Business Environment

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Business Environment

We run a scenario for the DDP class that is as follows:

You are buying a Fixed Base Operation in Puerto Rico. What are all of the factors you need to take into consideration when you as a future DDP are hired to conduct a due diligence review? (A fixed-base operator (FBO) is a commercial business granted the right by an airport to operate on the airport and provide aeronautical services such as fueling, aircraft hungering, tie-down, rental, maintenance, flight instruction.)

All delegates do an excellent job at looking at the business, the equipment, the licenses, employee history and discussing with management about staying on. They really do a good job at what is there.

There are two items they habitually over look. The first is the impact of the Puerto’s inability to service its debt. What will happen when (not if) Puerto Rico declares a default? Can we look to Detroit as to what might happen, such as power and water shut-off to the airport if the airport does not pay their bill?   What about the air traffic controller or airport employees just not showing up to work as they are being paid? This is nothing minor.

The authorization for filing of municipal bankruptcies is contained in Section 109(c) of the U.S. Bankruptcy Code that provides that a municipality may be a debtor in a Chapter 9 bankruptcy case only if the municipality is specifically authorized to be a debtor by State law, or by a governmental officer or organization empowered by State law to authorize the municipality to be a debtor.

Puerto Rico is not a state and thus may not be able to seek bankruptcy protection and the advantages offered to it under the Federal Courts. Is there a work around? I do not know.   But it must be considered.

The second issue over looked is the impact of the opening of relationships with Cuba. There are still restrictions and the Helms Burton act would need to be repealed for just tourism. So, what do you need to be able to travel to Cuba?

U.S. Office of Foreign Assets Control will approve a visit if the visit falls under one of 12 approved categories. Those categories are:

  1. Family visits
  2. Official business of the U.S. government, foreign governments, and certain intergovernmental organizations
  3. Journalistic activity
  4. Professional research and professional meetings
  5. Educational activities
  6. Religious activities
  7. Public performances, clinics, workshops, athletic and other competitions, and exhibitions
  8. Support for the Cuban people
  9. Humanitarian projects
  10. Activities of private foundations or research or educational institutes
  11. Exportation, importation, or transmission of information or information materials
  12. Certain export transactions that may be considered for authorization under existing regulations and guidelines.

While tourism is not on the list, any enterprising traveler can figure a way to visit and link to a conference, learn to paint, or even set up a school for pilots or aircraft repair and maintenance in Cuba that might be less expensive than you operation in Puerto Rico.

Further based upon a study: The Vacation Is Over: Implications for the Caribbean of Opening U.S.–Cuba Tourism Rafael Romeu of the IMF, the expected drop in tourism from the US will be about 19% less. That means over 200,000 fewer arrivals on the island from the US. That is a more or less immediate drop of 6% in tourism and a larger drop in high-end tourists arriving – like the ones that fly planes.

It is not enough in due diligence to look at a company or a person. One must look at the company or person as well as the totality of their environment in which they operate.

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