Dissecting The Fourth Element of the Six Intangibles that Build FBO Equity

Part One: Building a Sound Balance Sheet with Consistent EBITDA Performance

By John L. Enticknap and Ron R. Jackson, Principals, Aviation Business Strategies Group

In our continuing series expounding on the six intangibles that can build equity in your FBO, we break down the fourth intangible: Building a Sound Balance Sheet with Consistent EBITDA (Earnings Before, Interest, Taxes, Depreciation and Amortization) Performance.

The value of putting together a sound balance sheet consistently over several years has a lot of weight with the banking community, which is your primary ally when it's time to finance capital improvements to your facility. A strong balance sheet can also be viewed favorably by the airport authority when it's time to renew a lease or extend a lease for multiple years.

Adding in the dimension of demonstrating a consistent EBITDA performance is a plus when an FBO ownership is looking to sell the enterprise. Often, investors and buyers look to EBITDA performance in order to determine the value of an FBO, or for that matter any business. The resulting evaluation, and thus the offer, is usually based on a multiple of the EBITDA number.

The benefits of producing a sound balance sheet include:

• Provides a business snapshot of your FBO at a specific time.
• Easily calculates financial ratios to determine the company's fiscal outlook and profitability.
• Determines credit worthiness for investors and banks in order to obtain loans and funding.
• Show financial transparency into the company's assests and liabilities.
• Discloses the solvency of the FBO business to minimize investment risks.

In future blogs, we'll share some tips on how you can use your balance sheet to understand your current ratio, cash–to-debt ratio and debt-to-equity ratio. These numbers allow you to fully understand your FBO's financial position and how to measure liquidity. In addition we will discuss how to achieve consistent EBITDA performance.

There are many factors and nuances to developing a sound balance sheet that we will not be able to cover in this blog. Therefore, we encourage you to attend one of our FBO Success Seminars where we spend additional time discussing this important topic as well as others.

Please Share your comments in the space below.

ABOUT THE BLOGGERS:

John Enticknap has more than 35 years of aviation fueling and FBO services industry experience. 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. Visit the biography page or absggroup.com for more background.

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© 2016 ABSG

Why Office Space Is Premium Space at Your FBO

Part Two of the Four-Part Crafting Advantageous Hangar, Office and Tie-Down Agreements Series

By John L. Enticknap and Ron R. Jackson, Principals, Aviation Business Strategies Group

In our previous blog, we wrote about developing a favorable hangar agreement as the lead post for our new series about crafting advantageous hangar, office and tie-down agreements, which together are the third component of the six intangibles that can build equity in your FBO.

In this post, we center in on crafting an advantageous office lease agreement.

As with a hangar lease agreement, an advantageous office lease agreement can help generate passive rental income for the FBO. Therefore, it should stand as a separate but complementary component if it is to be tied to a hangar lease package for a flight department.

In determining the value of an office space to be let, keep in mind that an office area is really premium space. It is often finished out and is heated, cooled and may be plumbed for hot and cold water as well as lavatory facilities.

An FBO has a couple of options to consider when leasing commercial office space. First, a triple net formula is often applied that takes into consideration the tenant or lessee agreeing to pay all real estate taxes, building insurance and maintenance in addition to any normal fees that are expected under the agreement  to include rent, utilities, etc. In such a lease, the tenant may be responsible for a portion or all costs associated with the repair and maintenance of any common area.

The second option for a prospective tenant would be for the utilities, taxes, repair and maintenance to be included in the rental cost. This may be a simpler option for office space that is part of an office/hangar building. Multiple offices in a building may not have separate meters for electricity or water and may include multiple common areas such as lobbies, elevators, etc. The key issue for the FBO is knowing its costs of the facilities. They include the common areas and expenses for utilities debt service, lease costs, etc.

It’s important to keep in mind that like hangar agreements, FBOs should not devalue the true worth of office space in order to please a current or potential base tenant who wants a deep discount for the space based on promised potential fuel sales. It’s better to hold the tenant to measureable specific fuel sales goals that are spelled out in the agreement when considering any rent discounts.

As with hangar lease agreements, office lease agreements are a sublease and must conform to the master lease agreement your FBO has with the airport authority. Signatories to office subleases do have a right to know the contents of your master lease because they must also comply with its contents. In addition, terms for rate increases in your subleases should be similar to the master lease, and the term of subleases cannot be longer than the master lease term.

Please keep in mind that there are many factors and nuances to crafting an advantageous office lease agreement, and we will not be able to expound on all of them in the framework of a blog. Therefore, we encourage you to attend one of our FBO Success Seminars where we spend additional time discussing these important topics as well as others.

