FBO Best Practices Series #5: Leverage Your Lease
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By John L. Enticknap and Ron R. Jackson, Aviation Business Strategies Group - ABSGgroup.com
Welcome to our blog series on FBO Best Practices. With each blog post in this series, we’ll discuss “Best Practices” in running an efficient and effective FBO operation.
Best Practice #5: Your lease is your leverage and the cornerstone of your enterprise. Don’t wait until your lease is ready to expire to develop favorable terms.
We’re often asked at our NATA FBO Success Seminars, “When is a good time to negotiate a new lease with the airport?” Having worked with many FBOs in restructuring their leases, we can say unequivocally the answer is simple: anytime.
This might sound contrary to what you’ve been told or believe, but here are the facts:
- A long-term lease is one of the best ways to add value to your FBO business.
- When you make any substantial investment in your business, negotiate a lease extension.
- Your lease determines how, what, when and where you can provide services at the airport. It needs maximum flexibility for your FBO to succeed.
- A lease with 10 years or fewer remaining is a major detriment to the value of your business.
Let’s look at an example where an FBO suffers from decreased value due to a short lease term.
In the current mergers and acquisition (M&A) market, a good FBO property will sell for approximately 10 times earnings before interest, taxes, depreciation and amortization (EBITDA). The industry uses EBITDA to evaluate FBO worth because it’s a measurement of a company's operating profitability. Because EBITDA excludes depreciation and amortization, EBITDA margin can provide an investor with a cleaner view of a company's core profitability.
Let’s assume an FBO is valued at $1 million EBIDTA. Applying the 10 times earnings multiple formula, the business might be worth $10 million on a sale. However, if the FBO has only 10 years remaining on a lease, the buyer will make nothing on his investment while assuming all the risk. Therefore, this deal will not get done!
So what does the buyer offer? Perhaps half of EBITDA or $5 million!
In a scenario where the lease has only five years left, the buyer may offer $2.5 million. However, the buyer may insist, as part of the lease assignment, the airport approve a lease extension. In this case, if the FBO owner obtains the lease extension prior to the sale and he enjoys the financial benefit!
FBO owners know too well that, as part of a lease negotiation for a new lease or a lease extension, capital investments are required. Because airport authorities/sponsors are seeking to build or expand their municipal airports, they understand a reasonably long-term lease is required in order to amortize the FBO’s investment.
These lease issues were discussed a few years ago on a national level. Airport mangers know that without realistic lease terms, money is not available to the FBO at reasonable lending terms to build quality hangars and terminals.
Flexible Terms
Another important point we mentioned earlier involves flexible terms in the lease. When FBOs need to build facilities, they’re going to need capital. In most cases, FBOs will likely go to their local bank.
However, most bankers don’t understand the FBO business model. Imagine the banker’s surprise when he finds out the FBO doesn’t own any land!
Therefore, your lease is your collateral. You need a lease with at least 20 years remaining if you want to have a payback period of 20 years. However, the bank will need security as you get to the end of the payment period so a 25 to 30 year lease term is necessary.
Let’s say you get a lease for 20 years plus two five-year options to extend. The option language must be flexible so the banker understands you can extend the lease as long as you are paying your rent and in compliance with terms of the document.
An FBO also needs language in the lease to provide for the mortgage on the building to be built. The bank needs to approve this language as well as the airport. However, this can be difficult.
There are airport managements that don’t want to allow any mortgages. There may be banks that do not want to lend funds on leased land. All these issues can make for complicated lease negotiations. Therefore, an FBO must start early and allow plenty of time to complete a negotiation. This can take years.
Minimum Standards
In negotiating an FBO lease extension, minimum standards rules and regulations must be included. Minimum standards protect an FBO’s investment in their enterprise from unfair and discriminatory competition. Minimum standards lay out what services must be provided, what services are to be provided, and the size of the facility that must be built. Thus, minimum standards provide a level playing field for any competitor seeking to operate at the airport as they must also abide by the same rules and investment.
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Send us an email to Ron@thejacksongroup.biz or jenticknap@bellsouth.net and visit us online at www.ABSGgroup.com.
About the bloggers:
John Enticknap
John Enticknap has more than 35 years of aviation fueling and FBO services industry experience and has served as president/CEO of Mercury Air Centers, a network of FBOs he grew from four facilities to 21 locations. He has international FBO experience including opening the Royal Aviation Terminal in Kuwait. John has held executive management positions with DynAir Fueling and CSX Becket Aviation and holds a Bachelor of Science in industrial management from Northeastern University. He teaches the acclaimed FBO Success Seminar for the National Aviation Transportation Association (NATA) and is an NATA certified safety auditor. John is the co-author of the forthcoming book FBO Survival! Keeping Your Operation Lean, Mean & Profitable. He also writes an industry blog titled FBO Connection for Penton‘s AC-U-KWIK Alerts. He is an active ATP and CFI rated pilot with more than 8,100 flight hours; certified in both fixed and rotary wing aircraft. jenticknap@bellsouth.net, Ph: 404-867-5518 www.absggroup.com
Ron Jackson
Ron Jackson is co-founder of Aviation Business Strategies Group and president of The Jackson Group, a PR agency specializing in FBO marketing and customer service training. He has held management positions with Cessna Aircraft, Fairchild Aircraft and Bozell Advertising. Ron developed the strategic marketing communication plan and programs for Mercury Air Centers and consults with numerous FBOs in areas of marketing, promotions and customer service training. He is the author of Don’t Forget the Cheese! The Ultimate FBO Customer Service Experience. and co-author of the forthcoming book FBO Survival! Keeping Your Operation Lean, Mean & Profitable. He is a certified journalist and co-developed NATA’s acclaimed FBO Success Seminar Series. Ron writes an industry blog for Penton’s AC-U-KWIK Alerts titled: The FBO Connection. Ron@thejacksongroup.biz Ph: 972-979-6566 www.absggroup.com