What’s the best low risk business that I can buy?
It’s a popular question that ends up leading many people to explore FedEx routes.
When I first acquired my initial FedEx routes years ago, I was looking for some business to get me out of the corporate grind that often drowns in politics and general foolishness. The idea of a franchise appeared to be too much risk for me at the time and buying an independent business can be massively risky if you don’t understand the unique attributes of that business model. Notice I said, “the unique attributes of that business model” and NOT “understand business in general.” Business experience in general is helpful for being able to manage your routes and helps with the mathematics required to assess the financial side of things, but it doesn’t help nearly as much as you’d think with FedEx routes.
Regardless, it’s worth discussing the fact that due diligence only eliminates one of the 3 major risk factors with buying a route. While due diligence for routes has the biggest risk factor in terms of likelihood for things to go wrong, it’s important to consciously be aware of all 3.
The most critical element of risk in a business acquisition is:
#1 – DUE DILIGENCE
This has the highest likelihood of something being missed by new business owners, or worse yet, people that have had business experience and think that they can evaluate routes on their own because of their prior success.
To be fair, most sophisticated and brilliant business owners that have purchased other businesses eagerly want to work with me since they understand how each industry has different pieces of knowledge that need to be shared, since no amount of prior business experience can substitute for specific and proprietary knowledge of an industry.
This is both the biggest risk and the most probable point of risk in an acquisition. I describe the numerous facets of this issue in several other articles that I have since it’s so massively important, but there’s actually more risks than just the due diligence.
#2 – THE RISK OF MISMANAGEMENT
A lot of brokers and sellers will tell you that all you need to do is hire some people, slap some logos on the sides of some box trucks, and let the manager in place take care of everything. It’s true! But if you believe this is as easy as they make it sound…you’re in for a monstrous surprise.
There’s always a balance of “it’s too good to be true” and things legitimately being awesome.
As cheesy as it may sound, owning routes is an incredible and truly excellent business in numerous ways. Working on the same team as a juggernaut like FedEx is an honor and privilege. But please realize those pros come with some very nasty cons, and if you don’t know exactly what those are, you’re in for some trouble.
A lot of that trouble is where people are invariably focused initially on trying to see “what’s the value of a FedEx route” or trying to determine the income of a FedEx route on average. Those are great things to focus on, but definitely not at first, simply because…
The value and income doesn’t matter at all if you don’t have the skillset / time / desire to make that income continue to flow.
“But the broker told me FedEx takes care of everything! I just have to manage the business and the manager in place and let the cash flow pile into my bank account.” It’s true! If you’ve thought (or been convinced by some broker) this was the full truth, you desperately need to hear why these half-truths pervade this industry and grab a call with me.
Does his nose grow if he lies by omission?
While I’ve discussed that your background and experience doesn’t matter tremendously much in terms of being a contractor,
The truth is simply that not everyone has the skills required to be a successful contractor.
Your skillsets and understanding of what a FedEx contractor does on a day to day basis is critical to you understanding and evaluating whether routes are even a good fit at all in the first place, much less focusing on the due diligence.
#3 – THE RISK OF THE BUSINESS ITSELF
Most of the time when this topic is broached, people look over the price of FedEx’s stock (as of 2017, it’s doing quite well, and has done well for quite some time now) and feel like that’s a good sign. The next thing is to consider the industry itself – are people shipping more stuff? Is eCommerce increasing? Absolutely.
But there are other risks as well, such as things like:
- UPS could gain competitive advantage by lobbying for certain legislation. This almost happened a while back with what FedEx called the Brown Bail Out regarding an FAA bill that was lobbied on heavily.
- International risks such as North Korea could finally send a nuke our way while we patiently wait for them to strike first.
- Congress could change legislation on how contractors have been potentially misclassified. To give some history on the employee vs contractor legislation FedEx has faced, this has been an ongoing issue for many years and FedEx has fought diligently to uphold that contractors are properly designated.
- Sometimes people ask me why FedEx doesn’t bring all its operations in house and eliminate the contractor model. This question comes from not understanding the complexity of the interconnectedness of how unions, legislation, political lobbying, and the logistics industry operates overall especially in regards to the competitor relationships in this industry. To grossly simplify this, the contractor model is the sole element that is propping up this multibillion dollar company and keeps FedEx fiercely competitive with UPS.
Restated: If the contractor ever goes away, it will be with FedEx kicking and screaming the whole way. Congress will change the designation, not FedEx. And Congress would be squashing a lot of small, medium, AND large business owners that have these routes – that’s a nasty trifecta to fight with and I don’t think it’s likely for either FedEx OR Congress to actually change this classification.
As for the risk of this change, it’s not really a fear for most contractors at this point. The good news is that it appears that the number of issues with this have been alleviated in recent years due to the ISP transition that will be completed in 2020 that will make all states require contractors to own 5 PSAs (or deliver 500 stops on average).
- I’m sure people want to include driverless technology and drones in here as well. I’ve spoken on why I believe both of these technologies will either have no effect on contractors or if there is an effect, it’s likely to be positive. Will these technologies be a factor in the future? Likely so, but those days are far beyond the horizon in my opinion.
- Other mandates that FedEx could issue such as the Home Delivery and Ground merger, other mandates that have made certain route types evaporate nearly overnight (most people don’t know what I’m referring to here, for better or worse), and so on can create unforeseen risks. My opinion on this is that these risks are slight and other risks discussed here are quite a bit more likely, but can thankfully be overcome with some education.
I know I only mentioned 3 risks at the start of this article, but there’s actually one more –
#4 – BONUS RISK: NOT ENJOYING THE OPERATIONS OF THE BUSINESS
A lot of people think that leaving corporate America and owning their own business must inherently be enjoyable. It’s the dream everyone work-at-home business tries to sell inexperienced people. But seasoned business owners know that owning businesses is just like having a job where there’s no traditional boss to report to and you can actually sell your “job.” But the point is that some jobs are enjoyable for certain people and some people are miserable doing the exact same thing.
Let me tell you about a business that is more stable, lucrative and lower risk than a FedEx route…
Lincoln can’t tell a lie, but he sure might forget to explain all the risks of routes.
If I told you of a business that had tremendously low risk, had a near flawless due diligence process, and was practically guaranteed to make money with sustainable long term demand, would you want this business? What if you found out you were on call 24 hours a day, cleaning up basements with broken raw sewage pipes, or scrubbing up violent crime scenes? Both of these are low risk businesses that are highly lucrative. Hopefully this is driving home the point that this bonus risk is indeed a very real risk…
Routes can be enjoyable for sure, but they take the right person to like doing what they require to manage on a daily basis. I personally love managing routes in a lot of ways, but I know other people that feel very differently than me as well. If you’re not sure that routes are definitely for you, make sure you grab a call so we can discuss what it’s really like being a contractor.
The goal of talking about all these risks is not to scare you away from this business model – there’s some fantastic elements of buying FedEx routes that no other business acquisition possesses. The objective here in this article is that you need to simply be aware of the real risks of this business even though FedEx has a relatively low risk profile relative to many other businesses out there (when you do your due diligence appropriately and deeply understand these main risk factors I’ve outlined here).
That said, in order to assess risk fully, you need to be precisely aware of it.
Get the full story and let’s get moving forward assessing and valuing a route appropriately together.