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How to determine your school's worth in a loanHow to determine your school's worth in a loan

This is the second installment of the “Identifying and Creating Value” series. We will explore how flight training companies and small airport FBOs are valued and how they can maximize value.

The financing available for the purchase of your flight school may be a greater determinant in the purchase price of your business than any of the theoretical methods of valuation discussed in the previous article. It does not matter how much you think your business is worth, nor does it matter how much the buyer wants your business; if the money is not available then a deal will be difficult.

Obviously, your first choice of buyers would be an aviation enthusiast with a life-long dream of owning a flight school who happens to have several hundred thousand dollars in disposable income. Unfortunately these individuals are not in great supply. The next best buyer would be an aviation enthusiast with a life-long dream of owning a flight school, who also qualifies for financing. So what financing is available and how would an individual qualify?

Most flight training businesses are a size that would qualify for an SBA loan. The Small Business Administration (SBA) guarantees loans made by lenders to individuals buying businesses. To be clear, the SBA does not make any loans; it just guarantees a portion of them. This means that each bank has its own underwriting criteria based on some general requirements of the SBA. We will discuss some basic terms of an SBA loan, but it is important that the seller inquire to several banks about what programs they offer.

SBA loans are very desirable because they are primarily cash-flow based loans rather than asset-based loans. The amount of money they will lend is calculated by looking at the historic cash flow of the business to see how much debt service the business can afford plus a safety cushion (Banks call this a coverage ratio). They also look at the credit, work experience, and living requirements of the buyer. Typically sellers want as much cash as possible and a quick payoff for any amount they carry. Buyers usually want to put down as little cash as possible and have long payback terms. An SBA loan will satisfy these conflicting objectives, as a normal SBA loan will allow a purchase with 20 percent down and will give the buyer 10 years to pay the loan. Lenders like the seller to carry something too. That amount can be as low as 10 percent of the purchase price, effectively giving the seller 90 percent of the price at closing.

To get an SBA loan the buyer will fill out an application with a bank and provide three years of tax returns for the business. A bank underwriter will review the loan application package, provide a preliminary loan proposal, ask for additional information, and ultimately provide a bank commitment letter. The underwriter will also “interview” the buyer as part of the approval process. It is important to note that any loan of this size, including SBA loans, will require a personal guarantee from the buyer. Normally the entire process takes about 60 days. While almost any bank will try to process an SBA loan as the government is, in effect, a co-signor on the loan, approval goes more quickly with an institution that has a lot of SBA loan experience.

When looking at the specific factors relating to FBOs and flight schools, there are two important variables to keep in mind. First, facilities and land are generally leased with a reversion of all facilities at the end of the lease period. This means 1) That there are few fixed assets; and 2) If the lease term remaining is fewer than 10 years, the loan is amortized for the remaining portion of the land lease. This leads to the main assets of a flight school being the aircraft. This poses further issues. If a flight school primarily opts to use leaseback agreements, it has few assets on its balance sheet. While the SBA loan is mainly cash-flow based, assets do play a role in limiting the size of the loan that can be obtained. If a flight school owns its airplanes, it will be able to show more assets, but a bank will typically only consider a fraction of an airplanes value as security (likely a percentage of liquidation value).

So what does this all mean to the current owner of a flight training business? If you are preparing to sell, it would be wise to visit several banks and discuss their SBA lending programs and how they would lend on your business (a well-qualified business broker can help you through this process). You will not only be able to gauge a realistic price cap on your business, but also understand how your business decisions impact a possible future sale. These business decisions include the often difficult “purchase vs. leaseback” of airplanes. While it should not be the main factor in your decision, it should certainly be part of the calculus, especially if you are considering a sale down the road. Finally, going through this process will give you a much better understanding of your own financial statements and insight into how prospective buyers will be viewing your company.

Gael Marchal is on the FBO sales staff of

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