In , Silas Thorne operated a livery stable in eastern Ohio. He kept a ledger on a desk made of rough oak. The ledger contained two different sets of rates for boarding horses. Travelers paid the full price for hay and a stall.
Men from the town paid a lower rate because they helped Silas repair the roof after heavy snow. The stable owner did not view the lower rate as a loss of income. He viewed the labor of his neighbors as a form of insurance against the collapse of his building.
Walt Brenner sat in his office at on a Tuesday in March. The room smelled of burnt coffee and Jet A fuel. He looked at a printed copy of his rent roll. He did not like to read financial documents on a computer screen. Paper felt more permanent to him. He could hold the paper in his hands and feel the weight of his decisions.
The Deficit on Paper
The document had a column labeled Market Rent. This column was an estimate of what he could charge new tenants. Another column showed the actual rent his current tenants paid. Most of the numbers in the second column were much lower than the first. The gap between the two numbers represented thousands of dollars every month. This gap made Walt feel like a poor businessman.
The “deficit” of two hundred and fifty dollars per month in Hangar 7.
He looked at the entry for Hangar 7. Dale Kovac kept a Beechcraft Bonanza in that hangar. Dale had paid four hundred dollars a month since . The market rent for a hangar of that size was now six hundred and fifty dollars. Walt remembered the year very clearly. That was the year the FBO office needed new wiring. Dale was a retired electrician and did the work for no charge.
Walt picked up a black pen. He wanted to write an explanation next to Dale’s name. There was no space on the paper for a story about electrical wires. A buyer would not care about a favor from ago. A buyer would only see a deficit of two hundred and fifty dollars. The buyer would see this deficit as a simple way to increase the value of the business.
Small airports operate on a system of unpriced favors. These favors do not appear on a balance sheet. A tenant might check the hangar doors during a summer thunderstorm. Another tenant might fix the engine on a broken tug without sending a bill. These actions keep the airport running safely and smoothly. The owner pays for these actions by keeping the rent low.
A sale of the business changes the nature of these relationships. The new owner looks at the rent roll and sees potential growth. This growth is often called upside in the world of private equity. Upside is the difference between what is happening and what could happen. The new owner intends to close the gap between the actual rent and the market rent. He sees the low rent as a mistake made by the previous owner.
The Cost of Diligence
The seller often feels a sense of embarrassment during the process of diligence. He must explain why he did not maximize his revenue. He must justify his friendships to people who only value data. This creates a tension between the history of the airport and its future. The seller knows that raising the rent will change the culture of the field. He knows that the volunteers will stop volunteering.
The field becomes more like a parking garage when the social contracts are broken. Tenants pay the full price and expect professional service in return. They no longer feel a responsibility to help the owner with small tasks. They do not watch the fence line for intruders. They do not pick up debris from the taxiway. The owner must then hire employees to do the work that was previously done for free.
Walt Brenner searched the internet at for advice. He typed a question about raising hangar rents before a sale. He found many articles about maximizing the valuation of an FBO. These articles spoke about multiples of earnings. They did not speak about the men who sat in the lounge on Saturday mornings. The articles treated the airport as a collection of real estate assets.
Industry Perspective
The valuation of an FBO is a complex process. It involves looking at fuel volumes and lease terms. It also involves looking at the potential for higher hangar income. Firms like
understand how these numbers interact. They see the rent roll as a map of the business. They also understand that a buyer will look for every opportunity to increase the cash flow.
A buyer views a below-market rent roll as a gift. It is an opportunity to generate more profit without making a capital investment. He can simply send out letters to all the tenants. The letters announce a new rate based on a market survey. The buyer believes this is a logical move. He does not know that he is also canceling the informal insurance policy of the airport.
The Spreadsheet Error: Rent increase (+60%) vs. Contractor Costs for electrical repairs.
Dale Kovac would likely leave if his rent went up by . He would find a cheaper tie-down at a grass strip twenty miles away. The airport would lose a man who knows the history of every pipe and wire on the property. The new owner would have to pay a contractor to fix the next electrical problem. The cost of the contractor would be higher than the gain from the rent increase. The math on the spreadsheet does not account for the cost of lost knowledge.
Many small business owners face this same problem. They build a company by trading favors and building loyalty. This loyalty has a real value in the daily operation of the business. However, it is very difficult to put a price on loyalty during a transaction. A buyer wants to buy the assets and the cash flow. He does not want to buy the obligations of the previous owner.
The Margin of Silence
Walt Brenner looked at the margin of his paper. He thought about the retiree in Hangar 22 who buys of fuel every year. That tenant pays low rent but provides steady fuel sales. The fuel sales generate a margin that offsets the discount on the hangar. If the rent goes up, the retiree might stop flying his old Cessna. The fuel revenue would vanish along with the tenant.
The owner who keeps rents low is often accused of being soft. People say he is leaving money on the table. This phrase suggests that the money is just sitting there for anyone to grab. It does not suggest that the money was used to buy something else. It does not suggest that the money bought a community that survives through hard times.
The buyer sees the leak in the revenue stream. He wants to plug the leak and keep the money for himself. This is the goal of most acquisitions. The buyer wants to take a disorganized business and make it efficient. Efficiency is often the enemy of community. A community requires a certain amount of slack in the system to function.
Walt realized that the buyer would never see the invisible work. The buyer would never see the late nights Dale spent in the crawlspace. He would never see the way the tenants helped each other during the winter. All the buyer would see was a list of names and numbers. The numbers would be compared to a benchmark. The benchmark would determine the final price of the FBO.
The seller must decide if he wants to be the one to raise the rents. If he raises them before the sale, he captures the value for himself. He gets a higher price for the business because the cash flow is higher. However, he must look his friends in the eye for the last few months of his ownership. He must explain why the wiring job no longer counts for anything.
If he leaves the rents low, he leaves a favorite upside for the buyer. The buyer will pay less for the business today. The buyer will then raise the rents tomorrow and take the profit. The tenants will blame the new owner for the change. The seller protects his reputation but loses a portion of his wealth. It is a trade between money and social standing.
“The discount on the ledger is the price of the silence that keeps the airport safe at night.”
Walt Brenner decided not to write in the margins. He would let the rent roll speak for itself. He would let the buyer find the upside and celebrate the discovery. He would let the new owner be the one to send the letters. Walt wanted to spend his final months at the field drinking coffee with his friends. He wanted to remember the airport as a place where people helped each other.
The value of a business is more than the sum of its rents. It is the sum of the people who believe in the business. It is the sum of the favors that keep the lights on when the power goes out.
A buyer can buy the hangars and the fuel farm. He can buy the trucks and the office furniture. He cannot buy the spirit that Dale Kovac brought to Hangar 7.
The transition of an FBO from a family business to a corporate asset is a common story. It is a story of modernization and professionalization. It is also a story of loss. The loss is not found in the bank account. The loss is found in the silence of the lounge on a Saturday morning. It is found in the empty hangar where a friend used to keep his plane.
Walt stood up and turned off the office lights. He walked out to his car and looked at the row of T-hangars. They looked like silver boxes under the moon. Each box held a machine and a story. He knew the machines were for sale. He wondered what would happen to the stories. He drove home and left the rent roll on his desk. The black pen was still sitting next to the paper.