The Difference Between an Amazon DSP and a FedEx CSP

Bottom-Line: While both Amazon DSPs and FedEx CSPs provide similar last mile delivery services, FedEx CSPs can more easily build equity in their businesses. Bank financing for prospective buyers of CSP is more readily available given 1) CSPs are SBA eligible (DSPs are not) 2) FedEx provides a straight forward process to allow contracts to transfer (Amazon doesn’t), 3) CSPs contracts provide exclusive territory (Amazon doesn’t) and 4) CSPs typically own trucks which helps provide collateral for banks (DSPs don’t).

If your goal is to only build out a cash flow machine, both the DSP and CSP option will work well for you. However, if your goal is to someday monetize and sell your delivery business, becoming a FedEx CSP is the better option. 

Amazon and FedEx Relationship

The history of Amazon and FedEx’s relationship reads a bit like a soap opera.  Prior to becoming competitors, they were collaborators.

From Amazon’s nascence, FedEx was a reliable and much relied upon partner.  Their superior logistics capacity, in development since the company’s founding in 1971, had long placed them at the forefront of the delivery service industry.  As such, Amazon depended on FedEx for their timely air and ground deliveries to enable their growth as a reputable online retailer.

However, the relationship began to sour in 2013, following a holiday season during which FedEx struggled to deliver the unexpectedly high volume of Amazon orders on time.  Amazon began to build out its own delivery and logistics networks, lessening its dependence on FedEx’s services.

Finally, the big break-up occurred in 2019.  In June, FedEx announced that it would not renew its air delivery contract with Amazon; and, in August, FedEx finalized the divorce by ending ground delivery of packages as well.  Their decision hinged upon the expectation of continued growth in e-commerce as well as the deterioration of their relationship with Amazon.

In retaliation, Amazon forbade its third-party merchants from using FedEx in December of that year.  They reversed the decision, though, in January 2020.  This retraction proved fortunate, as “Shipageddon” lay just around the corner, precipitated by and continuing throughout the COVID-19 pandemic.

Although the acute delivery logistics crises of 2020 have largely abated, the rivalry between Amazon and FedEx remains with each competitor expanding and updating their capabilities to meet the needs of the future of e-commerce.

The good news is that both companies have opportunities to start or invest in package-handling businesses although the specifics involved are decidedly different.  Small businesses affiliated with Amazon are known as Delivery Service Partners (DSPs), while businesses associated with FedEx are Contracted Service Providers (CSPs).

Amazon DSPs

Amazon DSPs are strictly package-delivery businesses, best suited for individuals with little to no experience running a business and limited access to startup capital.  The DSP owner is akin to a middle manager in a large corporation and has little latitude or flexibility in decision-making; but, as a small business owner, an Amazon DSP owner assumes additional liability.

To apply for DSP ownership, an individual – partnerships are not allowed – is thoroughly interviewed and screened to ensure appropriateness of fit with Amazon.  Although startup costs can run as low as $10,000, the candidate must have at least $30,000 in liquid assets to receive final approval.  Investors and those wishing to run package-delivery businesses in multiple locations are not eligible for the DSP program.  Candidates whose spouse or partner own a DSP are also disqualified. DSP candidates are not eligible for SBA loans because their contracts can be cancelled after 30 days.

Once selected, the candidate is assigned to a specific delivery station and receives two weeks of on-boarding training.  The following image is an excerpt from Amazon’s DSP marketing brochure, detailing the training:

Source: Amazon Logistics[1]

It is fair to note that during week one Amazon introduces the deals with third-party vendors that it has arranged.  Owner-operators are expected to take advantage of these deals without considering outside options.  Though transacting with Amazon’s pre-approved third-party vendors simplifies the process of new business ownership, the DSP owner has few, if any, alternative choices to consider.  Furthermore, an inexperienced owner may be more inclined to accept Amazon’s recommendations because they have no frame of reference by which to assess the quality of an accountant, lawyer, health plan, etc.

This image, again from the Amazon brochure, shows the arrangements Amazon has made with third-party vendors for its DSPs:

Source: Amazon Logistics[2]

After training is complete, the DSP owner finalizes startup by creating their business entity along with filing for all necessary licenses.  Additional startup costs include obtaining professional services (e.g. accounting, legal, etc.), purchasing setup supplies such as a laptop and time-keeping software, recruiting and hiring, administering drug tests and background checks, and providing driver training.

The DSP owner must begin operations with at least five vehicles and is expected to expand operations to 20-40 vehicles.  The Amazon branded vehicles must be leased and not owned.  The DSP owner is responsible for all employee costs, including benefits, payroll taxes, and insurance; vehicle costs; asset costs such as devices and uniforms; administrative costs; and professional services costs.  The graphic above shows that Amazon has already provided access to the business management services that will assist DSPs with the bookkeeping aspects of their business.

The daily routine of a DSP is primarily focused on the management of their delivery team.  They schedule their drivers using Amazon scheduling tools, report daily to their designated delivery station to receive daily routes, delegate these routes to their drivers, and lead a daily morning huddle with their team.  DSPs do not have an exclusive delivery service area, nor do they have control over route design or delivery sequence. 

Throughout the day they track their drivers progress and respond to any delivery-related issues.  Amazon’s support personnel are available for assistance as needed.  Recruiting, hiring, and bookkeeping are continuing tasks along with coaching, helping, and motivating drivers.  The day ends with a route debrief and ensuring that all vans are prepared to begin delivery the following day.

