Why Listing Price as a Percent (%) of Revenue is the More Important Number
When it comes to investing in a business, Listing Multiple (or Asking Multiple) is one of the most common evaluation metrics. However, when it comes to FedEx Ground routes for sale the Listing Multiple can be misleading and investors should not use it as the primary or sole evaluation metric. Why?
We notice throughout the route industry widespread misrepresentation of Net Operating Incomes and Profit Margins.
Expenses for FedEx Ground Route Businesses May Be Difficult to Vet
Some businesses have messy financial records and they knowing or unknowingly are unable to account for every expense. And unfortunately, some businesses and brokers misrepresent a business’s expenses to create a more appealing listing.
Once your Total Expenses are inaccurate or misrepresented, your Net Operating Income and your Profit Margin are off. And when your Net Operating Income is inaccurate, you cannot have an accurate Listing Multiple.
Total Expenses: this is all of the outgoing money paid by the business in the previous fiscal year. The largest expense of any FedEx Ground route is payroll. Expenses also include vehicles, fuel, insurance, uniforms, office supplies, and more.
Net Operating Income: this is the income remaining with the business after you subtract business expenses. This is typically reflected as an EBITDA number accounting for all operating expenses, but excluding CAPEX.
Profit Margin: when you represent your Net Operating Income as a percentage of Total Revenue.
Listing Multiple: you calculate the listing multiple by taking the listing price and dividing it by the cash flow. The listing multiple provides you with an estimate of how many years it would take you to make back your investment if cash flow remained at present-day levels.
So how do we know some sellers/brokers misrepresent Total Expenses?
We frequently see sellers and brokers listing businesses at low Listing Multiples (in 3-3.5 range), but when we look at Total Revenue and Net Operating Income we calculate suspiciously high Profit Margins.
Here’s the blunt truth: a FedEx Ground P&D business can not operate sustainably at a 35% or higher profit margin. The profit margin range of a healthy P&D business is typically 15-20% and 25% on rare occasions.
There are basic expenses every P&D business has to carry and even highly efficient businesses have limits to how much they can lower these expenses. Thus, when we see a business with a high profit margin and low Listing Multiple we know they are not accurately representing their expenses.
So how do you know if a business’s expenses are accurately represented?
Sometimes the comprehensiveness and cleanliness of expense records for a business raises your confidence. Further, if a their P&L shows expenses within the industry average ranges (such as payroll within 40-50% of Total Revenue), you can feel even more confident.
However, at the end of the day you may need an industry expert to help you model the expenses and expected Net Operating Income.
Why Listing Percent (%) of Revenue is a Stronger Point of Evaluation
Without a doubt, Listing Percent of Revenue is the most reliable metric for comparing apples to apples when you are considering multiple FedEx Ground routes for sale.
Fundamentally, what you’re buying in this industry is the revenue because Net Operating Income will fluctuate based on how efficiently you operate.
Total Revenue is the easiest item to verify on a profit and loss (P&L) statement for FedEx Ground businesses. Contractors receive an official settlement statement from FedEx Ground for all payments and it will be clear how much gross revenue a business brought in recently.*
The listing price of a FedEx Ground route for sale will also be clear. These are the two numbers you need to calculate Listing Price as a Percent of Revenue.
Total Revenue: (also known as Total Income) this is all of income the business generated in the previous fiscal year.
Listing Price as a Percent (%) of Revenue: you calculate the listing percent of revenue by dividing the listing price by Total Revenue. This is the amount you are paying for the business as a percentage of gross revenue.
FedEx Ground P&D listings typically sell at roughly 70-75% of Total Revenue. Linehaul operations typically sell at 90-110% of Total Revenue—often higher than P&D businesses because linehaul operations average a higher profit margin.
Operations in high growth markets, with brand new fleets, or other significant growth opportunities may have a Listing Price as a Percent of Revenue that is higher than industry averages. Distressed businesses may reflect a lower one.
Listing Price as a Percent of Revenue is how you are going to know if a business is selling within industry averages. And, if a business’s Listing Price as a Percent of Revenue is outside of typical ranges, it’s an excellent starting point for your conversation with the broker/seller.
Now let’s take a look at some examples:
Listing Price: $499,000
Total Revenue: $555,255
Listing Price as a Percent (%) of Revenue: 90%
Net Operating Income: $160,500
Profit Margin: 29%
Listing Multiple: 3.1
Listing Price: $399,000
Total Revenue: $555,255
Listing Price as a Percent (%) of Revenue: 72%
Net Operating Income: $92,200
Profit Margin: 17%
Listing Multiple: 4.33
Looking at the example above, we notice several things about Blue Route:
Blue Route has a high Net Operating Income and Profit Margin of 29% (knowing industry averages, we should be skeptical)
The high Net Operating Income lends itself to an attractive Listing Multiple of 3.1
Blue Route’s Listing Price as a Percent of Revenue at 90% is above industry averages for a P&D route
Comparatively, let’s look at Red Route:
It has a lower Net Operating Income than Blue Route, but the resulting Profit Margin of 17% falls within industry averages for a healthy P&D business
Given the profit margin, the 4.33 Listing Multiple makes more sense now
Red Route has a Listing Price as a Percent of Revenue of 72%— right on target for the industry average
Finally, what stands out most when you compare Red Route and Blue Route is that they have identical Total Revenues, but the Blue Route Listing Price is $100,000 more. Remember: what you’re buying is the revenue (or potential revenue).
Why Listing Price as a Percent of Revenue Gives You a Well-Rounded Perspective
The malleability of expenses, and its trickle down impact on Net Operating Income and Listing Multiple may skew the attractiveness of a FedEx Ground route for sale. This is why it’s critical that you focus in on the financial line items you can be sure of: Total Revenue and Listing Price, which together help you calculate Listing Price as a Percent of Revenue.
What comes next?
Every single FedEx Ground route business we sell includes Listing Price as a Percent of Revenue. Make sure you evaluate that metric in addition to others, such as Listing Multiple.
If you are looking at businesses for sale by other brokers, you should absolutely calculate or ask for the Listing Price as a Percent of Revenue.
Finally, if you need help modeling Total Expenses, Net Operating Income, or navigating any of this FedEx Ground route for sale terrain, let us know!
*Note: there may be revenue variances if there was a recent material change to a business (such as a lost or acquired route). A FedEx Ground route consultant can help you understand the impact of such a change.