MyGround® Support provides the following information regarding the top 5 high level questions we get asked:
Q: I see ads showing FedEx Routes make a 30% or more margin, is it too good to be true?
A: Yes, it is too good to be true. The most efficient routes make a pre-depreciation margin of 10-15%. Some do achieve a pre-depreciation margin around 20%, but it is very rare. Sellers of Routes and Brokers get very creative to purport 30% or more margins using terms like Cash Flow, "Normalized" Cash Flow, and Add-backs. Some purport future revenue growth but do not increase required costs to support the additional revenue. The Cash Flow or "Normalized" Cash Flow the Seller or Broker calculates is actually calculated using non-generally accepted accounting principles (i.e. incorrect or made up financial terminology).
Bottom line however, a 10-15% margin can be pretty good, but it is a pre-depreciation return and you must factor in future capital costs for vehicle replacement. FedEx Routes can be a good purchase decision, but do not buy them assuming they hold 30% margins (or anything close) and obviously do not make a purchase based on those exaggerated margins. Engaging a FedEx Route Consultant is critical to ascertain what the likely Operating Cash Flow and the Free Cash Flow (Operating Cash Flow less Capital Replenishment) margins are. Only then can you make an offer based on true financial returns rather than 30% + margins based on made up financial terminology.
Q: Why do FedEx Route owners sell their routes? Who in the world would want to sell something that makes 30% margins?
- The Seller has an aged fleet and it is going to cost a massive amount of funds to replace the fleet. Never overpay for routes with an aged fleet as you will be investing a large sum of money to replace the fleet
- The Seller's contractual standing with FedEx Ground is in jeopardy to the point where routes are going to be lost or their entire contract is going to be lost. This could be due to staffing issues, high turnover, poor operations, or any number of factors. It is absolutely critical for Buyers to understand all non-financial aspects of route ownership and contractual requirements. Sellers may have also lost their exclusive rights to renegotiation of their contract.
- The Seller is being affected by a change in FedEx Ground contracting requirements. This could be caused by ISP overlap requirements, new equipment standards, new vehicle technology standards, work accident discontinuance (owner's must have worker's comp), ISP rates that were negotiated poorly / don't cover the costs, 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. It is likely they didn't engage a FedEx Route Consultant in their initial purchase and now have a full understanding of the true margins and are trying to exit quickly.
- The Seller is retiring and no longer wishes to run the business. The key factor here is the Seller was running the day to day operations so remember not to "buy a job". The Seller's salary is not an acceptable add back in this situation.
Q: What is the number one thing, above all else should I ask for and obtain first in due diligence?
Q: Can FedEx P&D Routes be run absentee or semi-absentee?, what about linehaul?
A: We will boldly say anyone claiming FedEx P&D Routes or Linehaul Runs can be run absentee knows nothing about the industry or is looking at the Buyer as a fool. A Buyer could be making a very poor assumption assuming FedEx P&D Routes or Linehaul Runs could be run absentee. 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, seems pretty straight foward?
A true sampling, non-inclusive list would include 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, 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, Mobile Phone reimbursement to drivers,....the list goes on and on. Engaging a FedEx Route Consultant is critical to ascertain what expenses apply and whether they are within range of what should be expected. Interest Expense & Depreciation is actually very important in this industry as well and cannot be ignored completely.