If you have a comment you'd like to share, please do so in the space provided below.

About the bloggers:

John Enticknap has more than 35 years of aviation fueling and FBO services industry experience. 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. Visit the biography page or absggroup.com for more background.

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How FBOs Can Craft Advantageous Hangar Agreements

Your Hangar Sits on Golden Ground

Part One of the Four-Part Crafting Advantageous Hangar, Office and Tie-Down Agreements Series

By John L. Enticknap and Ron R. Jackson, Principals, Aviation Business Strategies Group

In our previous blog, we concluded our four-part series on the 10 essential elements of a favorable fuel supplier agreement, which is the second component of the six intangibles that can build equity in your FBO.

In this blog post, we begin a new series about the third component, crafting advantageous hangar, office and tie-down agreements. Let’s start with the hangar agreement.

Hangars are among the most important real estate investments from which an FBO can generate true passive rental income. Therefore, the hangar footprint is golden ground to the FBO enterprise.

Too often, FBOs devalue the true worth of a hangar agreement. In the process of trying to please a current or potential base tenant, FBO owners and managers will provide a deep discount on hangar rent based on fuel sales potential. That’s why it’s important that the details of potential fuel sales be spelled out in the hangar agreement with specific language based on measurable fuel sales milestones.

Hangar lease agreements are a sublease and must conform to the master lease agreement your FBO has with the airport authority. Signatories to hangar subleases do have a right to know the contents of your master lease because they must also comply with its contents. In addition, terms for rate increases in your subleases should be similar to the master lease, and the term of subleases cannot be longer than the master lease term.

FBOs should have a more detailed agreement for the lease of an entire hangar complex to an individual or flight department, especially if the agreement is for a multiple-year term. Just as you have a written agreement with your airport authority, all prospective tenants should have written agreements for space within your FBO. In addition, FBOs should develop a rules and regulations document that spells out the dos and don’ts of tenants. Our final blog in this series will detail the rules and regulations section.

As part of your evaluation to determine rates and charges, it is imperative that FBOs determine the true cost of your real estate, including your hangars. Costs of the underlying land lease, construction or rent, maintenance, taxes, and utilities are all part the calculation. All these costs should be detailed and broken down on a per-square-foot basis.

FBO owners and managers should conduct a market study of comparable local and regional rental rates to determine the final rental cost to offer to the tenant. As mentioned, we recommend leasing your hangars for a profit and not subsidizing the lease cost based on potential future fuel sales. Instead, commit your lessee in writing to specific fuel uplift targets at an established price. Then detail an alternate pricing method that would go into effect if the targets are not met.

Please keep in mind that there are many factors and nuances to crafting an advantageous hangar lease, and we will not be able to expound on all of them in the framework of a blog. Therefore, we encourage you to attend one of our FBO Success Seminars where we spend additional time discussing these important topics as well as others.

If you have a comment you'd like to share, please do so in the space provided below.

About the bloggers:

John Enticknap has more than 35 years of aviation fueling and FBO services industry experience. 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. Visit the biography page or absggroup.com for more background.

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Breaking Down the 10 Critical Elements of an FBO Airport Lease, Part 4

By John L. Enticknap and Ron R. Jackson, Principals, Aviation Business Strategies Group

In previous blog posts we discussed nine of the 10 critical elements of an FBO airport lease as part of our series on the six intangibles that can build equity in your FBO.

In this final post for this subject, we will discuss the last critical element, Airport Minimum Standards.  The Airport Minimum Standards document is basically what creates a level competitive playing field. It further helps protect the intrinsic value of your enterprise by spelling out the minimum requirements for an FBO or SASO (Specialized Airport Service Organization) operating at your airport and sets the standard of compliance for existing or potential competition.

In essence, it states that if a new operator wants to start an FBO at your airport then they must make the same investment in facilities, pay the same rentals and fees, provide similar services, and operate on the same level as your business.

Although an FBO Minimum Standards document is generally separate from your lease and resides as part of the rules and regulations of the airport, it is important to make sure it is called out in your lease. Many airports do not have minimum standards and this may cause a problem for the existing businesses.

Two important elements of an airport minimum standards document are its purpose and the issuance of a permit, lease or operating agreement.

Purpose

The purpose of minimum standards is to establish and make requirements for general aviation aeronautical activities.  They are established in the public interest for the safe and efficient operation of the airport in order to enhance orderly growth and comply with federal, state and local government legal requirements. It also provides information to parties operating or desiring to operate at the airport. These standards in general establish minimum levels of service that shall be offered in order to protect the public welfare and prohibit irresponsible, unsafe or inadequate services.