It is clear that DSPs are highly team focused and customer service oriented.  They meet weekly with Amazon representatives from their delivery station as well as their Amazon Business Coach.  At these check-ins, the Amazon representatives and Business Coach provide performance reviews and offer suggestions as to how the DSP can continue to improve and grow their business. 

DSPs are paid monthly and must be mindful of their anticipated cash flow to remain solvent.  This graphic shows how revenues are calculated.

Source: Amazon Logistics[3]

The revenue and profit projections for a DSP owner running 20 to 40 vans are as follows:

Source: Amazon Logistics[4]

These estimates are provided by Amazon Logistics, and it is not possible to verify their accuracy.

In summary, DSP ownership is an attractive option for the individual who is passionate about managing a team and focusing on customer service.  Amazon provides for a quick, low-cost startup while taking a lot of the guesswork out of business management.  As a trade-off, the DSP owner cedes a significant amount of decision-making to Amazon Logistics and accepts intensive oversight of their operations.  Profit potential is also limited because they may only run up to 40 vans out of one delivery station and may not expand beyond that constraint. Perhaps the biggest negative of being a DSP is the difficulty of monetizing the asset to sell. Given the structure of the contract, it is extremely difficult to get 3^rd party financing in order for a buyer to purchase. This is not the case with FedEx CSPs.

FedEx CSPs

FedEx CSPs differ significantly from Amazon DSPs on almost all parameters and are an excellent opportunity for the more experienced business owner or investor with a greater capacity to finance the purchase of their business.  FedEx CSPs may operate either a Pickup and Delivery (P&D) business or a Linehaul business where packages are transported between stations and hubs, or hubs and hubs.  For the sake of comparison with DSPs, we shall focus on P&D businesses where direct customer interaction is involved.  However, much of the same information is directly applicable to Linehaul businesses.

To become a FedEx CSP, a business must contract with FedEx to provide service for a contracted service area.  Typically, the business will purchase the routes from an existing CSP and maximize the benefit of this transaction with the assistance of a qualified brokerage.  The purchasing business must be established as a for profit corporation, excluding LLCs, LLPs, sole proprietorships, and the like.  Investors who do not wish to be owner-operators, and would rather delegate daily decision making to a general manager, are not excluded from purchasing routes and contracting with FedEx as an CSP.

While CSPs may only contract for one service area per station/hub, they may contract for routes that service another hub.  The operations of an CSP are succinctly captured in the following graphic; but, bear in mind that CSPs not only deliver packages to a hub for transport, but they also pick up packages for delivery to residences and businesses within their service area.

Source: FedEx Ground[5]

CSPs, having purchased routes and contracted with FedEx to provide P&D services, operate exclusively within their contracted service area.  As independent businesses, they must purchase the assets (e.g. vans and trucks) and hire and train the employees necessary to meet the conditions of their contract.  However, it is at the sole discretion of the CSP owner and/or general manager to determine type and number of equipment needed, personnel and staffing decisions, work area configuration, route design, pickup sequence, and delivery sequence.

As independent businesses, CSPs are also responsible for:

• Employer related expenses including but not limited to:
  • Wages, salaries, and benefits
  • Employment taxes and unemployment insurance
  • Workers’ compensation and coverage
  • Providing FedEx approved uniforms as necessary
• Payroll and accounting management such as:
  • Payroll deductions
  • Payroll and employment records
  • Compliance with local, state, and labor laws including the U.S. Fair Labor Standards Act
• Hiring and training personnel and providing FedEx approved uniforms to personnel in contact with the public
• Vehicle related maintenance and insurance
• Maintaining registration and good standing in the state in which the business is incorporated
• Service reliability, especially with respect to timeliness
• Upholding the image of the FedEx Ground brand as the preeminent delivery service available

While the responsibilities of CSP owners are sundry, the modes and methods employed to fulfill these responsibilities are left to their own judgment.  So long as they meet the conditions of their contract, CSPs are given full latitude to run their businesses to maximize productivity and profitability, which leads us to compensation.

CSPs are paid an agreed upon amount that factors in the volume of stops and the packages delivered as well as other terms addressed in the agreement with FedEx Ground.  Payments are made on a weekly basis, providing reliable cash flow, and enabling constant planning and adjustment to changing circumstances. 

Profits depend on the productivity and efficiency of the CSP.  However, with the continual growth of e-commerce, opportunities for CSPs to expand their businesses and profits are essentially boundless.  P&D service areas are becoming increasingly dense, including both business and residential postal codes.  Increased customer demand and business results yield higher weekly revenues.  CSPs may also avail themselves of optional seasonal incentives and third-party vendor discounts on vehicle maintenance, tires, etc.  Finally, it is important to remember that an CSP may contract out of additional hubs so long as the hubs are distinct.  Growth is only limited by the desire, capacity, and competence of the CSP to uphold their contracts with FedEx Ground.

Becoming a FedEx CSP is an outstanding opportunity for the investor and/or owner-operator that wishes to take on the full risks and rewards of business ownership.  Exercising full decision-making power over the operations of one’s business requires knowledge, experience, and access to the resources that allow one to make optimal decisions pertaining to efficiency, growth, and profitability. 

