With FedEx routes becoming more popular among investors large and small, a question that we hear very often is “how do I conduct my due diligence on the routes I am looking at?” Most investors are used to the traditional types of businesses, for example, restaurants, ice cream shops, daycares…etc. Without experience and in-depth knowledge of FedEx routes, they immediately ask to see 3 years of tax returns! The idea is if I am not sure about the business, then the history should tell me what I want to know. We are here to tell you – don’t waste your time! FedEx routes are not your traditional business and it is a business of the future not of the past.
Why is the “Past” or tax return not important to due diligence?
Just like the industry that FedEx serves: the e-commerce industry, the business is changing at a rapid rate. From our clients, we are seeing YOY top line growth for the routes between 6% to 25%+. With this kind of growth, the route owners are constantly changing their business in order to manage the growth. They may be purchasing or selling a number of stops to their colleagues. They may be buying or leasing new trucks and sell off their old trucks. They may have received a new route from FedEx or their area might experience dramatic organic growth.
All these factors contribute to the fact that Tax return from last year is quickly becoming irrelevant. On top of that, because FedEx routes can be a very profitable business, many of my seller clients are not selling all of their routes, which further make their tax return not applicable to the buyers.
FedEx is a growth business and you need to look forward!
Since buying FedEx route is contradicting to how most investors evaluate a business, what should an investor be looking for during due diligence? Well, this is quite simple really. You need to know the revenue and cost, which will lead you to profitability. Revenue is extremely easy since all you need are the settlement statements from FedEx (make sure you compare regular and peak season). With that you are done with the revenue side of due diligence (the statements are issued by FedEx corporate, what more do you need?)
With the cost side, there are only handful of expenses for the FedEx route business. We have multimillion dollar sellers and the list of their expenses on their P&L is still very simple. Most importantly, the largest portion of their expenses comes from payroll, truck-related expenses and insurance, only 3 categories! What you need to do is make sure you ask the questions and proofs for these expenses. With that, you are able to determine the profitability of the routes in its current state.
A FedEx route is a simple business model but the business is not for everyone…
Since conducting due diligence on FedEx routes are so simple compared to other businesses, traditional investors become nervous and wonder if they are missing something or getting duped! However, that should not be their focus when considering investing in FedEx routes. What they should be focusing on is how they would manage the growth of the business when they own the routes. Ask any contractor, they will tell you this is the most difficult element of owning FedEx routes, the packages just keep coming and there is no slowing down!
How do you effectively manage your crew and trucks to do a very simple task (deliver and pick up the packages), becomes a not-so-simple business operation. Some contractors do not have the skills or experience to handle a growing business like this. However, if you are a good business operator and you believe in e-commerce and what FedEx’s role in it, there really isn’t any other business quite like the FedEx routes out there!