Buying FedEx Routes - Free FedEx Route Due Diligence Q&A

Statistics state approximately half of all business sales fall apart during the formal due diligence stage. FedEx Routes for Sale are no different and require careful due diligence by independent professionals.  FedEx Routes can be a very good fit for those who like to work very hard, but might not have had the opportunity in life to pursue higher education and are seeking to start a services business. An upper middle class income can typically be achieved as a "hands-on" owner. 

We offer the following free FedEx Route Due Diligence information from an unbiased perspective based on the top questions we get asked (Click here for information on our FedEx Route Buyer Support Services):

Q: The #1 question we get, what are FedEx Routes worth? 

A:   The short answer is whatever the market (someone) will pay.  That said, don't overpay or fall for the 3x, 4x, or even 5x of incorrectly calculated Net Income or "Cash Flow" & Broker/Seller mumbo jumbo! True valuation formulas should be used. 

Income Based Discounted Cash Flow (DCF) is a good method for valuation.  It is a recognized Business Valuation Approach by the National Association of Certified Valuators and Analysts® and American Institute of Certified  Public Accountants.  It uses Discounted cash flow valuation based on Free Cash Flow (EBITDA minus CAPEX) along with growth factor considerations and a Weighted Average Cost of Capital (WACC) or required rate of return.  Vehicles should be valued based on Blue Book Value.

Q: I see ads showing FedEx Routes or Linehaul Runs make a 30% or more margin, is it too good to be true?
A:   Yes, it is too good to be true.  Routes and Linehaul Runs make an Earnings before Interest, Taxes, Depreciation, & Amortized Items (EBITDA) significantly less than 30%.  You may be led on to believe there is a 30% margin with EBITDA "Add-backs" included or what are known as projected or Proforma P&Ls. Don't fall for "Add-backs" to EBITDA or Proforma P&Ls, if you do, you may be extremely disappointed with the financial returns you make as the new owner of  Routes.  

Its very important to note that EBITDA is just one part of an equation when determining the potential return.  Routes and Linehaul Runs are very capital intensive.  Delivery Trucks and Road Tractors require major capitalized repairs at times (by definition they aren't in the P&L/EBITDA) and scheduled replacement. These activities are extremely costly. Engaging a professional advisor that can calculate CAPEX needs is critical.  EBITDA or net income is of little concern without knowing the other metrics, especially if the majority of the EBITDA ends up being used for CAPEX.  

Q: How can I go wrong with the "Cash Flow" generated by routes or linehaul runs?
A:   We've found many of the "Cash Flow" calculations by Sellers/Brokers do not follow Generally Accepted Accounting Principles (GAAP) definitions of what cash flow really is.  In other words, they make up their own definition of what is and isn't in the number.  In these cases they omit future capital expenditures for vehicle replacement or CAPEX.  Future capital expenditures in terms of truck replacements and other items must be in your free cash flow calculations.

Q: Are FedEx Routes better than Amazon Delivery Service Provider (DSP 2.0) Routes?
A:  We would love to answer this question, but it all depends on your personal preference.  We constantly have DSPs coming to us wanting to be FedEx contractors and FedEx contractors coming to us wanting to be DSPs.  Interestingly, both think the pastures are greener on the other side. 

We believe Amazon DSP 2.0 routes are easier to operate, require very low capital to start, and are slightly more financially profitable than FedEx Routes.  However, Amazon Logistics is a relatively new organization that requires contractor flexibility due to the massive growth.  FedEx Routes have slightly lower financial returns after vehicle replacement considerations, but are a more mature and stable organization.  It all depends on your goals.  If you want to go from 5 to 60 trucks on the road in just months and the challenges (and rewards) with that, go Amazon.  If you want something that has been around longer, but capped growth (FedEx prevents how big you can get), go FedEx Ground.  Both are suited for someone seeking an upper middle class income as a "hands-on" owner involved in the daily operations as their full time job.   

Q: Outside of financial related items, What should I be asking for in due diligence?

A: One of the first things a buyer should get and ask for is the Seller's current Agreement with FedEx Ground.  If you can get a copy of the Seller's entire Agreement plus all their performance metrics even better.  If not you must have the following as a very first step.

• Linehaul:  TSPA Attachment A-1, Schedule B, and Schedule C for linehaul. Service  Level & Availability Metrics. Screenshot of CSP Performance  Dashboard.
• P&D:  ISP Attachment A-1, Schedule B, and Attachment C-1.  Inbound Attainment  & Cure Letters.  Screenshot of CSP Performance Dashboard. Last Rapid Ratings financial health assessment.

