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

Free Q&A on the Top Questions asked of MyGround® Support

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 Route Buyer 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 of incorrectly calculated "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.

FedEx Routes can definitely be a good investment, but setting a purchase price based on 3x, 4x of a loosely defined "Cash Flow", x% of Revenue in isolation, and other methods could lead to a very happy Broker/Seller when the transaction closes and a Buyer who has overpaid and possibly setup for failure as a result. 


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  and biased or financially novice route consultants are incorrect.  They omit future capital expenditures for vehicle replacment or CAPEX.  For example, let's say you have 10 P&D trucks producing $1,000,000 in annual revenue with an EBITDA of $200,000.  Some biased or financially novice route consultants and sellers will say your free cash flow is $200,000. This is completely incorrect and shows a lack of financial skills and knowledge.  Future capital expenditures in terms of truck replacements and other items must be in your free cash flow calculations.  Don't fall for Free Cash Flow calculations that are generated by someone who doesn't know how to calculate, attempt to leave out key things, or assume vehicles last in perpetuity.  If you're getting a loan your cash flow projections for the bank will need natural vehicle replacement in them so model as the bank does.


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 believe Amazon DSP 2.0 routes are easier  to operate, require very low capital to start, and 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.


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%.   It is possible to get a 30% EBITDA if the Owner(s) is driving and not paying themselves a market wage.  Payroll would then be understated and you're just buying a job.


EBITDA is actually just one part of the equation though.  Looking at it in isolation could be a major flaw.  Routes and Linehaul Runs are a 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  is of little concern without knowing the other metrics, especially if the majority of the EBITDA ends up being used for CAPEX.  You would then  have very poor Free Cash Flow as result.

Knowing vehicle replacement costs (CAPEX) and vehicle operating costs (capitalized and non-capitalized) inside out are critical in the FedEx Route and Linehaul Run market.  It you don't consider aspects of this you will likely have buyer's remorse as your actual  return will be much less than what you thought.

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 related items 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.

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're going to be a full time driver and count your pay in that 30%...no one would be selling if it was true and Fortune 100 companies across America would all drop what  they were doing and buy FedEx Routes. You may think there is a 30% margin with EDITDA "Add-backs" included. 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. In our experience a Seller is  selling for one of the following reasons.
 

  • The Seller has an aged fleet and it is going to cost a massive  amount of funds to replace the fleet.  CAPEX IMPACTS ARE ONE OF THE MOST IMPORTANT FACTORS IN ROUTE AND LINEHAUL EVALUATIONS.
  • The Seller is becoming concerned about the future competition and declining revenue potential, specifically Amazon.  
  • 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.
  • 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. This could be caused by ISP overlap requirements,  "e-commerce"/SmartPost obligations at extremely low rates, 7 day  delivery, new  equipment standards, new vehicle technology standards (FCAM - 2024 in  Linehaul),  ISP rates that were negotiated poorly, decreasing rates from FedEx, and numerous other factors in both  linehaul runs and P&D  routes.
  • The Seller is a fairly new owner of the routes ( less than 3 years )  and has realized the routes are not as profitable as they thought when they purchased especially after CAPEX considerations.  It is likely they  didn't engage a skilled and unbiased FedEx Route Consultant in their  initial purchase, overpaid as a result, and now have a full  understanding of the true financial considerations and are trying to  exit quickly.  These routes will typically contain an aged fleet and an  inflated asking price.
  • The Seller is retiring and no longer wishes to run the business.   These routes typically have fairly solid returns, but the key factor here is the Seller was likely running the day to day operations or driving so remember not to "buy a job".  The Seller's salary when they are driving is not an acceptable add back in this situation and a market  wage for the Owner's efforts must be in the payroll number or adjusted with a market wage.  Routes owned for a long time are sometimes some of the best purchase options.


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 (we have!) or has something to gain from telling you that they can be.  A Buyer could be making a very poor assumption assuming FedEx P&D Routes or Linehaul Runs could be run fully absentee either operationally or from a  financial perspective.  DO NOT BELIEVE ANYONE THAT TELLS YOU ROUTES CAN  BE A PASSIVE INCOME ACTIVITY AS AN INVESTOR.  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.


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 and would be significantly over simplified.  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.   

image50