How to Conduct Due Diligence on FedEx Routes for Sale

Photo by Patrick Tomasso

Photo by Patrick Tomasso

As you consider buying FedEx routes for sale you need to know that these businesses are structurally simple and niche. What do we mean by that?

If you know what to look for, conducting due diligence on a FedEx Ground operation can be straightforward. However, if you approach due diligence with these routes as you would a more traditional business for sale you are going to miss key flags.

Recent Business Tax Returns Will Not Be Definitive

Investors evaluate traditional businesses for sale using tax returns from recent years to understand the full scope of the business. There are many reasons tax returns do not paint accurate financial pictures for FedEx routes for sale.

FedEx Ground territories average 15% year-over-year growth directly related to the overall growth of e-commerce. The current-day business may be expanded from last year’s business seen on paper.

Some businesses are still completing the ISP transition. FedEx Ground requires all operations to move from the Independent Contractor (IC) model to the new Independent Service Provider (ISP) model by May 2020.

By that date, all ISPs will hold 100% ground and home delivery overlap as well. Additionally, FedEx Ground businesses must meet a minimum scale/size. In most areas that minimum is five routes and/or 500 daily stops, but a single contractor generally cannot own more than 15% of the routes out of a terminal.

As businesses negotiate new ISP contracts or make material changes to the business for compliance, there will be an impact to business financials. One possible material change is that a business may have added or sold route(s) in the current year.

Finally, you may be buying only a portion of a business. Owners often sell a subset of routes either to meet ISP compliance or to recapitalize to handle growth in their remaining territory.

Look at Revenue and Expenses to Understand Your Challenges and Opportunities

Total Revenue

When you buy a FedEx Ground business, you’re buying the revenue stream.

If you are purchasing a business in its entirety that has not experienced material change, you can confirm and forecast revenue easily using tax returns, 1099 forms, or FedEx Ground settlement statements. These are records of payments FedEx Ground made to this business for their services.

If you are buying a portion of a business or FedEx Ground routes that are substantially different for one reason or another, you will need to forecast the revenue based on settlement statements alone. Unless you have experience in this industry we recommend working with a buyer-side consultant to help you do so.

Total Expenses

Every FedEx Ground route business has nearly identical expenses. How efficiently they operate within those expenses is what ultimately determines their Profit Margin.

Your largest expense will be payroll. This line item usually costs between 40 and 50% of your Total Revenue. Be cautious and curious about businesses that advertise payroll expenses far outside that range.

Truck repair and maintenance numbers vary widely based on expense strategies, but new contractors can expect fleet maintenance to consume approximately 11 to 15% of their Total Revenue. It would be rare to see a business with repair and maintenance costs lower than 11%, but this could occur in some cases depending on the quality of the fleet and the daily mileage of the routes.

Other business expenses will include fuel, taxes, insurance, license plates, equipment, uniforms, accounting, office supplies, and required medical physicals for drivers.

As with Total Revenue, modeling Total Expenses is possible. We recommend hiring someone who’s modeled hundreds of businesses to get the most accurate assessment of your potential business.

Your Challenges and Opportunities

Once you’ve looked at Total Revenue and Total Expenses you understand how the business landed at its current Net Operating Income and Profit Margin.

You may also see some challenges such as an outdated fleet or poor driver retention.

Hopefully, though, you see opportunity as well. Perhaps this is a fixer-upper business and you see a path towards solvency? Maybe you simply see clear ways the business could operate more efficiently, and thus, more profitably.

Or, maybe this business is a prime opportunity for scale. As you increase the size of the operation, you decrease your per unit costs.

Need help conducting due diligence on FedEx routes for sale? Connect with our team for personalized buyer consulting.