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Selling Your FedEx Ground Line Haul Company Starts by Educating Buyers

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.

Acquisition Financingfan-of-money-in-hands

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.

 

How to Sell a Wood Cabinet Manufacturing Company

When you are seeking to sell your cabinet manufacturing company it is important to be prepared to go to market.  In this article, we are going to discuss the factors that are involved in selling a cabinet manufacturing company as well as areas that you are able to benchmark to help improve the value.  Sigma is always here to help as you navigate this process. 

Industry Outlook

In recent history, cabinet manufacturing in the US has improved due to an increase in construction. The increased demand and improvements in residential construction have really accelerated the cabinet and vanity manufacturing industry forward. As the housing market continues to grow, we can expect rapid growth to continue in the overall construction industry. As we will discuss later, this fluctuation in the residential housing industry is both a positive and a negative factor when it comes to selling the business.

Factors That Influence Value

Cabinet manufacturing is considered in the categories of other light manufacturing operations, and since demand for all manufacturing is at a premium, pricing will command higher multiples. This is primarily due to the buyer demand for manufacturing.

Industry

Considerations that strongly influence the ability to sell, as well as the price, are the housing market and construction industry. This is great when the industry is on a rise, but can be a drag on the valuation when the industry is headed down.  Keep in mind that the best time to sell a cabinet manufacturing company is when the industry is on the rise not decline. Industry buyers are willing to pay a premium when the economy is rising and looking for bargains when it is in a decline.

Niche

When your business serves a specific niche, it will set your business apart from the competition and give an uptick on the value. This niche can be a type of product such as custom or it can be a specific customer type that you service. “Riches are in the niches,” is especially a true statement in the cabinet manufacturing industry.

Customer Concentration

As in any industry, the number of customers is an important factor when looking to sell a cabinet manufacturer.  The industry standard is the largest customer being around 25% of the revenue of the business.  Close behind this calculation is the number of customers that it takes to make up 80% of the businesses revenue.  If that number is greater than 5, it will create an uptick in the business valuation.

Equipment & Inventory

One of the specific factors for a cabinet manufacturer is an issue of how the business handles production efficiency.  This can mean higher labor costs, raw goods costs and production delays for the amount of revenue and profit that the business produces. Some wood cabinet manufacturers have state-of-the-art equipment that increases this efficiency. When analyzing this matrix it ultimately has a strong impact on the value.  Equipment can add or decrease value when pricing the business. It is not uncommon for a custom shop to have automated equipment that, in turn, results in a higher price even compared to other shops that have the same level of profit.

Benchmarking

The following is an industry analysis based on IRS data as provided on tax returns.  This is based on a percentage of revenue:

  • Cost of Goods: 25%
  • Facility Costs: 10%
  • Payroll/Labor Costs: 35%

When comparing your business to the above three factors it can help determine where you may need to adjust your business if your seller earnings are not where you would like it to be.

Pricing

The best way to determine a factual value/price for a cabinet manufacturer is to look at the market.  Ultimately, what other cabinet manufacturers are selling for will have a strong impact on what your business will sell. The following is a chart that outlines that price of the business as a percentage of SDE, EBITDA, and Revenue.  

 

Minimum

Max

Average

SDE as a % of Revenue

5.90%

35.93%

17.53%

EBITDA as a % of Revenue

3.54%

29.99%

13.68%

Multiple of Revenue

0.16

1.00

0.53

Multiple of SDE

1.50

5.54

3.00

Multiple of EBITDA

1.85

6.17

3.96


The efficiency of earnings is typically the largest factor in a cabinet manufacturer’s value.  The best determining factor for the efficiency of earnings is based on SDE or Sellers Discretionary Expense or profit.  At the end of the day, the performance of the business is the most important factor.  The number that stands out the most is the Multiple of SDE of three. Revenue is typically not the best way to determine the value as it really isn’t an indicator of how efficient the business is in making a profit. The reason we included revenue here is more as a benchmark for you to see where the profitability typically is for the industry.

The reason the SDE is a major determining factor is that buyers are interested in ROI or how long it took them to get their initial investment back.  Looking at the chart above, the average ROI that is expected in this industry is three years.  While the high ROI is 5.54 when you dig deep into the data it is easy to determine as we said earlier that efficiency and state of the art equipment drove up these specific business sales. 

If you are interested in receiving a formal business valuation then contact us today.  We will analyze three to four years of your business performance to better determine where your specific business falls in the range above. 

 

Prepare for the Business Valuation!