Permit, Lease or Operating Agreement

No person, including an aeronautical service operator, shall offer or perform a commercial aeronautical activity, operation or service at an airport without written authority for such service. Such authority will generally be contained in a Permit, Lease or Operating Agreement that has been negotiated between the FBO/SASO and the airport.

Keeping these elements in mind will assist you in maintaining your FBO business no matter what the competition may bring to the airport environment.  Make sure the minimum standards are up to date. Many documents we review for our clients are up to 20 years old.

In our next blog, we’ll start a new series based on the second intangible that can build equity in your FBO: A Favorable Fuel Supplier Agreement.

About the bloggers:

John Enticknap has more than 35 years of aviation fueling and FBO services industry experience. 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. Visit the biography page or absggroup.com for more background.

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Breaking Down the 10 Critical Elements of an FBO Airport Lease, Part 3

By John L. Enticknap and Ron R. Jackson, Principals, Aviation Business Strategies Group

In previous blog posts we discussed six of the 10 critical elements of an FBO airport lease as part of our series on the six intangibles that can build equity in your FBO.

For this blog post, we'll break down three additional key airport lease elements and provide insight and tips to help you protect your business while adding intrinsic value to your enterprise.

Improvements, New Buildings and Renovations

FBOs should view this section as a way to spell out and secure future equity in their enterprise. Making lease hold improvements, building new facilities and making timely and needed renovations are critical in negotiating a longer lease term and potentially additional optional years.

In this section, it is critical that you consider the best investment in facilities that gains two things:

• Longer lease term
• Return on your investment (ROI)

Having a business plan that details what your goals are will greatly assist you in getting the project financed and approved by your board of directors.

During your evaluation of expansion projects, it is important to keep in mind the goals of the airport authority. Airports like to see investments into the infrastructure of the airport environment, expansion of the business base and job creation. Make sure your project meets these goals and adds to the success of the airport master plan.

Insurance, Indemnity and Hold Harmless Agreement

Protecting your enterprise from unforeseen perils that can expose you to risk and harm is what this section is all about.

Insurance must meet the requirements of the lease. In many cases the lease insurance amount requirement may be too low, such as $2 million or $5 million in aviation liability coverage, auto liability and workmen’s compensation insurance. You should review these requirements with your insurance broker to make sure you are adequately insured and there are no clauses in the agreement that cannot be met. The airport will want to be a named insured on your policy. This is a standard requirement.

Both the Indemnity and Hold Harmless clauses are very important to the FBO. When there are problems at the airport that involve your business and the airport authority, these clauses may come into play. Unfortunately, in many cases the legal language in both of these paragraphs can be onerous to the FBO. The airport may want to be completely indemnified for any actions on its part and held harmless for any acts, gross negligence or misconduct.  Your legal counsel should review this language to make sure you can live with it. In many cases, since you are operating at a government owned facility, the FBO may have to accept less than ideal language.

Environmental Liability

In running the day-to-day FBO operations, owners and operators are constantly dealing with aviation fuels and other chemicals that can be environmentally hazardous. With this in mind, it is important to understand that if you are operating a tank farm system for fuel storage you are required to provide environmental insurance. If you are operating at an older airport and you are new to the facility or the ground, you may want to consider completing a Phase 1 environmental assessment  prior to use. This inspection could be a requirement of your insurance underwriters. Your legal counsel and insurance brokers should review the inspection and subsequent lease language prior to signing an agreement.

In our next blog, we’ll examine the remaining critical element of your lease, the Airport Minimum Standards section. We consider this one of the main six intangibles and will treat this as a separate subject because it is a very important component with distinct elements.

About the bloggers:

John Enticknap has more than 35 years of aviation fueling and FBO services industry experience. 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. Visit the biography page or absggroup.com for more background.

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Breaking Down the 10 Critical Elements of an FBO Airport Lease, Part 2

By John L. Enticknap and Ron R. Jackson, Principals, Aviation Business Strategies Group

Previously we discussed three of the 10 critical elements of an FBO airport lease as part of our series on the six intangibles that can build equity in your FBO.

For this blog post, we'll break down three more of the airport lease elements and provide insight and tips to help you protect your business while adding intrinsic value to your enterprise.

Payments, Including Rental, Gross Revenue, Flowage Fees and out Years to Include Escalators

By paying attention to the exact wording of this very important element, you can protect yourself from any future disagreements or disputes. Payments may include investments in refurbishment of your terminal building and/or hangars to keep them up to date. Payments may include capital investments for a new hangar or building to exercise lease extensions. These rent payments and additional investments are all financial obligations that contribute to the success or potential failure of your FBO. Please note that each one of these elements is negotiable; therefore, do your homework by getting other comparable FBO leases in your area and region. If you have a competitor at your airport, ask to see its lease. Because it is considered a public record, you can obtain a copy under the Freedom of Information Act (FOIA). Remember, knowledge is the key to negotiating your best rates.

