If you are considering buying a yacht, Make sure to do “due diligence” and review your options, including corporate ownership.
Story by Danielle Butler, Esq.
A common ownership scheme in the yachting industry is for a single-asset company to own a yacht.
The corporate ownership has its benefits, including potential cost, tax and duty savings, a shorter closing time and advantages in flagging and registration, to name a few. All of these advantages can naturally entice buyers to consider purchasing the company owning the yacht instead of simply purchasing the yacht itself. It is feasible, but buyers should be aware of major differences between transactions.
A typical yacht purchase transaction starts with a buyer making an offer to a seller through a yacht broker via a written document known as a “Vessel Purchase and Sales Agreement.” If the seller is a company, the buyer typically only purchases the company’s asset (the yacht itself). Usually, yacht brokers manage the entire process from offer through closing, occasionally with the assistance of an attorney.
Purchasing the company that owns the yacht is an entirely different process, which an attorney is best qualified to handle along with a yacht broker.
One of the major differences between the two transactions is the drafting of documents. The first document that the parties will be asked to sign when purchasing a company is a Letter of Intent that outlines the transaction’s business terms. This Letter of Intent serves as the basis for an Agreement to Purchase the Company, which differs greatly from the standard Vessel Purchase and Sale Agreement. A buyer should not enter into a Vessel Purchase and Sale Agreement when purchasing a company.
The Purchase Agreement is a key document that buyer and seller must review in minute detail to ensure that it correctly outlines the terms to which they have agreed. It is in the Purchase Agreement that the parties should define everything that the buyer intends to purchase, including any assets, intellectual property and goodwill. The following checklist details the items that the agreement should address:
• Names of seller, buyer, and company
• Background information
• Assets being sold
• Purchase price and asset allocation
• Any adjustments to be made
• Terms of the agreement and payment terms
• Inspection of the asset
• List of inventory included in the sale
• Any representation and warranties of the seller
• Any representation and warranties of the buyer
• Determination as to the access to any business information
• Determination as to the running of the business prior to closing
• Fees, including broker’s fees
• Date of closing
• Closing or Settlement Sheet
Once the seller and buyer sign the Purchase Agreement, the buyer has a specific period of time to access to the company’s books and records, known as the due diligence period. Typically, the seller will require a down payment or deposit to secure the sale, either upon signature of the Purchase Agreement or at when the due diligence period begins.
The buyer must conduct due diligence not only on the company, but also on the asset itself, such as a yacht survey and sea trial. The information uncovered during the due diligence should give the buyer a realistic picture of how the business is currently performing, and how it is likely to perform in the future. It should also highlight any issues or problems. A few of the questions buyers need to ask include: Are the company shareholders authorized to sell the business? Does the company own all assets outright? Are there any regulatory, environmental or litigation issues? Are there potentially hidden financial issues?
Beware of skeletons! The best course of action for buyers is to trust only what they can verify and for sellers/brokers to fully disclose all pertinent information. Many companies have negative features that sellers are reluctant to discuss. But if buyers uncover problems during the due diligence process, they may be reluctant to move to closing. Negative aspects that are clearly presented and discussed can be overcome, avoided or modified. There must be an end to the negotiation process or things will begin to unravel. Trying to re-open negotiations after a Purchase Agreement has been signed may lead to a collapse of the entire deal, another reason for sellers to be up front with disclosures.
Once these hurdles have been cleared, the transaction will move into the next phase—closing the deal. The closing or settlement sheet will outline the transaction’s financial aspects. In order to avoid surprises, the parties should have negotiated all settlement terms before closing.
Buyers may obtain financing when purchasing a company just as they can when purchasing a yacht. All the work that they have done during the negotiations and due diligence period will be important, since lenders will require many of the transaction documents. Lenders will usually require the Purchase Agreement, all details pertaining to the business and the sales, accounts for the last three years and buyers’ personal assets and liabilities details.
Purchasing a company is not any more complex than purchasing the vessel outright; it is just a different process unfamiliar to most in the yachting industry. However, with the proper diligence and professional counsel, buyers may find the business advantages of such a transaction better suited for them than just purchasing the vessel.
About the author
Danielle J. Butler is a maritime attorney located in Fort Lauderdale, Fla., handling litigation and transactional matters within the yachting and pleasure boating community.
She may be contacted at 786-543-1141 or email@example.com.