agreement.   

Personally, I wouldn't do any of this because a non-owner pilot probably cares less about engine longevity and it is possible that some would abuse the engine. 

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We have 4 pilots in an LLC that owns our plane too.  We have the 'contract' and we have a separate operating rules agreement.  Be sure to put everything in one or the other.

Monthly dues to pay for fixed costs and upgrades (hangar, insurance, registration, annuals, subscriptions, etc.)

Hourly costs to pay for expenses related to aircraft operations (engine, oil, prop, mag, tires, plugs, etc.)

Scheduling.

Damage.

What to do if one of you wants out.

If you want a copy of our agreements, PM me and I'll send them to you.  They are living agreements though, so I have a few proposed changes for our next meeting.

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The best of 3 aviation partnerships I've been in was the one where we met, together bought a plane, and treated each other as equals.  It went very well & conflict was rare and always quickly resolved. 

We also had no issues with spending money on the plane, for which we paid cash.  Adequate funds always help a relationship. 

Less comfortable was one where I bought a share from a fellow who already owned the plane. He was used to making his own decisions and transitioning to shared responsibility was a slow process.

 

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19 hours ago, peevee said:

Doesn't sound like you want a partner. Sounds like you want to call the shots, take their money, and kick them out when you're done with them. 

LOL! That's certainly an option. I was in exactly that type of arrangement as a "non-equity owner" in a Comanche for a few years. In that case, ownership was in a corporation (these days an LLC will probably be a better choice) and I owned one share. It worked out well.

19 hours ago, Conrad said:

In seriousness though, a contract is there to establish/protect some rights, which implies treating the potential partner as an adversary for the purposes of creating the terms, and of course expecting him to do the same of me

No it doesn't. Exactly the opposite. It means (not implies) you both recognize you are entering into a arrangement and want to get your understanding in writing in order to avoid most potential areas of conflict.

Consider your KOSH trip example (add Thanksgiving and Christmas family visits and 3-day weekends to the list if you want) . Perhaps you think it's better to stay silent and then argue about who gets to go when it comes up, but I think it's better to be up front about scheduling issues at the beginning and document what you both agree to.

True story. The absolute worst business court case I ever saw involved two guys who had been best friends since childhood. One became a residential landlord; the other founded a major trash hauling company in the community. When the real estate crash of the 1980's occurred, the landlord was in dire straits and couldn't afford to pay for much to maintain his properties.  The trash hauler stepped up, servicing his apartments without current payments. That's what best friends to. But...

When the economy recovered, the trash hauler expected to be paid; the landlord thought his best friend was lending a helping hand as just a friend. Both believed their positions in good faith. Feelings were legitimately hurt. It was like a nasty divorce by a married couple who once loved each other but now hated each other.

There is nothing wrong with doing business with friends. So long as you do business with friends.

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I bought into our LLC partnership in 2010 and never looked back. At the time there were four of us, but one wanted to sell due to health issues and we bought him out.

We split everything 3 ways and have never had a scheduling problem in all that time. When one partner wants to take her on an extended trip, we ask around first if it's ok. To date nobody has said no.

As opposed to other partnerships where egos and personalities get in the way, we have all become close friends.

But I have to agree with peevee, it does sound like "you want to call the shots and kick them out when you're done with them." 

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A good way to ensure fairness of buyout terms is to empower seller to become a buyer, for example: "you set your sell at such a great (high) number, now that's the number at which you must buy me out."

+1 on hashing things out in advance. If your partner becomes your adversary, you've both failed. No good outcomes there.

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