Building/Ramp Maintenance Responsibilities

Be sure to be very specific with the language for this element. Any ambiguity can lead to finger pointing, and the FBO can end up on the short end. If you are leasing buildings owned by the airport, most leases provide for the lessee (FBO) to pay for building upkeep, utilities and taxes. If you operate in the snow belt, it is incumbent on the FBO to understand whose responsibility it is for snow plowing ramps, approach taxiways or other areas.

Be very clear on taxes. In many cases you don’t have to pay property taxes on buildings owned by a city or municipality. In some states you may have to pay school taxes or other fees. Therefore, be clear on defining responsibilities.

Termination by the FBO or Lessor

In this section, it is wise to spell out unequivocally how the lease can be terminated by either party in cases of dispute, natural disaster, fires or other unforeseen events. What is most important is that the parties to the agreement have sufficient time to correct and negotiate any disputes or other occurrences. The “cure” clause should be at least 30 to 60 days to fix problems. This length of time is generally not used if the issues are late payment of rents or fees.

When there are issues, prompt resolution is the best way to solve problems. As Colin Powell once said “Bad news isn’t like wine. It never gets better with age.”

In our next blog, we’ll examine the final three critical elements of your lease with additional tips that can help you build equity in your FBO.

About the bloggers:

John Enticknap has more than 35 years of aviation fueling and FBO services industry experience. 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. Visit the biography page or absggroup.com for more background.

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10 Critical Elements of an FBO Airport Lease

By John L. Enticknap and Ron R. Jackson, Principals, Aviation Business Strategies Group

As part of a new blog series, we'll take each of the six intangibles that can build equity in your FBO and give you valuable insight as well as insider tips to help you add intrinsic value to your business.

Starting at the top of our intangible list, developing a long-term lease with your airport authority is the lifeblood of your FBO operation and plays a large part in building equity in your enterprise.

The critical elements of a lease to understand, and that are a part of the negotiating process with the airport authority, include the following:

1. Term and option years
2. Operating rights
3. Payments, including rental, gross revenue, flowage fees and out years to include escalators
4. Building/ramp maintenance responsibilities
5. Assignment sale clause
6. Termination from FBO and lessor
7. Improvements, new buildings and renovations
8. Insurance, indemnity and hold harmless agreement
9. Environmental liability

The tenth critical element, an Airport Minimum Standards document, should be part of your lease. We consider this one of the main six intangibles and will treat this as a separate subject in a future blog because it is a very important component with distinct elements.

In our next blog, we will break down these components with some additional tips to help you negotiate the optimum lease. 

About the bloggers:

John Enticknap has more than 35 years of aviation fueling and FBO services industry experience. 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. Visit the biography page or absggroup.com for more background.

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Six Intangibles That Can Build Equity in Your FBO

By John L. Enticknap and Ron R. Jackson, Principals, Aviation Business Strategies Group

Running a successful FBO operation requires attention to six intangibles. Reaching favorable terms and taking care of these intangibles the right way will help build equity in your business.

If you’ve ever gone to a bank to get a project financed, you know that it takes a savvy banker who understands the FBO business to get the project done. Most lending institutions can’t get over the first hurdle when they discover that an FBO doesn’t own the land where a proposed hangar is to be built.

To be sure, the FBO business is relatively unique. Often airports require FBOs to make major capital improvements as part of their lease, especially at time of renewal or in granting a request for a lease extension. Yet, at the end of the lease, none of the improvements are tangible assets that an FBO operator can liquidate. They are owned by the airport, which also owns the land.

Besides some ground service equipment, a typical FBO doesn’t have much tangible collateral.  The real value bankers or investors are interested in is mostly the intangibles that help increase equity in an FBO enterprise. These include:

1. A long-term lease with extension options.
2. A favorable fuel supplier agreement.
3. Advantageous/profitable hangar contracts/agreements.
4. A sound balance sheet with consistent EBITDA performance.
5. A strong Airport Minimum Standards document.
6. A strategic business, operational and marketing plan.

In coming blogs, we’ll discuss each of these and make recommendations on how to improve the equity in your FBO.

About the bloggers:

John Enticknap has more than 35 years of aviation fueling and FBO services industry experience. 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. Visit the biography page or absggroup.com for more background.

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