FedEx routes provide small business owners with the potential of a great business opportunity. However, no business opportunity is perfect, and you must carefully weigh the benefits against potential downsides. This article discusses the advantages and disadvantages of acquiring a route and becoming a contractor for FedEx.
Is a FedEx route a good investment?
Buying any type of business is the most significant investment decision that most people ever make. Understandably, many individuals are often very cautious. Prospective FedEx route operators commonly wonder if a FedEx route is a good investment.
In short, there is no general answer to this question that applies to every situation. Every business acquisition is different. Each route opportunity has its pros and cons. As a potential business owner, you must make sure that the combination of advantages and disadvantages is suitable for your financial situation, plans, and management style.
The only advice that we can offer is to suggest that you get professional advice before making the acquisition. At the very minimum, work with a CPA to help you review the business.
Note: you can find FedEx opportunities here.
FedEx Route Advantages
Owning a FedEx route has several advantages over other potential business acquisition targets. In this section, we discuss some of the most important ones.
1. They provide reliable revenue
One of the most significant advantages of owning a FedEx route is that the business will have a reliable income. FedEx is widely used in the United States and is one of the leading logistics engines for package delivery. Keep in mind that, while the income is reliable, it also has seasonality to it. FedEx delivers a large percentage of its total packages during its busy periods.
2. Represent a well-known brand
FedEx is a well-known brand with an excellent reputation. Your business gets built-in brand recognition and customers thanks to FedEx’s marketing efforts.
3. Get support from FedEx
FedEx provides exceptional support in many aspects of the business. For example, FedEx’s marketing team handles promotions, which helps develop your route. The type of support may vary based on the kind of route you operate. An important benefit of working with FedEx is that the fleet is usually kept and maintained at the terminal. This ensures that the fleet is well-maintained and operating efficiently.
4. FedEx pays you quickly
FedEx knows that cash flow is important and pays you quickly. Quick payments help ensure you will have the funds to cover payroll and other business expenses. This is a significant benefit. Many companies that work with commercial clients often have to wait 30 or more days to get paid. Slow payment creates cash flow problems that lead to business disruption.
5. Good opportunity for business appreciation
Investors acquire companies for two reasons – the cash flow they generate and the potential to sell the business in the future for a higher price. A well-managed FedEx business in the right location presents an attractive opportunity for the potential of high returns.
6. Work-defined territories
Pickup and delivery routes have defined territories with a certain number of stops in them. This strategy allows you to focus on a territory that you know well. Linehaul routes are different as you will be pulling loads as required by FedEx.
FedEx Route Disadvantages
Every business opportunity has disadvantages, as no business is perfect. Here are some of the disadvantages that we have seen while helping buyers finance FedEx transactions.
1. Difficult to buy
Owning a FedEx route is a popular option among a specific group of entrepreneurs. Consequently, sellers often have the upper hand in negotiations. It is common to encounter sellers with unrealistic pricing expectations or who only entertain a cash sale. This can make buying a FedEx route difficult.
2. Acquisitions are challenging to finance
We have found that FedEx routes can be difficult to finance. These routes are a niche opportunity, and only specific lenders are comfortable funding them.
We have also noticed that some sellers are not willing (or able) to help with the financing process. For example, a seller needs to provide three years’ worth of corporate financial statements and taxes. These documents are required for due diligence. However, some sellers can’t provide this documentation. Lenders shy away from opportunities where they can’t perform adequate due diligence. Consequently, getting a business acquisition loan may be difficult.
If you’d like to see how we financed a FedEx opportunity, read our route purchase case study.
3. The purchase may require a higher equity injection
Many routes are acquired using a leveraged buyout (LBO) model. An LBO allows buyers to finance most of the acquisition cost and minimizes the funds (i.e., equity) they put into the acquisition. The personal funds a buyer contributes to the transaction is known as the “equity injection.”
Most small business LBOs only require an equity injection of 10% of the business value. However, buyers run into problems when sellers ask for a higher price than can be justified by the valuation of the business. A lender will finance amounts only up to the business valuation, leaving the buyer to make up the difference through a higher equity injection. Consequently, some route acquisitions require more than a 10% equity contribution to handle this difference. Note that the equity injection cannot be financed or come from the seller. Learn more about equity injection sources. To learn more, read “How much money do I need to buy a business?”
4. Harder work during the holidays
Although FedEx routes have a constant flow of packages, volume increases dramatically during the holidays. Consequently, you can expect the number of packages your team handles to increase significantly during these periods.
5. Finding drivers is difficult
Some FedEx locations complain that driver turnover is an issue. Turnover affects both pickup and delivery routes and linehaul routes. Additionally, linehaul route owners have to deal with another issue. There is a national shortage of truck drivers. Finding drivers who meet the requirements is difficult and is an ongoing challenge.
Keep in mind that you can always increase employee acquisition and retention by creating a good workplace atmosphere. Ensure compensation and benefits are competitive. However, you should consider that finding drivers may be an ongoing issue.
6. Financing some route divestitures is nearly impossible
We have seen some FedEx route owners who own multiple routes and only divest some of their routes while keeping others. Often, the owner cites that the reason for the divestiture is to increase business efficiencies.
Route divestitures are difficult to evaluate accurately. Unless the company meticulously segments its accounting by specific route, it is impossible to determine the route’s profitability. Consequently, the buyer has no specific way to determine the financial health and opportunity of the route they are acquiring.
Finance companies are usually unwilling to finance a situation that they don’t fully understand. Consequently, financing these situations is nearly impossible.
Need to finance a FedEx route acquisition?
The first step to work with us is to submit this form. Once we review it, one of our associates will contact you to discuss the specific details of your acquisition.
Given the complexity of how businesses can be purchased and the products that are used, this document is not guaranteed to be 100% accurate or cover every potential option. However, we make every effort to provide the best information. If you have comments, suggestions, or improvements, contact us via LinkedIn. Also, we are not associated with the FedEx brand in any way.