What “net” means for routes.
The term “net” has a crazy, convoluted history in regards to routes. As more people discover routes as a viable business to make excellent returns on their money, more buyers are stepping in and of course, more brokers as well each having a different idea of how to definte “net.” With other businesses, the net usually means, “After the owner has worked and paid the employees, how much is left?”
Routes were a different story though…
Routes often portrayed the “net” as the figure that was paid to the contractor by the parent company, whether it be Pepperidge Farm, FedEx, or whatever. It was the figure you could arrive at before deducting any expenses at all (fuel, trucks & maintenance, and employees).
But routes actually come in 3 main ownership varieties, all changing the definition of net:
1) The owner / operator with employees.
2) The owner that’s just a manager with employees.
3) The owner that has hired a manager and is mostly absentee.
How much these owners are making, or netting, in each of those 3 situations varies dramatically. Which is why originally, the “net” used to just show how much the route made before the expenses of any employees since it could vary so much from route to route.
It’s easier to evaluate the ROI on a route if everyone follows a similar accounting method, but they don’t.
Consider this: 2 somewhat identical routes:
Route A is for sale for $100k and nets $70k
Route B is for sale for $95k and nets $35k.
Route A is selling for a multiple of 1.42 of its sale price to net, vs Route B selling for a multiple of 2.74.
Which is the better ROI? The answer is, “who the hell knows!”
One you talk to the brokers, you later discover that the route netting $70k was with the owner running the route himself. This is versus the identical $35k net route after all expenses of a $40k employee with a managing owner. Now the multiples (in the case of standardizing “net” to owner operator) are that Route A is still 1.42 but Route B is now 1.26 (35k net + $40k employee = $75k owner operator net divided into $95k).
Therefore, a cursory glance of asking price vs net in the current market will not work for determining ROI.
Some contractors want to run routes themselves, some want to manage, and some want to hire managers. For people experienced in routes, they probably prefer the net amount to show what was paid by the parent company, but this excludes many new buyers since they may not know yet how they want to manage the business.
It’s important to quickly discover what “net” your particular broker has decided to use. It’s often based simply upon how the business is currently managed by the owner; whether they’re working a route, managing it, or managing managers.
There’s no one real good answer on how to use the term “net”, but brokers should all be prepared to answer what “net” they’re using. Knowing the variances in this term and understanding the 3 main types of ownership structures of routes is imperative to evaluating routes quickly.