Although CSPs are independent, FedEx Ground does not take their contractors for granted.  FedEx Ground recognizes its top service providers with several awards: Entrepreneur of the Year and The Humanitarian Award.  You may find stories of recent award recipients on the FedEx Ground site.

Conclusion

Amazon and FedEx have evolved uniquely divergent models for the provision of package delivery services.  The former involves a collection of small businesses with limited authority over their own operations, a great deal of company oversight and the inability to actually sell the business; while the latter entails the aggregation of many independent, for-profit corporations given great latitude to operate for their own risk and reward all while having the right to sell the business to a 3^rd party. 

The reasons that each company has developed such different delivery models is a moot point.  However, it is worth mentioning that Amazon operates its delivery services at a net loss to the company, subsidizing them with its other diverse revenue streams.  It is more important for them to enlist good soldiers rather than entrepreneurs.  On the other hand, FedEx Ground’s sole focus of operations and revenue source is package delivery.  Therefore, they benefit most from accessing the talents of ambitious entrepreneurs.  The success of their operations relies on having independent business owners akin to four-star generals who can acquire and maximize the use of resources unique to their service area.  The profitability of each independent business lends itself to the profitability of the corporation as a whole.

The decision to become a DSP or CSP hinges on the particular career goals of each individual.  Black Iron Advisers specializes in assisting entrepreneurs to become FedEx CSPs or to expand current operations with FedEx Ground.  Combining extensive investment banking expertise with firsthand FedEx CSP operator knowledge, they can help you identify appropriate business opportunities and complete such transactions to your maximum benefit.  For more information, you may contact them here.  

Buying or selling FedEx routes can be a challenging, confusing, and highly complex process.  While some individuals wish to go it alone in undertaking these types of transactions, they may lack the specialized knowledge to identify the correct market price for the business and/or assets in question, the connections necessary to produce an optimal deal, or the time to effectively manage a transaction while attending to their current business ventures amongst other things. 

Though there is a strong temptation to avoid the cost of using an investment banker as an intermediary when conducting a FedEx transaction, their contribution to the process adds value that more than compensates for the additional expenditure.

What Is an Investment Banker?

Before discussing how an investment banker can add value to your transaction, it is important to identify what an investment banker actually does. 

Investment bankers facilitate complicated financial transactions, frequently structuring acquisitions, mergers, and sales.  They also are involved in issuing securities as a means to raise capital, but that subject is beyond the scope of this article.

Ideally, investment bankers are experts in their particular field with the insight to identify risks and opportunities, having an in-depth understanding of the current investing climate.

How an Investment Banker Can Add Value to Your Auto Center Acquisition or Sale

Far from being mere number crunchers, or the wheelers-and-dealers seen in Hollywood films, investment bankers possess a diverse range of skills and abilities that all contribute to the structuring of the most advantageous deal for both buyer and seller.

The following list comprises the main attributes that a qualified investment banker brings to the table to maximize the value of your acquisition or sale:

1. Investment Bankers Have Strong Quantitative Abilities (i.e. They are very good at math.)

An investment banker’s quantitative acumen is extremely important in identifying the correct market price for FedEx routes as well as any associated assets that are part of the transaction.  They apply specialized financial mathematical analyses to arrive at the appropriate market price.

An incorrect sale price for the business will result in a suboptimal outcome for the parties involved.  If the price is too high, then the business may not sell.  If the price is too low, then the seller is giving away value that they otherwise could have captured.  And, while it may be tempting to accept on trust the offer of a known colleague, sellers must be aware as to whether this offered price matches the current market price.

On the other side, an investment banker can advise a potential investor whether the asking price for a business is too high.

Additionally, an investment banker’s adeptness in evaluating numerical data can assist buyers and sellers in deciding whether to buy or sell all routes currently owned or whether to sell only a subset of routes or assets.

The specialized experience of an investment banker is unparalleled when it comes to conducting numerical analyses to determine pricing and how to structure a FedEx deal that will maximize profitability for both buyer and seller.

2. Investment Bankers Are Excellent Communicators

That investment bankers are capable of communicating unambiguously and effectively is important on several fronts.

From the seller’s perspective, it is important that an investment banker be able to articulate the reasoning behind a recommended sale price as well as any possible advisement that pertains to the components included in the highest value transaction.  Financial concepts are far from intuitive, so it is important that the investment banker be able to translate these concepts into working terms.

Secondly, an investment banker plays a key role in marketing a business for sale.  Beyond financial analysis, the investment banker can draw up a broad and comprehensive overview of a business, highlighting its key selling points.  This information can be assembled into a thorough presentation package that explains to potential investors the nature and workings of the business operation under consideration.

This clear communication to both buyers and sellers helps to remove confusion and overwhelming complexity from the transaction, enabling them to better consider their options and assisting them in making the best decisions for themselves.

Adroit communication is absolutely critical in another aspect of facilitating a transaction.

3. Investment Bankers Are Highly Skilled Negotiators

All is for naught if an investment banker cannot structure a mutually beneficial trade between parties.  As such, investment bankers must maintain strong communication with both buyer and seller to ensure that they are able to cooperatively achieve the best possible outcome.

As a negotiator, an investment banker must be quick-witted and persuasive with an eye to creative problem-solving.  Not seeking to exploit one party for the benefit of the other, the savvy investment banker wishes to reach a deal that both parties can agree to with confidence and satisfaction.  Game theorists need not apply.  An investment banker cannot expect to have many clients in the future if he or she develops a reputation for cheating one side of a transaction for the other’s gain.

