I gave you the 4 absolutely vital questions to ask before buying ANY business …, and here are some more, in response to Jeff’s quest to buy a business:
This week I found an air charter business for sale for 825K [AJC: Jeff is a navy pilot]. The sale price includes five airplanes (twin engine pistons) and the FAA certificates required to conduct flight operations for hire. Depending upon the condition of the airplanes, 825K, might just barely exceed the cost of the aircraft, leaving me the profits, employees, and business model for free.According to the financials listed on the sales ad, the business brings in 600K in revenue and cash flows 216K. That looks like a 36% profit margin to me, which is good from what I can tell. The revenue comes 80% from freight and 20% from passengers. This tells me that the passenger focus I’m interested in is one that they either don’t have much market for, or maybe haven’t tried to exploit.Needless to say, I’m intrigued. For significantly less than I think I need to start things with my original plans, I could buy an air charter that has airplanes, employees (and pilots), procedures and systems in place AND appears to operate profitably. That would leave me to try and expand the passenger side of the business and as/if it grows, I could slowly begin to acquire the aircraft necessary to take the business to where I want to try and go. All the while having the cushion of a profitable business model to mitigate much of the risk.
I’ve shot an email at the broker asking for more details about the business and the aircraft, but am wondering if you have any bits of wisdom and questions I should consider as I begin looking into the details?
So, the first four questions that I would ask are:
1. Do I understand the business?
2. Am I comfortable with management?
3. What is the business worth?
4. What do I have to pay?
… after those have been answered satisfactorily (i.e. now you are serious about proceeding), it’s time to get ‘down and dirty’ with these additional questions (some of which are specific to this business, but can/should be modified for any other ‘capital intensive’ business):
5. Do I want to own an air charter business?
6. If I did, would this be the TYPE / LOCATION of air charter business that I would want to own (at least, to start out)?
7. If I still did, would these be the type / qty / age / condition of aircraft that I would want (or, at least, could work with)?
8. What is the current value of the aircraft (what it would cost you to buy similar aircraft … NOT the value that they list on their books)?
The answers to these 8 questions will tell Jeff:
(a) if he wants to be in THIS business and,
(b) what he is paying for capital (i.e. aircraft) v goodwill (i.e. past/future profits, etc.)
… obviously, if Jeff could start a new business – from scratch – similar to this and ‘buy’ aircraft and customers, these answers will tell you him much time he can save by buying rather than building.
THEN, he should start looking at profitability, which will barely approximate the numbers that the seller provides to him 😉
If Jeff can buy the business for not much more than startup cost (better yet, USED aircraft acquisition cost), as he thinks he may be able to do, then he really only needs to assure himself that the business AT LEAST breaks-even.
Remember, if you undertake a similar analysis for a business that you may be looking at acquiring, when looking at profitability BE SURE TO INCLUDE a reasonable salary for yourself. Many owners ‘bump up’ their profit figures by taking their ‘salary’ out of profits rather than accounting for it as a salary. Is it a family business? They are rife with these kinds of practices …
To protect yourself against this kind of ‘profit inflation’, the question to ask is: “what would I pay for each job that needs to be done” and make sure that you build in the appropriate allowance, whether the current owners do or not.
And, just in case you’re also thinking of buying an air-charter business, here’s the additional questions that Jeff says that he’s started asking:
I’d like more details about the operations…typical freight customers and passengers, typical flight destinations etc…
Plans for future growth?
Condition of the aircraft? Hours, TBO, SMOH.
Expenses…typical employee salaries, pilot salaries, cost per flight hour of the aircraft etc.
Where is the business located?
Is there any real estate included in the sale?
Is the current owner willing to stay on during the transition to help ensure a smooth transfer and train the new owners as necessary?
There you go, a great place to start your questioning process, when looking to buy a business. Now, tell me about your experiences? 🙂