The unpleasant truth for banks lending on FedEx routes.
Banks are using SBA programs to finance FedEx routes…and it’s going to be a mess all over again.
In 2019, it will have been over 10 years that I’ve been in the FedEx route world.
Those of you that know me, know that I’ve done a lot of work from interviewing ex-corporate executives off the record, befriending terminal managers, comparing notes with some of the largest logistics research companies in the US, owning routes personally for years, chatting with publicly traded banks about their loans on FedEx routes, discussing routes with multiple CPAs experienced in the accounting of routes, and talking to highly tenured owners as well as some of the largest contractors across America.
When you do something for a while, you start to see patterns, and the important part of what I just mentioned was chatting with banks about the loan prospects for routes. The banking side wants a slice of the pie on a business that has as many good things going for it like routes.
That sounds like good news, but in actuality it may not be.
Typically, routes have been the outcast of banks using SBA loans for many years. The reason why loans weren’t available was because of the idea that a FedEx business wasn’t quite a true independent business, nor a franchise, but instead, a contract business. That means,
Owning FedEx routes doesn’t mean you truly own your own business.
First off, that’s a totally acceptable (preferable?!) thing, but it’s important to drill that into people’s minds. You own a contractual relationship where you’re performing to the contractual specifications of the contract that you sign. This means that all the business professionals out there that have had massive financial success and have tremendous knowledge of finance / economics find themselves in a bad spot. It’s a bad spot because there is this false sense of security that the experience they’ve had prior to routes, lulls them into evaluating the route on 3 typical levels:
The industry (Logistics)
The company inside the industry (FedEx)
The route business financials (The specific FedEx contracting business)
If they evaluate a FedEx business in these 3 typical ways, those people will very likely lose.
As an important aside, one thing that’s good to understand in the FedEx world is that the amount of unprofitable and terrible routes out there are very few and far between. I say those people will “lose” in that they will: 1) end up making much less money than what they thought, 2) they’ll be working far harder, and 3) they’ll be aware of a significantly greater amount of risk.
To me, that sounds like a “lose” more than a win. But I don’t want to sound alarmist here by saying they’ll lose everything. The reality is if you had very solid business skills, you could flip a coin and buy a random route and jump right in – you’ll likely be somewhat profitable for a while (I don’t suggest trying this strategy).
But if all you judge a route by is its profitability exclusively, that’s not a good start if you consider the idea that a lemonade-stand, or even a job, is definitely profitable.
Back to the point of the experienced bank analyst. They will look at the industry and conclude logistics is growing. They look at FedEx and read over shareholders annual reports and say it looks to be a solid company. Finally, the look at the FedEx bundle of routes for sale and see the money flowing in and say “Hot dang, got a winner here!” But when the banks get their experienced lawyers and CPAs to evaluate the businesses, as many banks are doing, they don’t know how to figure out if a route they’re about to loan on is a total nightmare to operate in terms of the operations. They can look at a tax return and see the money is there though.
To be fair, many top level CPAs / lawyers / business owners DO know they need expertise in the business they’re buying, and I’ve definitely worked with hedge funds, banks, private equity groups and so on to help. There most definitely are some brilliant people out there, and I’ve been blessed to be able to work with them as well. It’s usually the most experienced and successful people in those fields that reach out to me, which makes sense.
Back to discussing the typical analyst at a bank…
They can’t tell whether a route is being well run or not…and here’s where things get nasty.
In the typical evaluation of a business, the profitability often tells us whether it’s well run or not.
In the FedEx world the profitability does NOT always tell us how well it’s run.
If you were buying a car wash and the profits are lower than industry average, then you can buy that car wash and maybe level off the downtrend with good business skills, or maybe you can even fix it up over time. The banks can look at the car wash and say, “Well, based on this profitability, we feel confident you can pay back this loan,” and they’re usually right.
When they look at the FedEx route, since it’s not truly your own business as much as it’s a business contracting with FedEx, it means a poorly managed businesses profits don’t just downtrend or flatline…
It means the profits disappear overnight.
Because FedEx got “FedUp” with poorly performing contractors, and in efforts to protect their brand image and provide great service, they terminated that contractor. A buyer may be happy with lackluster performance as long as the money is good enough, but FedEx is not going to be ok with poor service.