In this way, an investment banker contributes tremendous value by ensuring that a transaction meets both the buyer’s and seller’s financial goals.

4. Investment Bankers Protect Confidentiality

Frequently FedEx route owners require confidentiality when putting their business on the market.  The major reasons that sellers wish to keep a possible change in ownership confidential are:

• To avoid losing the top talent among their employees who might look for other employment when fearing a change in management

• To protect their financial information and intellectual property rights

To maintain confidentiality, an investment banker can require all parties to a sale to sign non-disclosure agreements.  Once signed, the seller is willing to share proprietary information to the potential buyer while ensuring that news of the sale remain private and that the information shared remain confidential and not be revealed to a third party. 

Should a potential buyer violate the terms of the non-disclosure agreement, the business owner has the right to sue for compensation.

Yet again, the communication skills of the investment banker come into play so that they can explain to prospective buyers why non-disclosure agreements are necessary as well as why access to certain information may be limited.

A major perquisite of an investment banker’s non-disclosure requirement is that it serves to qualify the buyer.  Essentially, it identifies the individuals or entities with a sincere interest in acquiring a business and excludes those only interested in mining for inside information.

5. Investment Bankers Have A Solid Network of Industry Connections

To aid clients who need supplementary assistance with financial, legal, or other business-related matters, experienced investment bankers have a highly developed network of industry connections from which to draw in order to provide useful referrals.  Much as a primary care physician may refer a patient to specialists to treat their specific needs, so an investment banker may refer a client to certain industry professionals to optimize their business’s wellness to ensure maximum enterprise value.

Knowledgeable FedEx business investment bankers are able to read the client’s needs and direct them to a range of professionals from attorneys to insurance agents to vendors, lenders, accountants, and other industry professionals.  The goal is to connect the client with the right specialists to address any aspects of the business or legal process that might become obstacles to the most advantageous transaction.

An investment banker, therefore, generates a sort of network effect by bringing disparate interests to bear on a given deal, which synergistically increases the value of the transaction for all parties concerned.

6. Investment Bankers Display A Tireless Work Ethic

Investment banking is not for the faint of heart.  It requires dedication, patience, attention to detail, and substantial time to structure a successful financial transaction.  At the outset of their careers, many investment bankers work 60-70+ hour work weeks in a dues-paying trial by fire.

The ingrained habit of hard work is a massive benefit to the clients of an experienced investment banker.  They can expect their investment banker to approach their project with focus and commitment, executing a transaction with a superior level of efficiency and know-how.   

The net result is that the client saves time, energy, and money, allowing them to remain focused on their current business ventures and other pursuits. 

Black Iron Advisers Can Help

The investment bankers at Black Iron Advisers possess the qualities described above and more.  As one of the few FINRA licensed investment banks focused on serving FedEx route investors, Black Iron Advisers can represent their clients in the full breadth of transaction structures.  They have personal experience owning FedEx routes themselves.  They were founded with a client first philosophy with their only priority being maximizing value for you.  If you want to learn how an investment banker can help you, please contact Black Iron Advisers for further information. 

The Differences Between SDE And EBITDA

Buyers use SDE (seller’s discretionary earnings) or EBITDA (earnings before interest, taxes, depreciation, and amortization) to estimate the free cash flow of a company.  The number used depends on who the potential buyer is.

SDE reflects the cash flow produced for an active owner, meaning that the owner is involved in the management and daily operations of the business.  This measure is generally relevant to smaller businesses, typically with earnings below one million dollars.  SDE does not deduct the salary of the owner-operator or other business expenses because it assumes that the owner will be the beneficiary of all the earnings of the company.  With respect to the purchase of FedEx routes in particular, SDE is most often the cash flow estimate under consideration.

By contrast, EBITDA is the measure preferred for the financial buyer who does not plan to have an active daily role in business operations.  Private equity groups, family offices, and large strategic buyers consult this estimation, and it is generally applied to businesses with earnings over one million dollars.

The interesting aspect of EBITDA is that it allows for the estimation of free cash flow without any consideration placed on the capitalization of the company or the tax circumstances of the owners.  Additionally, sellers can add back any expenses that are exclusive to that owner.  By way of example, a seller might add back the salary paid to a family member who has no functional roll in the company to reflect a more accurate picture of the true earnings of the business.

EBITDA seems complex because it is a long acronym with technical terms; however, it is quite understandable once you break it down into its components.  For starters you remove interest because it is correlated with how you have chosen to capitalize the company.  Since this decision is unique to each buyer, it is removed from the EBITDA estimation. 

Secondly, taxes are removed, again because each buyer has an individual tax situation that may not correspond to that of the seller.  Depreciation is deducted because it is a non-cash expense.  An example of depreciation for a FedEx purchase may be that your trucks depreciate over time, lessening their sale value.  You cannot do anything about that really, so depreciation is removed from the equation.  Finally, amortization is taken out of the picture because it also is a non-cash expense.  Since these numbers are highly individualized, they are not relevant to the calculation of EBITDA.

The story of value computation is never so simple though, and there are several more factors involved in the esoteric calculus of valuation:

• Larger purchases = Higher multiples
  • Buyers believe that a larger purchase represents lower risk.  For instance, the larger FedEx route purchase that the buyer chooses, the more recession-proof it will be.  The more employees one employs and the more the trucks one owns, the more resilient the continuation of deliveries will be in the face of adversity.