It is critical to engage an independent FedEx route consultant like MyGround® Support to understand what these items represent.  It is typically too complicated for a buyer without deep FedEx contracting knowledge to do it on their own. 
 

Q:  Why do FedEx Route or Linehaul Run owners sell their routes?  Who in the world would want to sell something that makes 30% margins?
A:  As noted in an earlier question, the 30% margins don't exist...unless you've been drinking route broker or route consultant Kool-Aid. If you, as Buyer think FedEx Ground contracts out its services to allow contractors to make more than FedEx Ground's own Operating Margin (much less than 20% - see here for FedEx Ground's operating margin), no offense, but you need to keep your money in your pocket before you loose it all.  In our experience a Seller is selling for one of the following reasons:
 

• The Seller is retiring and no longer wishes to run the business.  These are sometimes the best opportunities for a "hands-on" owner/operator to purchase.
• The Seller has an aged fleet and the Seller needs to spend a large amount of funds to replace the fleet, but would rather sell than do that.  
• The Seller's contractual standing with FedEx Ground is in jeopardy.  Engaging a FedEx skilled consultant is key to help determine if this is the case.  In linehaul this may not be applicable as metrics reset, but in P&D its can be very telling.
• The Seller is being affected by a change in FedEx Ground contracting requirements they simply don't want to deal with (could be positive or negative).  CHANGES IN CONTRACTING TERMS ARE OCCURRING ALL THE TIME AND LATELY ARE VERY SIGNIFICANT. 
• The Seller is a fairly new owner of the routes (less than 3 years), a remote owner, or semi-absentee owner.  Its likely they completely misunderstood the financial returns possible or management aspects and drank a lot of route broker or route consultant Kool-Aid.  These are sometimes the worst opportunities to purchase and are typically way overpriced anyway.  If the Seller has owned for just a year or less, run or lowball offer as they are likely desperate.

Q:  Can FedEx P&D Routes be run absentee or semi-absentee?, what about Linehaul Runs?

A:   We will boldly say anyone claiming FedEx P&D Routes or Linehaul Runs can be run completely absentee has never owned them. Depending on the level of involvement and margin erosion that will occur, some P&D Routes and some linehaul can be run semi-absentee.  Linehaul is likely to have more of a chance being run semi-absentee given the operations, but again do not assume it is possible at all.  Margins at semi-absentee involvement are obviously lower than those where the owner runs the day to day operations.  In many cases semi-absentee ownership is breakeven financially.  

Q:  What expenses do I have running P&D Routes or Linehaul Runs, seems pretty straight forward?

A:   Sometimes a Broker or Seller shows you a Proforma P&L (i.e  estimated P&L) that looks like expenses are pretty small in number.  It sometimes contains just a quarter of all the true expenses.  Again, don't fall for the "Add-backs" to EBITDA, if you do, you may be extremely disappointed with the financial returns you make as the new owner of Routes. As noted earlier P&Ls DO NOT HAVE CAPEX in them.  CAPEX IMPACTS ARE ONE OF THE MOST IMPORTANT FACTORS IN ROUTE AND LINEHAUL EVALUATIONS.

 
As for a sampling of expenses...non-capitalized expenses  would include, but aren't limited to Fuel, DEF, Payroll, Employer  Payroll Taxes, Tolls (P&D only), Parking (P&D only), Parking  Tickets (P&D only), Worker's Compensation Premiums, Scanners  (P&D only), Tires, Repairs & Maintenance, Non-Capitalized  Equipment Repairs, Annual Vehicle Inspection Fees, Rental Trucks/Rental  Road Tractors, Heavy Use Tax (Linehaul Only), ELD Service (Linehaul  Only), Vehicle Registration/ Vehicle Plate Fees based on GVW, Annual  Business Personal Property Taxes, Vehicle Camera Systems, Driver  Training Schools (P&D), Employee Timekeeping System/Software, Route  Optimization professional fees (P&D only), Accounting/CPA Fees,  Payroll Service Provider, Lawyer/Attorney Fees, Recruiting/Advertising  Fees, Driver Uniforms, Small Equipment (dollies, carts, etc), Vehicle  Washing Vendor, Vehicle Decals, DOT Physicals for Drivers, Annual State  Corporation Filing Fees, Business/Commercial Property Taxes on Assets,  Mobile Phone reimbursement to drivers,....the list goes on and on.