Unpacking an Industry: FedEx Routes

Contracted FedEx routes are a popular business that aspiring entrepreneurs often seek to acquire using financing from SBA 7(a) loans.

FedEx routes present a business opportunity to leverage an established national brand with a predictable income stream that comes with fixed contracts. Routes can be added over time to expand operations and increase scalability. This proven model alleviates the need to create a business from scratch and can allow small business owners to benefit from the consumer shift toward e-commerce. Furthering its attractiveness as a business venture, FedEx routes do not require marketing expenditures, and most function semi-autonomously with a dedicated management team in place. Requirements that trucks be stored on-site at a FedEx facility mean owners do not incur rent expenses and can manage their business from a simple home office.

Of course, this FedEx route ownership does not come without its potential drawbacks and risks. Purchasing such a business requires a sizeable upfront investment— often hundreds of thousands of dollars into the millions for higher-performing routes. Ongoing expenditures to maintain and replace trucks are also an important consideration. While contractual revenues are generally positive, routes are compensated based on volume and miles driven, and these contracts are negotiated every one to two years for most routes. This means that unexpected inflationary pressures in expenses such as fuel and labor can erode profit margins in between renewal dates, pinching profits and potentially creating debt service issues in extreme cases.

With business operations dependent on a dedicated and competent crew of delivery drivers, issues with hiring or retaining employees can result in a route underperforming and the contract not being renewed. In a worst-case scenario, a route that severely misses objectives can be terminated before the end of the contract term.

Routes have two distinct functions: linehaul and pickup and delivery (“P&D”). Linehaul routes transport large quantities of packages between hubs using semi-trucks and are generally operated at night. They cover long distances and require drivers to have commercial driver’s licenses and meet certain experience requirements. These routes are generally more profitable and sell at a premium to P&D routes.

P&D routes transport smaller quantities of packages, delivering them to homes and businesses within a designated territory in small trucks or vans. P&D routes are usually operated during the daytime, and delivery drivers do not need to meet the same qualifications as linehaul drivers. The density of a particular P&D route can significantly influence the multiple at which it will sell, with urban routes being preferred to rural routes given the amount of time and fuel expended between stops. P&D routes can have a strong seasonal component, with the holiday shopping and return season driving demand.

As with all valuations, value is created through the expected future cash flows a company will record. Companies that own their vehicles and operate newer vehicles will likely face lower maintenance needs and reduced capital expenditures in the short term. Having to incur these costs earlier due to an older fleet of vehicles would reduce cash flows and the company’s valuation all else equal. In certain instances, it may be advisable to have an equipment appraisal performed to understand the condition and remaining useful life of each vehicle. In doing so, an appraiser can more accurately assess the company’s future capital expenditure requirements.

A purchaser of a FedEx route may have the luxury of choosing between a business that leases its vehicles and one that owns them. Full-service leased vehicles may reduce time and money on maintenance, as the leasing company covers these costs. For P&D routes, these options may be more limited compared to Linehaul, where providers like Ryder, Gatr, and Penske offer full-service lease options.

Overall, an appraiser needs to understand the condition of the acquired trucks and whether these vehicles are owned or leased. This will assist the appraiser in estimating the company’s future expected cash flows when performing the business valuation.

Withum has considerable experience valuing both linehaul and P&D routes for lending purposes. Lenders must engage a qualified business appraisal to determine whetherthe operating performance of a FedEx route business justifies its purchase price. Withum’s business valuation professionals are adept at identifying thequalities of specific routes that drive valueand understanding and accounting for risks that may present challenges to a new owner. Additionally, Withum’s tangible assets valuation professionals work in tandem with its business valuation team to assess ongoing capital expenditure requirementsand collateral quality. By working with a quality appraisal team, lenders can have confidence in the credit quality of a business, and prospective buyers can embark on a rewarding and lucrative business venture in a growing industry.

Author: Bryan DiMonte, CFA | [email protected]