Why Listing Price as a Percent (%) of Revenue Matters
One very common value metric used across the industry for FedEx Ground routes is a Multiple of Earnings. While the Multiple of Earnings is an important metric, on its own it can be very misleading. The Multiple of Earnings relies on an accurate representation of the earnings (or profit) of a business and not all listings in the market are represented accurately.
When looking at FedEx Ground routes for sale through Route Consultant, you can expect valuations to be presented as both a Multiple of Earnings and as a Percent of Annual Revenue. This allows you to better compare listings in the market instead of relying on a single value. In this blog, we will discuss some of the reasons why metrics can be misleading and how the Listing Price as a Percent of Annual Revenue can give you a better gauge on the potential of an operation.
Expenses for FedEx Ground Route Businesses May Be Difficult to Vet
First, let’s address why the Multiple of Earnings alone can be misleading. In our combined decades of experience evaluating thousands of contracting operations, we’ve noticed a widespread misrepresentation of Net Operating Incomes and Profit Margins in the route industry.
This can happen for a few different reasons, but there are two primary reasons worth mentioning: Some businesses have messy financial records and knowingly or unknowingly cannot account for every expense. And unfortunately, some businesses or brokers intentionally misrepresent a business’s expenses to create a more appealing listing.
If the Total Expenses are inaccurate or misrepresented, then the Net Operating Income and Profit Margin will also be incorrect. And when the Net Operating Income is inaccurate, the Multiple of Earnings will be inaccurate.
Some common terminologies to be familiar with are:
Total Expenses: This is all of the outgoing money paid by the business in the previous fiscal year. The largest expense of any FedEx Ground route is payroll. Expenses also include vehicles, fuel, insurance, uniforms, office supplies, and more.
Net Operating Income: This is the income remaining with the business after you subtract operational expenses. This is typically reflected as an EBITDA value accounting for all operating expenses, but excluding interest, taxes, depreciation, debt, and CapEx.
Profit Margin: This is simply your Net Operating Income presented as a percentage of Total Revenue.
Multiple of Earnings: The Multiple of Earnings is calculated by taking the Listing Price and dividing it by the Net Operating Income. The Multiple of Earnings provides you with an estimate of how many years it would take you to make back your investment if the Net Operating Income remained at present-day levels.
Percent of Revenue: The Percent of Revenue is a representation of the Listing Price as a percentage of the Annual Revenue for the business. This gives a better apples-to-apples comparison of operations based on market value independent of the operational choices made by the current owner.
The Effect of Misrepresented Financials
We frequently see sellers and brokers listing businesses at low Multiple of Earnings (below 3.5 times), but when we take a closer look at the Total Revenue and Net Operating Income we calculate suspiciously high Profit Margins.
Here’s the blunt truth: a FedEx Ground P&D business can not operate sustainably at a 30% or higher Profit Margin. The Profit Margin range of a healthy P&D business is typically 10%-20%. In rare situations and depending on market conditions, you could see a business attain a 25% Profit Margin, but even then you should be skeptical until you see the source data.
There are basic expenses every P&D business has to carry and even highly efficient businesses have limits to how much they can lower these expenses. Thus, when we see a business with a high Profit Margin and low Multiple of Earnings outside of the attainable ranges, we know they are not accurately representing the expenses of the business.
At the end of the day, you may need an industry expert to help you model the expenses and expected Net Operating Income. As the largest broker in the market with the most experience analyzing FedEx Ground operations, we work with all of our buyers to ensure they are buying the business they think they are. We also offer services to do a financial and operational deep dive into a business you are interested in purchasing. In this deep dive we will confirm all of the source data, uncover any skeletons and hidden expenses, and provide an action plan for you along with all of the data.
The Value of Percent of Annual Revenue
As we’ve hinted at above, your Net Operating Income will fluctuate based on how efficiently you operate the business. This means that two businesses with the same top-line Annual Revenue potential could have very different Multiples of Earnings. So how do you compare the two? Which one is the more valuable or attractive listing? This is where the Percent of Annual Revenue can be helpful.
Percent of Annual Revenue allows us to evaluate a business based on the top-line Annual Revenue of an operation which is much easier to predict and calculate, and it cannot be influenced by bad expense strategies. This value gives a more wholistic view of the operation that still accounts for the value of the Multiple of Earnings based on market values, but it also accounts for the quality of the fleet and other qualities of the business.
For FedEx Ground P&D businesses, you can expect the Listing Price as a Percent of Annual Revenue to be somewhere between 60% and 80% for most healthy operations. A portion of that percentage is heavily affected by the quality of the assets (the fleet). This average range is based on what we would classify as an average fleet, meaning a fleet of vehicles with an average age of around 3-5 years.
If a business has an entirely brand new fleet, you can expect the Percent of Annual Revenue to be markedly higher to account for the asset value. If a business has an extremely old fleet, you can expect the Percent of Annual Revenue to be much lower to account for the potential investment required in the fleet. By lowering the Percent of Annual Revenue, this also lowers the Multiple of Earnings on a business with likely high expenses from the aging fleet.
Using the Listing Price as a Percent of Annual Revenue in your evaluations is the most reliable method for comparing apples to apples when you are considering multiple FedEx routes for sale.
There are many other examples and factors that we can teach you to look out for when evaluating FedEx Ground routes for sale. Having an expert broker and consultant in this space can be invaluable to find the right business for you and ensure you are educated and ready for your first day as a FedEx Ground contractor.
Want to Learn More?
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