I’ve tried to warn a few banks that them giving loans to their customers is a bad idea if they don’t know what they’re doing. The problem is because they’ve got experience dealing with millions of dollar’s worth of businesses, they feel like they’ve got FedEx evaluation under wraps. “How hard could it be,” they wonder. They consider that there’s no cash transactions, only one customer (FedEx), the only hard assets are trucks, and it’s using a predominately unskilled / replaceable workforce for drivers.
That is literally almost as easy as it gets – a liquor store is actually more complicated than that.
Their confidence and evaluation lulls loan customers into feeling the highly erroneous belief that,
If the SBA is happy to loan on it, they must know what they’re doing, therefore it’s one of the better routes.
It’s simply not true. Now, if it’s for a regular brick and mortar business, then an SBA pre-approval sounds like a much better chance of it being a legit “good” business, than one that didn’t qualify to be pre-approved. But for FedEx routes, SBA pre-approval may not mean much at all.
So…here’s the bombshell that both banks and people looking to buy routes need to hear:
I looked at a FedEx business last year that was showing very honest income estimations in my opinion and it was also SBA pre-approved. The taxes matched up perfectly with the 1099s (the SBA cares about that stuff, not me) and all seemed to be well financially. But before the loan officer pats himself on the back for managing to figure out the financials, you need to know the other part of this story, which is…
The route was being run so poorly it was in the process of being terminated.
Now, before you think I’m trying to fear monger here, you need to know that termination tends to be rare, and SBA preapproval on a route in mid-termination is even rarer. The fact that this occurrence is rare isn’t the point – the point is that sort of thing happened to begin with.
So here’s the pattern we’re going to see recur: Banks many years ago used to lend on routes, then a bunch of the routes failed, and the banks blacklisted routes.
Banks erroneously thought FedEx routes were highly risky, but I say those lenders were highly uninformed.
Now, some savvy banks are starting to require the training here for anyone looking at routes to get approved. And the reality is that loans are definitely happening from banks trying to get into this space. Which leads me to my prediction that we’re going to see what we saw happen a bit many years ago…
The banks today using the SBA program are going to have a spike in loans defaulting for FedEx routes because they don’t understand the difference between the routes outside of the financials, and all those failures are going to put a sour taste in their mouth, and they’re going to blacklist FedEx again like they did years ago.
You still see some brokers that will say “No SBA financing allowed,” that’s not because the business is “bad.”
Those brokers are just used to the fact that it used to be that hardly any bank would ever lend on them and brokers don’t want to waste anyone’s time. The reality is that some banks are lending on routes now, and some brokers are patient enough to try to work with the buyer to help see things through.
I’d like to see more banks loan on FedEx routes and for routes to be acknowledged as one of the best business to get a loan on, but that’s not the world we’re in.
However, for a buyer, it’s a very favorable time, they’re actually still lending in 2019.
I recently discussed the risks of FedEx routes with a bank and from that discussion they literally have decided to avoid loans on routes completely since they don’t want to expend the effort to deal with all the unique caveats of routes – it’s easier and “safer” for them to just loan out on yet another coffee shop (that collapses the moment Starbucks moves next door – whoops).
On one hand, it sounds like I’m shooting myself in the foot, since if people can’t get loans, they’re not interested in evaluation training from me, because they couldn’t even buy the business even if they did find a great route.
I try to practice the idea that doing good things and providing value ends up having the greatest net positive.
While less fundability in the marketplace is not directly a good thing for me, I also consider the following scenario. Perhaps by you getting educated on what to look for when evaluating the pitfalls of FedEx routes, maybe you can help save yourself by buying a fantastic route instead of a bomb, which also saves the banking industry just a tiny bit by not being another default that hits the banks books. This helps the next guy wanting to buy a route, and because the banks have such great results loaning on routes, it then helps me because that buyer gets approved for a loan, and wants to get trained on how to evaluate the routes.
So maybe it all works out in the end.
There are a few banks that I’ve worked with throughout the years, they tend to come and go for various reasons, and if you’d like to get introduced to one of the banks that I work with, I’m happy to do so.
I continue to believe routes to be one of the best businesses out there to buy when you know how to deeply evaluate them. If you’re a bank considering adding a strong business with very strong metrics to your lending portfolio, please reach out me.