• Larger markets = Higher multiples
  • FedEx routes in larger cities fare better than routes in smaller markets.  There is more growth potential in such markets, and the desire for home delivered goods shows no signs of flagging since the Covid pandemic rocked markets a year ago.  Subscription services are ubiquitous, and the probability that home delivery has a good future is strong.

• Growing companies = Higher multiples
  • Growth receives a premium because buyers are receiving a stream of cash flows, and buyers are assuming cash flow growth.  One cannot stress enough that the retail-to-delivery swap-‘em-out is likely a new fixture of the home delivery economy.  There is still plenty of growth in the FedEx delivery sector, and it is likely that FedEx will experience plenty of growth in business in the foreseeable future.

Conclusions:

The difference between SDE and EBITDA is that they estimate the cash flows of companies (or FedEx routes) differently based on who will be the potential buyer. 

It is the job of Black Iron Advisers to determine whom the most likely buyers are, calculate the most relevant measures of cash flow and valuation, and present either SDE or EBITDA numbers to the party interested in a transaction.  They are also capable of assisting you to improve the SDE and EBITDA of your business before you bring it to market.  They have a strong history of optimizing business earnings before going to market. Their devotion to a client first philosophy stands at the forefront of their practices, and they are devoted to creating win-win situations for all of their clients.

No Payments for 6 months?  Now you have my attention.

Under the provisions of the new CARES Act, the Small Business Administration (SBA) will cover the first six months of payments – including principal, interest, and associated fees – on new SBA loans.  The loan must be closed from February 1, 2021 to September 30, 2021, and payments are capped at $9,000.

What is an SBA loan, and how do I get one?

SBA loans are government-backed loans, intended to promote economic growth and entrepreneurship.  All major business lenders (e.g. Wells Fargo, JPMorgan Chase, Bank of America, etc.) offer SBA loans.  The loan forgiveness program covers SBA 7(a) and SBA 504 loans, which have a variety of purposes including business acquisition, equipment acquisition, working capital to help manage cash flow, and business expansion.  It does not cover Paycheck Protection Program (PPP) loans.

Are there any additional benefits during this SBA loan period?

Beyond six months of payments forgiveness on new loans, the additional benefits are as follows:

• The SBA is increasing its loan guarantee to 90%.
• The SBA is waiving guarantee fees, which range from 2.6% to 3.5%.
• Refinanced loans – both SBA and non-SBA – will also receive six months of payments forgiveness under this program.
• Borrowers that obtained SBA loans during the 2020 forgiveness period may qualify for another 3 to 6 months of covered payments.

The positive outcome of these benefits combined is that banks will be more willing to make SBA loans, as they are largely guaranteed by the SBA.  These conditions bode well for those seeking to buy or sell FedEx routes and are also favorable for those wishing to invest in the routes they own.

I want to buy FedEx routes.  What else is important to consider?

It is an opportune time to purchase FedEx routes because:

• The temporary SBA loan forgiveness program will increase the ease of access to financing.
• Six months of no payments will significantly improve cash flows immediately following purchase.
• More high-quality routes will be available for purchase since current contractors perceive the favorable lending conditions for potential buyers.

Buyers will need to obtain an SBA 7(a) loan.  These loans are available in amounts up to $5 million with flexible terms, allowing for longer maturities and less money down.

To qualify for this type of loan, borrowers must identify the FedEx routes to purchase.  If the seller filed tax returns for the routes, the returns must be provided to process the loan. 

It is possible to buy only a portion of the routes without purchasing an entire business.  However, the seller will need to provide separate financial statements for the routes being sold as well as the routes not being sold.  Without clear financial records, it is unlikely that an investor will be able to obtain an SBA loan.

It is worth noting that SBA loans are now a more attractive option for banks, as the SBA has guaranteed 90% of the loan amount.

What if I am a current contractor?  Is it a good time to sell?

With the new SBA loan program in place until September 30, 2021, it is a very favorable time to consider selling your business.

Savvy investors would be wise to consider the most recent FedEx earnings report, released December 17, 2020.  According to this report, FedEx Ground handled an average of 12.3 million packages per day in the three months prior to November 30, 2020, up from 9.6 million from the same period in 2019.  During this time frame, revenue per package rose from $8.80 in 2019 to $9.42 in 2020, and operating margin increased from 6.4% to 7.5%.

These encouraging numbers increase investor interest in purchasing FedEx routes.  With COVID-19 accelerating the trend toward ecommerce, route-based businesses have proven recession- and pandemic-proof. 

Thus, there are three major forces at play that are driving FedEx route valuations higher:

• The new SBA loan program is providing attractive financing options for investors.
• FedEx Ground has seen higher profits due to the surge in demand for delivery services.
• Buyers are increasingly interested in purchasing a finite number of FedEx routes for sale.

Consequently, the current market conditions present excellent opportunities for FedEx route owners to sell at high transaction values.

I am a current contractor, and I do not wish to sell at this time.  Can I still benefit from the SBA loan forgiveness program?

Current contractors can avail themselves of this program by obtaining an SBA loan during the specified forgiveness period for real estate or equipment acquisition (e.g. trucks), construction, working capital to manage cash flows, and refinancing debt.

Depending on the exact use, a current contractor may obtain either an SBA 7(a) loan or an SBA 504 loan.  Only SBA 7(a) loans can be used as working capital, and the maximum amount is $5 million. 

