Owning a fixed base operator (or “FBO”) is a solid investment. As a necessary staple in aviation, an FBO is a commercial business granted the right by an airport to provide certain types of services for an aircraft, passengers, and crew on the airport’s premises. Not only does an FBO provide a place for pilots to refuel and perform minor maintenance tasks on the aircraft, but they also provide a wide range of other services. For example, FBOs provide ground handling, aircraft parking, customs and immigration, passenger lounges, crew rest areas, meeting rooms, security, concierge services, and much more. General aviation has taken off over the past century and has grown into a multibillion-dollar industry. Because FBOs are so embedded in the fabric of the aviation industry and so necessary to keep the industry flying forward, the purchase and operation of an FBO is a reliable venture. This article lays out several tips for buying an FBO.
Assemble Your Acquisition Team
When entering into the purchase of an FBO, the team you assemble is vital for success. The purchase of an FBO includes certain types of aviation specialists, which can very depending on the specific type of FBO you wish to acquire. The right acquisition team will help you properly value the acquisition, overcome financial and regulatory hurdles, and close the deal, all while efficiently streamlining the entire process.
At a bare minimum, the core acquisition team should include:
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- An aviation lawyer who specializes in mergers and acquisitions (“M&A”) and aviation regulatory law,
- A business broker who understands the aviation industry, and preferably the specific type of FBO you wish to acquire, and
- A technical specialist, whether an individual or an entire team, to assist with specific areas of due diligence and regulatory and technical compliance
Normally, aviation lawyers or business brokers should have a solid and reliable network to assist you in assembling the right team.
Conduct the Appropriate Due Diligence
Due diligence may seem simplistic initially, but it is a fundamentally important aspect of any purchase of an FBO. Due diligence done well often does not receive the proper praise. But, done poorly, insufficient process or investigation can create unforeseen liability and additional costs on your business. Two categories to focus on are: (a) economic due diligence and (b) legal due diligence.
1. Economic Due Diligence:
- As with any type of deal, economic due diligence should always begin with an analysis of the target company’s financial statements, including its balance sheet and income statement. A business broker should be able to review these and help analyze whether the financial statements are above or below market, and also to assist in determining the appropriate EBITDA multiple applicable to the FBO. Beyond these basic financial concerns, certain additional fundamental metrics can help appropriately analyze a target FBO, including:
- Airport Traffic Metrics: Gallons of jet fuel sold at the specific FBO or airport generally, number of annual aircraft operations including hours of flight activity, number of hangered aircraft, including a year-over-year analysis of each
- Lease Agreement Fundamentals: Length of term and remaining term, annual or other types of rent adjustments, and costs and expenses of items required under lease such as insurance
- Equipment / Inventory: Current and past inventory levels to assist in analyzing which products sell the most or are most profitable and what types of equipment are at their end of life and may need to be replaced soon
- Personnel: Number of employees and independent contractors, pay rates, and costs of benefits plans for employee or IC, to help analyze whether a reduction in workforce or pay rates can immediately lead to greater profitability
2. Legal Due Diligence
The right aviation lawyer should be able to guide the entire due diligence process with a due diligence request list, which will request all of the necessary financial and legal documents and information needed to analyze the deal and discover potential liabilities. An FBO transaction requires a solid understanding of the intersection between M&A law and areas of law impacting FBOs, including aviation, real estate, and environmental law to name a few. Several legal issues should be investigated and overcome when purchasing an FBO, including:
- Corporate Governance: Current cap table, operating agreements or bylaws including any transfer restrictions, in an effort to ensure 100% of the target company is transferred without any restrictions or resulting encumbrances
- Legal Contracts: Vendor, supplier, customer, airport, employee, and IC contracts should be analyzed to confirm the nature of relationships and potential liability or obligations flowing therefrom
- Regulatory Requirements and Approvals: Licensing requirements, regulatory approvals both on an annual recurring basis and also for the transfer of the target company, and insurance requirements
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- Past Violations: Current and past history of legal violations, including an assessment of any resulting or potential liability
These are just some of the high-level subject areas included within a due diligence list. Again the right attorney should have a template due diligence request list, access to a virtual data room, and knowledge of how to streamline the entire process to be able to gather and analyze all of this data.
Structure the Purchase Agreement to Limit Liability Exposure
Once the appropriate due diligence is conducted, a prospective purchaser should have a solid understanding of the assets and potential liabilities of an FBO target. Purchaser’s counsel should ensure that the Purchase Agreement is structured appropriately, especially to address any concerns or potential liabilities discovered during the due diligence process. The typical route to do this is through the representations and warranties section of the Purchase Agreement. The purpose of reps and warranties is to provide statements of facts and promises about what is being sold, acting as a form of assurance that the transaction is what the parties believe it to be and providing legal recourse if it is not. Certain reps and warranties are essential to FBO acquisitions, including reps and warranties relating compliance with law, compliance with taxes, real estate, condition of assets, and environmental compliance. In the Purchase Agreement, buyers and sellers normally negotiate a survival period for the reps and warranties, providing the buyer with recourse and indemnity for a breach of a rep and warranty that occurs after closing within a specific period of months or years thereafter. A standard survival period is normally around 2 to 3 years, with a higher number of years for certain fundamental reps such as compliance with laws or taxes.
Being in such a highly regulated industry, FBO transactions can be complex with potential acquisition landmines for the inexperienced or unwary. Due diligence and structuring the Purchase Agreement appropriately is critical. If you would like experienced legal counsel, please call us at the number below or email us at Counsel@BizjetLaw.com.