Due diligence is likely making your acquisition riskier?!
Yep. Good due diligence is actually making your acquisition riskier. Bear with me a second though…
A lot of people buying their first business believe that proper due diligence is a crystal ball that tells them the future and eliminates all the risk such that it can be easily avoided. While a good due diligence process is certainly illuminating future possibilities, the problem comes into play when you consider the differences that start to emerge from what’s been presented to you by the seller, and what reality is.
Someone asked me recently why anyone would get a FedEx route after I explained the real obligations of this business.
It’s an excellent question, but really, this question shows the point that a lot of people looking at this business are coming in with rosy colored glasses that they’ve found the best business ever – low risk, low stress, low effort, low volatility, low competition, all in an industry that’s growing at an insane pace. It looks like a home run! And I continue to maintain that FedEx routes are one of the best businesses out there to buy.
So why do some people shy away from it after they start to really dig into this model?
Because they believe all the positive attributes I just listed out earlier. And the reason they believe it, is because it’s true. But every one of those aspects are all incomplete truths, and when people start to flesh things out, it starts to drift further and further from their ideal until they decide that this business isn’t what they were expecting and pursue “something else.”
Usually, that “something else” is no business at all…
Because often they start to realize that FedEx might still be the best business to buy, even with its imperfections.
For some people, due diligence is helping them find a wonderful and incredibly profitable business that’s a great fit for them. For others, the due diligence is helping them avoid this industry because the route they were considering was garbage and/or not a good fit for them. Either way, with solid due diligence, you’re in a much better position, whether it’s on the sidelines or whether it’s in the field hitting a home run.
Throughout the years I’ve watched this industry from just about every perspective, from brokering FedEx routes in the past, buying FedEx routes myself, and helping on the training / consulting side of things since the very start of it. We’ve seen brokers come and go, good brokers go bad, and even the average contractor change from having a background in trucking to new contractors that now come from common backgrounds in real estate, finance, and high tech.
The average price of a FedEx business for sale has gone from about $200k years ago, to now over $850k in 2018.
What’s this all have to do with this idea that due diligence increases your risk when it should be decreasing it? Well, it actually does both. Most people I work with are brilliant MBAs, people that have had tremendous corporate success, and/or some that have already bought and sold many businesses. These people are smart enough to know that they need to invest in some training, but they’re also often surprised at the numerous aspects that are specific to FedEx that need to be considered during examining a FedEx route.
It’s at this point that people realize FedEx can actually seem like a high risk venture.
Most people look at the surface of this business, which is just delivering packages and make the conclusion that it “just can’t be that hard.” Consider the idea of something as simple as a coffee shop – brew the coffee, pour it for the customer…easy. Now let’s pretend that I knew that there was going to be worker’s strike in Columbia, forcing the price of beans sky high for the region, which would cripple your profit margins for your best-selling brew. Or that there was pending litigation that coffee plants were going to be made illegal. Or that Starbucks was moving in across the street next year. And so on. Anything can happen, but that’s all quite outlandish for coffee shops, of course.
But is that analogy still so outlandish for FedEx routes?
It’s critical that no matter what business you’re considering, that you consider the subsurface characteristics of it.
The training we go through has got to get you to understand what the most likely primary risk points are for routes. Because you can’t start to eliminate risk, unless you know that there’s a risk point to eliminate to begin with.
A lot of people consider their risk point as, “Is the FedEx contractor making what he claims to be?” And this is a fine question and we have to answer this, but it’s just one of the pieces. Because most people believe that if they can nail down what the owner is actually making, everything else falls into place.
I’ve got good news and bad news…
The bad news: Evaluating the net income of a FedEx route is just one of the parts of this game and there’s other huge risk factors.
The good news: We can find a lot of those other risk points and eliminate them.
More bad news: There will be certain other risk points that will be impossible to remove.
The best news: When you discover those remaining risk points, you can make an incredibly better decision on whether this opportunity is for you or not. Good due diligence is reducing your risk in certain areas and illuminating the risk in others, and since most people think this is zero-risk business, it starts to seem riskier as they learn more.
But the biggest problem for FedEx routes right now is greed.
Sellers will often take a good route and sell it as a fantastic route. When we examine that “fantastic” route, we often discover there’s all sorts of stuff they tried to hide. For buyers, it’s often a letdown to see the owner is working far harder than he claimed, the business is structured much worse than suggested, and the net income is likely 30% less than what was claimed.
However, often times what’s left after we carve away all the BS from these sellers is still a great business. The problem is, now it looks awful compared to that fake ideal that set our expectations to begin with.
What’s left is an industry that continues to get shadier, exaggerations get worse and worse, and people leave the table with a sour taste. Again, that sounds bad, but the reality again is I think that even after uncovering the truth, you’ll see that the business is still very very good for the right person – it simply might not be AS good as they wanted you to believe.
I hope the trend stops, because I believe that if sellers would present their routes with total transparency as opposed to making you use multiple strategies to uncover the truth, they’d sell the business faster and easier, and maybe even for more money!
If you’re thinking to yourself, “I get it, everyone wants to make things seem a bit better than they are. That’s salesmanship!” I agree totally, and I’m 100% okay with that. No one’s sales pitch starts with listing every con about the business and everything that could go wrong, and I’m not expecting them to or even asking for that.
But you haven’t seen some of the routes that have come across my desk…
And if you did, you’d realize that sellers are going far beyond just “polishing” things a bit. If you’re interested to find out how bad it really can be, just buy a route without getting some help with this process (just kidding – don’t do that).
I hope this post helps shine some light on the evolution of the pricing of this business throughout the years, the types of backgrounds contractors come from, and understanding the necessity to judge a business beyond its surface level activities. If you’re serious about moving forward, let’s start getting to work!