Business owners often want to sell their business but have no idea how much they can expect to sell it for. If you’re genuinely looking to sell your business, it’s important to understand that a business buyer is looking for clear and objective facts that will give them the confidence that your business will be a solid and profitable investment going forward.

We are here to help you understand a fact-based approach to business value. Following are six primary areas that are important to help the valuation company quickly assess the value. This preparation is important. Here are six key areas to begin to focus on making the valuation process to go well.

Since no two businesses are alike, it is crucial to have a third party that will objectively look at your business as a whole. Financial performance, employees, operation systems and other proprietary characteristics will objectively determine the true value of your company. 

1. Prepare Your Financialsstack-of-cash-and-coins-on-top

The step to discovering the correct value for your business begins with preparing the company’s financial statements. Make sure that your books are current including that all expenses and income are entered correctly.

A quality business valuation and the business purchaser will need to see the financial records for the past three to four years including a Profit and Loss (on an accrual basis), a balance sheet and a “go away” expense list (more about this below).

2. Determine the Asset Value of Your Business

One of the tricky parts of the business valuation process is to determine the value of your assets.  Sometimes it is necessary to have an equipment appraiser and other times it is less difficult to decide on.  First, you must estimate the replacement value of the company’s tangible assets.  The replacement value is the cost that someone would pay to purchase that asset in the same condition sitting in the same place.

Assigning the value to intangible assets like patents and trademarks can be tricky, and it may be best to consult with a business broker or professional appraiser. Most intangible assets are valued as part of the “goodwill” or “blue sky” of the business.  This means that the value of these intangibles comes primarily from the profit that those intangibles provide the company.  This means that the intangibles may not be valued separately from the business as an asset. 

While asset valuation gives you a clearer picture of the book value of your business, it does fail to reflect the value of your company as an on-going operation and earning potential.

3. Determine Your SDE and “Go Away” Expense List

Next, work with a business broker or accountant to convert your income statement into a Seller’s Discretionary Earnings (SDE) statement, which takes into account non-recurring purchases and discretionary expenses. We also call these discretionary expenses “Go-Away” expenses, meaning that any expense that will no longer be there when you leave.  I encourage business owners to open their Quickbooks and look at the general ledger for the last 3 to 4 years.  This can be a daunting task, but it can often result in tens of thousands of dollars in your pocket.  This scavenger hunt is merely looking for expenses that the company paid and deducted from its tax return, but if you were not the owner, then the expense wouldn’t have been incurred. Examples of this include, family cell phones, home expenses, auto expenses for a vehicle not used in the business, etc.

4. Key Ways to Improve the Value of Your Business

Most business owners in America are trying to minimize the amount of income taxes that are paid. The typical businesses that we work with are making more profit than what they are reporting on the tax return.  In the process of selling a business, you will make $2 to $5 for every $1 in profit that you show on the tax return.  Some key areas to improve the value of your company is to go back and show the actual profit that you made.  While it may increase your income tax, it will undoubtedly increase your value at a much more significant rate.  The reason is your tax rate will be 20 (twenty cents) to .49 (forty-nine cents) for each dollar and as we said above when selling the business you will make $2 to $5.  This is a $1.50 to $4.80 increase in your money.  Most business owners take this option when they realize that they can do a little work and make a significant profit.  We can also show you how to make sure you are going to make that profit BEFORE you pay the tax.

5. Operation Documentation

Buyers are looking for a smooth transition into their new business, so evidence that your business is well organized and running smoothly will also add to your company’s value. Presenting your business as a clean and well-oiled machine with a neat, organized package of records detailing operating will help the valuation and sale process:man-and-woman-shaking-hands

  • Copy of the current lease
  • Insurance policies
  • Professional certificates
  • Supplier and distributor contracts
  • Employment agreements
  • Financing agreements in place.
    • Standard operating procedures,
    • Compliance with health and safety regulations,
    • Employee policies,
    • Contracts,
    • Supplier lists

This list is not intended to overwhelm you but rather to help you genuinely reflect the value of your company.

6. Consult With a Professional Appraiser and Get a Formal Valuation

Hiring a professional business appraiser not only allows you to benefit from his or her expertise, but it also provides the objectivity that you may lack when it comes to your business. Many brokers are experienced at conducting a formal valuation or have connections with qualified professionals. Correctly valuing your company is essential in a competitive market, and enlisting the help of a third party professional will not only eliminate seller sentiment from the sales process, but it will also shorten it by aligning the business value with up-to-date market conditions.

 

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