SBA 504 loans are more frequently used to refinance debt, and the maximum amount is $5 million from the SBA.  However, depending on the specific project and the lender, these loans may have a maximum amount of $11.5 million or more.  The additional loan funds come from Certified Development Companies (CDCs), which are nonprofit corporations that promote economic development in their communities through 504 loans.

Both types of loans require only a 10% borrower contribution, and both will have six months of forgiven payments if closed before October 1, 2021.  The forgiven payments will not be counted as income by the IRS.

Wait…so, everybody wins with the SBA covering the first six months of payments on loans closed between February 1, 2021 and September 30, 2021?

Yes, there advantages for buyers and sellers of FedEx routes, and there are benefits for FedEx route owners as well. 

The experts at Black Iron Advisers are uniquely qualified to assist you in the purchase, sale, or financing of your FedEx routes.  Not only are they experienced FedEx Ground Independent Service Provider (ISP) brokers, they are also FedEx Ground ISP operators.

Black Iron Advisers exclusively represents their clients.  As one of the few FINRA licensed investment banks serving the delivery route market, Black Iron Advisers can provide a level of service and flexibility that business brokers cannot match.

COVID-19, while having a significant negative impact on the US economy, it has been a boon for route-based businesses as consumers have been forced to shift their buying habits from off-line, to online, as most brick and mortar stores have closed.

Because of this backdrop, we have three forces at play that are all driving valuations higher:

• Increased buyer interest in FedEx routes (more competition)
• Higher profits thanks to the surge in demand
• Very attractive financing options

Investors are now very focused on buying recession/pandemic-proof businesses. Witnessing first hand how many companies are not considered essential and significant uncertainly regarding when the economy will open back up and at what level, Fedex routes have never looked more attractive to buyers. With more buyers looking at the same number of opportunities, valuations are increasing.

Second, with revenues and earnings up significantly in 2020 overall (two peaks in one year), route owners have the opportunity to sell their businesses for more as a combination of higher valuations on higher cash flow equals high transaction values.

Finally, the Small Business Association, has released very attractive financing options for buyers through the CARE act. Specifically, the SBA will pay both principal and interest for the first 6 months of any loan used to acquire a business. What does this mean for you as a seller? The more affordable financing is, the more a buyer can pay for a business without impacting the economics. 

In short, today might be one of the best times to sell your FedEx route business. With investors excited about the resiliency of the business, higher profits and financing that hasn’t been this attractive in years all points to higher transaction prices for your routes.

If you want to learn more about the sales process, the current market environment or want to know how much your business could be worth (we provide free business valuations), please give us a call at 303.997.0796 or email at info@blackironadvisers.com.  

As we are all aware, the COVID-19 pandemic has swiftly shut down large swaths of the US economy. In fact, as I am writing this, over 150 million US residents are currently under a “stay at home” directive. Only businesses considered “essential” are being allowed to operate. While this is obviously very disruptive to the overall economy, there is a silver lining. FedEx is bucking this trend.

Given that the Federal government considers FedEx an essential service, business has been booming. With a significant shift in shopping moving online as customers remain at home, we have been seeing substantial week on week increases as we continue to progress through this pandemic. While business closers are certainly a headwind, home delivery stops are up significantly. For example, for our own operations this past weekend (March 21^st-22^nd) we saw a 36% increase in deliveries compared to the prior weekend. That’s massive!

Bottom-line, we believe there is upside risk to our 20% volume growth expectation for 2020. Our growth expectations have been based on the following 3 factors:

• Increasing e-commerce volume (only 18% of all retail sales currently online)
• Injection of Smartpost volumes into the Ground network
• The addition of FedEx Express volumes into the Ground network

With the impact of people staying at home, we firmly believe that e-commerce volumes , and thus overall growth, will be substantially higher given the requirements of people staying at home.

If you have thought about selling your FedEx routes, this might be an opportune time as these businesses will be very attractive to investors looking for recession proof companies to acquire. Give us a call at 303.997.0796 or email at info@blackironadvises.com today to discuss how we can help you maximize value in a sales process.

FedEx Ground is poised for significant growth in 2020. With the FedEx Ground and Home Delivery service overlap transition finishing up in summer 2020, this will allow FedEx to turn on the proverbial volume spigot.

SmartPost Integration Has Begun

As has been previously announced, SmartPost volume will be fully integrated into FedEx Ground operations in 2020. Based on our conversations with ISPs in terminals where SmartPost has already been integrated, volume is now at Peak-like levels. This means ISP are experiencing volume bumps of 20-50% depending on areas they serve. 

FedEx Express Volume Moving To Ground

A new development, as announced earlier this month, FedEx Express will be transitioning some of its Express packages to Ground for last mile delivery. These packages include 2 day delivery and other Express saver packages. What does this mean for growth for FedEx Ground ISPs? In short, this could be another significant bump in volume growth.

• Currently, FedEx Ground handles 9m packages per day (Fiscal 2019)
• FedEx Express handles 2.9m packages per day
• It is estimated that 1.1m packages of Express will fall into the category that FedEx Ground will be receiving
• As such, moving Express packages to Ground could translate into an incremental 12% growth for FedEx Ground ISPs

Bottom-Line: With the combination of SmartPost and Express moving into the Ground network, growth could approach 60% in 2020 for some ISPs.

