Back-to-back transactions
By Jeff Wieand - December 1, 2008
A prominent aviation lawyer complained to me recently when his outraged client discovered he was being “back-to-backed.” The lawyer wasn’t pleased either, but he acknowledged that so-called back-to-back transactions are common in the business jet marketplace.
That’s not surprising. Lots of money changes hands every time a corporate jet is bought or sold. For some salespeople, the opportunity to stuff a sizeable amount of that money into their own pockets can be irresistible, and back-to-back transactions can make that possible.
To see one way a back-to-back might occur, let’s consider the sort of deal my lawyer friend complained about, where the salesman conceals the owner’s identity from the buyer. Suppose you’re in the market for a Falcon 2000. Sal, an aircraft salesman, tells you he has a terrific one that he would consider selling to you for $20.5 million. After some back and forth, you agree to pay $20 million. You talked him down, and you think you’re getting a deal. Meanwhile, Sal approaches Owen, the owner of the aircraft, and says he’ll buy it for $19 million. Since Owen thinks that’s close to what the aircraft is worth, he agrees.
Your purchase agreement is between you (the buyer) and Sal’s company, XYZ Co. LLC, (the seller). Owen’s deal, meanwhile, is set down in a second purchase agreement between Owen as the seller and Sal’s XYZ Co. as the buyer. All of your dealings are with Sal; you never speak to Owen and don’t even know he exists. Sal arranges the title search and tells you it’s clear, so you never see that XYZ Co. isn’t the aircraft’s registered owner. After some kind of prebuy evaluation–the less, the better, as far as Sal is concerned–you close and get a bill of sale from…Owen. What happened is obvious: Sal used your money to buy the aircraft from Owen for $19 million, pocketing $1 million, an amount greatly in excess of a standard brokerage commission–which isn’t to say that Sal won’t try to collect one of those also.
In this story, it’s you, the real buyer, who got bilked, assuming Owen received fair market value for the aircraft. But it often happens the other way around. If the buyer knows the aircraft is worth $19 million and won’t pay more, Sal will have to convince Owen to let it go for $18 million in order to net $1 million for himself.
This all sounds easier to put together than it is. Sal, of course, never intends to own the aircraft–even briefly. Unless he is a business jet dealer with ample financial resources or just a whole lot wealthier than the typical back-to-back artist, he doesn’t have $19 million to plunk down for a Falcon 2000, no matter how briefly the money would be tied up. In fact, Sal may not even have, say, $250,000 to put down as a deposit with an escrow company. So he will want to use the real buyer’s deposit (and later, the real buyer’s purchase money) to acquire the aircraft. Consequently, back-to-back deals frequently come to light at the stage of funding an escrow deposit and checking the title. Sometimes this blows up the deal, sometimes not. (Note that if Sal does take title to, or is deemed to have obtained ownership rights in, the aircraft, it may become subject to claims by his creditors. Needless to say, it’s not likely Sal has AAA credit.)
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