Due Diligence for FedEx Routes
One commonly overlooked aspect of investing in FedEx Ground routes is the due diligence process. While this can be a lengthy and intimidating endeavor, it does not have to be!
Whether you are looking at entering the space for the first time or expanding your existing operation, you should know what you are buying.
In this article, we will guide you through the process and highlight some of the most important questions you should consider when acquiring a FedEx Ground route.
What is Due Diligence, and Why is it Important?
Due diligence is best described as the evaluation process for a potential investment. This is your opportunity to be a detective.
Financial health and operational efficiency are the primary factors that will determine profitability. However, revenue, expenses, and net operating income can only tell you so much – you need to dig deeper.
As a buyer, it is your responsibility to use key metrics to infer the overall health of the business.
Who Benefits from Due Diligence?
Our due diligence process is extremely valuable for current contractors and prospective investors alike.
First-time buyers will be exposed to the ins and outs of contracting for FedEx Ground.
Current contractors should consider the implications of growth. Hiring new drivers, entering new territories, and increasing expenses should all be considered, as they will ultimately affect profitability.
“The most important data range for monitoring the volatility in package volume and operating expenses are the last 6 weeks of financial reporting.”
Regardless of your experience, this can be an intimidating process. Route Consultant has resources to help ease your concerns and find the right business strategy for you to succeed.
Where to Begin?
FedEx Ground businesses are unique from almost every other business model. In a normal year, FedEx Ground pickup and delivery (P&D) routes can expect anywhere from 20% to 40% annual growth, year over year. Those are significant profits!
When reviewing potential routes, you will often receive historical financial information. While these profit and loss (P&L) statements and tax returns are helpful, you still need to dig deeper.
The most important data range for monitoring the volatility in package volume and operating expenses are the last 6 weeks of financial reporting.
You are inheriting the business as it functions today, not in the previous year. Don’t just focus on the revenue – be sure to consider how to manage expenses like payroll, fuel, repairs, and maintenance—the major cost centers of the business.
Monitor expenses during times of growth and plan to invest new capital to meet demand. There are almost always opportunities for efficiency during periods of growth.
How to Measure the Impact of Expenses?
Although FedEx Ground contracting seems like a unicorn in the business space, there are many commonalities that the nearly 6,000 contractors share across the country.
We all view expenses as a percentage of total revenue.
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.
For example, we understand the unique challenges presented by operating both densely-populated urban areas and spread-out rural territories. Considering the variance in stop frequencies, package volume, and vehicle fuel consumption, your fuel cost should be between 22%-28% for linehaul and 6%-14% for P&D of total revenue. Knowing your territory is the key to asking the right questions and formulating your own conclusions from the data.
Your largest expense will be payroll. For linehaul, this line item usually costs between 30%-35% of your total revenue. While P&D payroll costs between 37%-52% of 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 15%-22% for linehaul and 8-12% for P&D of their total revenue.
Other business expenses will include taxes, insurance, license plates, equipment, uniforms, accounting, office supplies, and required medical physicals for drivers. There is an acceptable variance and appropriate range for every line item on the budget. Stick within those ranges, and you can all but ensure profitability.
Another tip is to create weekly budgets. Avoid sinking painstaking time and effort into monthly/quarterly/annual budgets. Be diligent in your bookkeeping efforts. Managing a fleet of trucks with increasing package volume is like trying to hit a moving target and can make those long-term plans obsolete.
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. But pay close attention! These weekly budgets will affect your fleet strategy. If you cannot measure it, you cannot manage it.
Do You Have to Give a Deposit or Sign a LOI to Receive Due Diligence Information?
The short answer is, No. You do not have to sign an Letter of Intent (LOI) or make a deposit before conducting your due diligence on a business. This false narrative can be common among some brokers in the industry, and uneducated buyers can be easy victims. These brokers will refuse to provide any due diligence information or documentation on the business until you sign a LOI or submit a non-refundable deposit.
We will say it again: You should NEVER give a down payment or sign any agreement outside of a standard Non-Disclosure Agreement (NDA) before first reviewing the details and financials of a business.
So What Is a LOI?
A Letter of Intent (LOI) is a document in which a buyer declares their interest in doing business with a seller. This document serves as a form of informal offer, but it is not legally binding. The reality is that LOIs are not worth the paper they are written on. However, even though a LOI is not legally binding it can still cause conflict between the buyer and the seller.
After signing an LOI, you may learn that the business is selling above market value or has serious financial issues. If this happens, you may have to adjust the offer you initially wrote in the LOI. Without a signed Asset Purchase Agreement (APA) you are will within your rights to alter your offer, but this can create unnecessary tension with the seller and give the appearance that you are rolling back your initial offer.
Completing due diligence is imperative when purchasing a FedEx Ground business. Without an accurate description of a business, you could potentially invest in the wrong opportunity for your goals.
For this reason, we recommend that you first complete due diligence and then leverage an APA, which is a legal document that binds the buyer and seller to the deal compared to an LOI.
Where To Go from here?
We recommend all prospective FedEx Ground contractors complete our FedEx Ground 101 course. This free resource consists of online training modules to put your knowledge to the test and help you identify the keys to owning and operating a successful FedEx Ground route.
Every buyer is different and has different financial goals. If you are interested in determining with certainty if this investment path is right for you, join us for one of our New Investor Summits. These summits are exclusive, 2-day seminars designed to give you the knowledge and confidence to determine whether this investment is worth pursuing.
Want to Learn More?
Dive into the world of logistics and delivery routes with our complimentary FedEx Ground Routes 101 E-Course. This course will teach you the fundamentals of delivery routes so that you can decide if this is an industry worth pursuing further. Whether you’re interested in FedEx Ground routes, Amazon routes, Bread routes, or other logistics operations, we are here to help. Enroll now for free and take the first step towards entrepreneurship in the e-commerce space.