What Is the Large Package Network?

FedEx Ground has recently announced that it will be investing in dedicated large package sorting/distribution centers around the country. Some of the dedicated facilities will be standalone while others will be segregated within an existing terminal.

The purpose of separating out these large packages is due to compatibility issues with the existing sort systems FedEx Ground uses. These packages typically cannot fit on the sort belts and require extra handling by both FedEx Ground employees and FedEx Ground contractors. As a result, these packages have essentially “clogged” up both trucks and the sort facility.

The second prong of this announcement is the launch of dedicated large package routes. These dedicated routes will allow contractors that service certain areas to better optimize these large packages by running bulk truck routes with lower stop counts/higher package counts.

Why Is FedEx Ground Announcing This?

One of FedEx Ground’s competitive advantages relative to UPS, USPS and Amazon is its ability to handle larger packages. As customers have been able to purchase increasingly large items online, large packages as % of total packages continues to climb at FedEx. This announcement recognizes the opportunity FedEx Ground has in this niche, wants to invest in the future growth while mitigating the effects these packages have on its entire network.

Black Iron Advisers Take

We believe this is a positive step taken as this shows FedEx Ground recognizing a growth opportunity, investing further in its competitive advantage all while mitigating operational challenges these larger packages can pose. For FedEx Ground contractors, this is yet another growth opportunity for their businesses to capture within their CSAs.

If you have any questions as it relates to the Large Package Network or have any other questions at it relates to FedEx Ground routes, we are here to help. Contact Us to begin the conversation

What Happened?

On August 7th, FedEx Ground formally announced that it will not renew its shipping contract with Amazon. The contract is set to expire at the end of August.  This announcement follows on the heels of FedEx Express own Amazon contract termination announcement a few months ago.

Why?

This announcement really wasn’t surprising given FedEx’s extremely small market share in Amazon package deliveries. Starting in 2012/2013, FedEx began to move away from Amazon and up until last year, Amazon represented less than 2% of revenues for the entire company. Given the small impact Amazon has on FedEx, now seemed like a good opportunity to cut ties so FedEx can focus its efforts on its various growth initiatives.

How Does This Impact FedEx Contractors?

For the vast majority of FedEx contractors, this is a non-issue for their business. For the past few years, USPS, UPS and Amazon’s own delivery fleet have handled the bulk of Amazon’s packages. FedEx typically handled one off packages where its network/pricing made more sense for the package to be delivered by FedEx. To give you a sense for how small Amazon really is for FedEx, our terminal typically delivers between 30,000-40,000 packages per day. Of that total, Amazon was approximately 80-100 packages per day. Now if one contractor happened to be doing those 80-100 packages per day (unlikely), then there could be an impact to a contractor. Outside of that, our terminal certainly won’t feel any impact from the loss of Amazon.

Future For FedEx Ground Post Amazon

FedEx Ground has a bright future going forward as it continues to grow faster than the overall ground market. FedEx continues to take market share from UPS, taking back more volume from USPS and is launching new initiatives like 7 day operations and large package routes to continue to win customer accounts and drive volume for FedEx Ground contractors.

Are you interested in buying FedEx Ground routes? Are you a current contractor looking to sell your routes? Contact Us! We are not only experts in selling routes, but we are one of the largest FedEx Ground contractors in the mountain states.

What About New Scanners?

FedEx Ground has been trialing new Star V scanners at a few select terminals around the country for nearly a year (my terminal was one of them). Now with the trials officially over, FedEx started offering contractors the ability to purchase the new scanners starting on July 29th, 2019 for certain terminals.  

The purpose of the roll out is two-fold. First, this is an opportunity for FedEx to replace its existing scanners with a more Smartphone like scanner in terms of size, operating system and functionality. Lets face it, the old ones were slow, clunky and way past their prime. The second, and more significant change, is FedEx is stepping away from the scanner business altogether. FedEx, on a go-forward basis, will have 3-party vendors offer the devices to purchase or lease. This means FedEx will no longer bill you directly for scanners that you lease through FedEx. Instead, you will be billed through the 3rd party provider.

Big picture, this is just one more step where FedEx is reducing its direct service contact with ISPs.

Where Can I Get Them?

 Initially, ISPs will be able to purchase or lease new scanners from two different service providers:

Peak-Ryzek (https://myfxground.peak-ryzex.com/)

Vector Solutions (https://shop-fxg.velsol.com/)

What Are the Options?

At the moment, both Peak and Vector provide the same couple of options. The two scanners currently offered are:

Panasonic FZ-N1

Zebra TC77

The two major differences between the two scanners are 1) brand name vs. non brand name and 2) where the scanner function is located on the device. Both scanners have been put through the paces by FedEx. As such, both will perform to minimum FedEx requirements. For what it is worth, we have trialed the Panasonic scanners for a year and have had no major issues.

Lease Vs. Buy

Leasing will always be more expensive over the long-term vs. purchasing. However, one needs to understand opportunity costs. Using Vector’s pricing as an example, it will cost $1,059 to purchase the Panasonic “Driver” package. A 3 year lease it will run you $33.85/month. $33.85 x 36 months = $1,219. A 15% premium to the initial purchase price. On the surface, yes, you should just purchase the scanners because you will save 15% over the next 3 years (5% per annum). However, instead of paying all the money upfront to purchase a scanner, could you instead invest that capital elsewhere and make a return greater than 5% per annum? The short answer is a resounding yes! Save your money and deploy your capital by expanding your routes! The return your generate on purchasing a new route will blow away the measly 5% hurdle rate you need to generate to break even on your lease option.

