FedEx Ground contracts are “the best-kept secrets in trucking” – but buyers need to understand why before they’ll pay top-dollar
The U.S. trucking industry is a large, sustained and critically important segment of the U.S. economy. In 2017, the trucking industry generated nearly $700 billion in revenue, and 71% of freight moved in the U.S. touches a truck, according to the American Trucking Association (ATA). While the trucking industry is a massive operation with millions of trucks on the road and millions of drivers employed, the overwhelming majority of trucking companies are small businesses. The ATA estimates that about 97% of these companies operate less than 20 trucks.
Of course, one of the biggest names in trucking and logistics is FedEx. This $50 billion company breaks itself up into four primary business segments – FedEx Express, FedEx Freight, FedEx Service and FedEx Ground. Every one of these segments has its own unique market position and offering, with FedEx Ground providing small package delivery services over the road, and ultimately to homes and businesses. According to a Market Realist report, FedEx Ground accounts for 25% of FedEx’s total revenue, but it has the highest operating margin of any segment in the company.
While most buyers may think FedEx Ground is just another trucking operation, FedEx Ground line haul contractors understand how unique and valuable their businesses really are. So educating buyers about these differences becomes paramount when you’re trying to sell your FedEx Ground line haul business. The first step in this process is to find out how much your business is worth. We have provided some basic formulas you can use to estimate the value of a FedEx Ground line haul business and get a rough idea of where you stand. Keep in mind, however, there is much more to putting an accurate value on your company than these simple guidelines. A professional business broker can analyze your entire operation and give you a true market valuation.
- 2x-3x SDE (Seller’s Discretionary Earnings), with SDE up to $250,000
- 3x-4x SDE, with SDE up from $250,000 to $500,000
- 4x-5x SDE, with SDE above $500,000
While these rules of thumb are helpful to give you a general idea of your business’ value, there are several additional important factors that can significantly impact buyer interest in your business and the final sale price. These key factors can include the number and quality of your dedicated routes, the points you have on each truck, the total number of trucks you’re running, the condition of your trucks and your personal involvement in the business. A professional business broker with experience selling FedEx Ground businesses understands these factors and can provide you with an accurate market valuation of your business. Most buyers don’t understand what makes FedEx Ground different. Our firm has valued and sold numerous FedEx Ground line haul businesses and know what buyers need to understand to truly appreciate and get excited about your business.
Line Haul vs. Home Delivery
You’d be surprised how many buyers interested in FedEx Ground opportunities don’t realize the difference between line haul and home delivery. While that confusion is understandable to someone from the outside, you know how important the difference is between the two – and buyers need to understand that. In our experience, we’ve found that buyers are much more attracted to the operational efficiencies, scheduling ease and cash flow consistency of line haul operations, and those are the traits most buyers expect to see when they look at a FedEx Ground business for sale. Some of them get turned off quickly when they see a home delivery business instead but don’t realize there is a difference. So it’s important to always start at step one with a buyer and make sure they understand the differences in these to segments of FedEx Ground and the benefits of a line haul operation.
Dedicated Routes, Points, and the Open Board
Most buyers looking at a FedEx Ground line haul business for the first time are probably used to a more traditional trucking contractor model and how loads and routes are typically assigned by dispatch. FedEx Ground’s dedicated routes are unique and lucrative, and buyers need to understand the true value of owning these routes. They also need to be educated about the point system. This is one of the harder aspects of the FedEx Ground line haul model for buyers to grasp because they don’t have a feel for the value of a point. Nonetheless, they need to understand how points are earned and ultimately used to improve dedicated routes or obtain new ones. Finally, buyers need to be taught about the open board and how the terminal’s route assignment rotation works. This helps them better understand the value of the dedicated routes and points also.
Deciphering the Settlement Statement
One of the beautiful things about FedEx Ground line haul is the weekly settlement statement. One of the confusing things about FedEx Ground line haul is also the weekly settlement statement. Because so much of the operational financial information needed to run a FedEx Ground line haul business is included in the weekly settlement statement, many owners rely on that reporting to manage their businesses and fail to maintain proper financial books and records. When it comes to selling your business, however, this can create a challenge for a buyer to properly evaluate and understand your business’ financials. So it becomes imperative for you to make sure your business has complete financial records that paint an accurate picture of the entire operation. For example, even though the majority of your fuel is deducted from your settlement, your P&L should still show an expense line for fuel. The settlement statement needs to be used as supporting documentation for your financials, not as your actual financial documentation.
Buyers and sellers both need to understand the difficulties in obtaining third-party financing for FedEx Ground acquisitions. Most buyers acquiring businesses priced from $500,000 to $5 million are going to pursue SBA financing, as well they should – for businesses in that price range, SBA financing is a tremendous tool. While we have heard rumors of FedEx Ground deals getting done with SBA loans, we have yet to speak to a lender, buyer or seller directly who managed to actually get an SBA loan approved. Without getting too detailed as to why the SBA avoids FedEx Ground deals, the two primary objections the lenders have are: (i) the businesses only have one customer – FedEx – so there is a tremendous customer concentration risk, and (ii) they do not like to finance deals with rolling stock as collateral. Any FedEx Ground owner and an interested buyer can argue why these two objections should be overcome in the specific instances of a FedEx Ground line haul business, but lenders very rarely deviate from their risk profiles and make exceptions. What this means is that in most cases, owners need to be prepared to seller finance a portion of the sale, and buyers need to be prepared to make a larger down payment than they would with a third party loan.
The Owner’s Role
Buyers must completely understand the owner’s role in a FedEx Ground line haul business. Not only because the buyer needs to make sure he/she feels comfortable assuming the owner’s responsibilities, but also because the buyer ultimately has to be approved by FedEx and the terminal manager to take over that contract. That terminal manager wants to ensure whoever takes over a successfully run operation understands what the current owner is doing and feels confident the buyer can replicate those duties. It doesn’t matter if the owner is a full-time driver or lives in a different state from his/her home terminal and visits quarterly, buyers need to make sure and understand exactly what role and duties they will be responsible for.
Overall, FedEx Ground line haul businesses are tremendously valuable and attractive to buyers – but to successfully locate a buyer, negotiate a deal and manage the operational and financial due diligence process through to closing is a difficult task. For buyers to get and remain excited and motivated, you can’t just assume they understand why they should be excited. Buyers have to be educated about what makes FedEx Ground line haul businesses “the best-kept secret in trucking,” as one contractor put it.
Today’s market conditions for these types of businesses make this a tremendous time to consider selling your FedEx Ground business. Whether that’s in the cards for you today, or you still need some time to get your company ready to sell, a professional business valuation is a great resource to have. That’s why we always offer business owners a no cost, no obligation business valuation before doing anything else. Feel free to contact us today and we can get that process started for you.