It can be tempting to determine that buying a FedEx Ground route is right for you, find one in your area, and simply purchase it. However, you would not purchase any other business that way. Every business purchase involves something called due diligence.
Quite simply, it is making sure everything the seller claims is true about their business actually is. Let’s take a deeper look.
What is Due Diligence?
Essentially, due diligence is detective work for anyone looking to buy a business. The seller has told you what is happening with their route. This is your opportunity to verify those facts by doing research.
Let’s use an example. Let’s say the route owner has told you that his vehicle maintenance expenses are a certain amount per year. However, by digging deeper you find that his repair costs have been higher because his truck or trucks are aging. That means you need to determine if purchasing the truck is a good idea (if it is a part of the route sale) or whether you should buy a newer one of your own. For some route sellers, this can be a deal-breaker.
You also need to look at profit and loss statements and taxes from previous years. Most healthy FedEx routes grow 20-40% year over year (YOY). That is good, but you also need to look at recent numbers, in the last four to eight weeks. Why?
You are buying the business as it is now, not as it was last year. This became especially relevant in the pandemic era, when routes with large residential areas often grew, and some businesses slowed on shipping. This depended largely on geography and territory, so it pays to know your local market and what is happening there.
Look at Historic Revenue by Month
The nature of the delivery business is seasonal, so looking at historic revenue by month can give you a great foundation for managing cash flow. This seasonal swing can be influenced by geographic region and territory as well, so take a close look before you buy to ensure you understand the revenue stream thoroughly.
That’s because when you buy a FedEx Route, you are really purchasing the revenue stream. A great way to analyze and verify this is from the FedEx Ground settlement statements. Beware any contractor who is reluctant to share this data. If a large business has relocated or revenue has dropped, they may be trying to get rid of a less profitable route, but still get a premium price.
Due Diligence of Expense History
All FedEx routes have pretty much an identical set of expenses, and they should fall within a certain range. For example, fuel costs will vary a great deal but should fall between 8-12% of the total revenue. There are ways to reduce and manage those costs, like buying more fuel-efficient vehicles for rural routes.
This is something that will alter with the emergence of electric delivery vehicles but will also be impacted by available charging and keeping your trucks rolling no matter what. But in the meantime, better routing, reduced idling time, and driver behavior can all impact fuel costs. Knowing your drivers and ways to improve efficiency will help, but if you see rates far outside of this range when talking with a contractor about buying their route, you may want to understand why this is happening.
Payroll is your largest expense. If you have more than one route this is what you pay drivers. You should also pay yourself if you are running a single route. This expense should be 40-50% of your overall budget. If this percentage is too low, you may have drivers who are not loyal, and the contractor may have high driver turnover. If it is too high, it may mean that either drivers are being paid too much, or routes are not profitable enough and should be reevaluated.
Truck repair and maintenance varies a lot, but it should not exceed 15% of total revenue. In rare instances, a contractor can make this work. Expense management will largely influence this. Newer trucks involve payments or leases, but fewer repairs. Older trucks run the risk of more repairs, but can often be offset by the lack of lease or loan payments.
You can develop sophisticated models to predict these expenses, but often a solid weekly or monthly budget is enough to determine how profitable a route is. Look at all the expense data carefully.
From time to time a contractor will split off a route from their current ones, or the FedEx terminal will work to create new ones. These are often up for sale at some great rates. The main issue is that there is no track record to follow to determine how well the route will perform.
In this case, you will want to compare as much information as you can from similar routes in the same area to determine if you are getting good value for your investment.
Due diligence is important when you are buying any business. Talk to us here at Route Advisors. We can help you understand the process and find a route that will work well for you and your unique situation. We’d love to work with you to find the right route for you at the right time.