If you have additional questions regarding scanners, buying FedEx routes or selling FedEx routes, or how to maximize your investment in FedEx contact us now!  

What?

On May 30th, 2019 FedEx Ground announced that starting January 2020, it will begin year round 7 day delivery operations. Historically, FedEx Ground and its ISP/IC partners provided 7 day operations during the busy peak Holiday season.

Updated: FedEx Ground has updated the start of 7 day operations for select markets. Initially planned for January 2020, FedEx has moved up the full time start date to November 3rd.

Why ?

As consumers continue to do more of their shopping online, FedEx and other shipping providers need to adjust to 1) customer delivery time expectations (faster) and 2) handling of the increased package volumes with existing asset base (terminals and trucks). By running 7 day operations this helps accomplish both goals.

Impact

This is a positive sign as the industry continues to see significant long-term package volume growth as consumer buying habits structurally change from offline to online. This is a natural progression for the industry that in some ways has become the defacto retail industry. Initially, brick and mortar stores used to be open only 5 days a week. To cater to the growing contingent of dual income families, stores began operating on Saturdays and then eventually Sunday to cater to changing consumer needs. This industry arc is no different for the parcel delivery space. What was initially a 5 day a week industry has transitioned to 6 day and soon to be 7 day operation.

Inevitably there will be some operators who will not appreciate the extra day of operations. For operators with scale, flexible labor and/or technology, this could be a potential boon as it will allow extra route owners to make more money with the same level of assets as before. Trucks sitting on Sunday don’t make operators any money. Trucks running on Sunday can.

SmartPost Integration

What is SmartPost?

SmartPost is a program between FedEx and USPS where Fedex can redirect some of it own ground volume to USPS for residential delivery, thereby bypassing FedEx’s own contractor network.

Why is FedEx Integrating SmartPost Back Into FedEx?

In order to drive higher route density and increase volumes with the announcement of 7 days, FedEx has announced that it will reincorporate roughly 2 million SmartPost packages back into the Ground network by 2020

Impact

This is low hanging fruit for FedEx and route owners in terms of package volume growth. These packages already exist, are typically smaller and generally quick to deliver (residential).

So, you have decided it’s time to sell your company. While that decision can be difficult to make as it means letting go of the business you built, it is only the first step in the process to ensure your transaction goes smoothly.  Below, we have listed a few key items that we believe can help maximize value for your business.

Are you interested in selling your business? Contact us today to see how we can help you realize your goals.

Timing of Transaction - FedEx

Timing the sale of your business is key. Given that all transactions are ultimately approved by FedEx, there is one time of the year where approvals grind to a halt. Peak. Given how busy operations get during peak season, FedEx unofficially puts on hold any route transfers from essentially late October through December. In our experience, it is nearly impossible for FedEx to approve a route transfer in the middle of peak. With it being the busiest time of the year, it simply is not the ideal time for FedEx to allocate time to onboarding a new route operator. At Black Iron Advisers, we recommend that if you want to sell in a particular year, the earlier you can start the process in a particular year, the better. However, this doesn't mean you can't be getting your business ready to sell, speaking with potential buyers, or agreeing to a deal during peak. It simply means the official sale of your business won't occur until January.

People

Another item to think about is your labor force. Given selling a business can be a distraction to the owner, it is best to start the process when you feel you have a reasonably seasoned team. With an experienced team, this helps buyers get more comfortable acquiring the business. Undoubtedly, buyers will expect some level of transition help from sellers to learn about the business. While negotiable, sellers do typically provide 30-60 days of transition help to new buyers. After that though, the buyer is on his own with your former employees. As such, the stronger your team is, the more comfortable the buyer becomes and ultimately the higher the price your company will be worth.

Assets

Similar to people, trucks are also a key aspect of the business. While we would not recommend going out and buying all new trucks, you also certainly do not want your entire fleet to be on its last legs. As a seller, you must be able look at your business from a buyer’s perspective. A fleet that is old with significant deferred maintenance will be certainly less attractive (and worth less) than a properly taken care of fleet both mechanically and visually.

Timing of Transaction - Financials 

While there is a timing component for FedEx approvals, there is also a timing component with your financials. As with most businesses, ones that show growing or steady profits will appeal more to buyers than companies who showed significant declines in prior years. If declines are driven by one-time costs like large weather disruptions (think hurricanes, tornados, etc.) or road construction that significantly alters an area forcing business/residential relocation, it might make sense for you to operate the business for another year to demonstrate the one-time nature of the one off year so that you can maximize value of your business.

Over the last several years, FedEx has discussed and gently pushed for Independent Service Providers (“ISP”) to achieve overlap. However, with separate facilities for both Ground and Home Delivery operations, it rarely made sense for ISPs to make the adjustment. Fast forward a few years, FedEx has aggressively rolled out new/converted “co-location” terminals that can handle both Ground and Home Delivery services from one location.

Here is a cheat sheet as it relates to overlap

What is Overlap?

Per FedEx, overlap is the operational condition where one Independent Service Provider (“ISP”) provides 100% of both Ground and Home Delivery service in a specific zip code. 

CSA Vs. Zip Code

Former ISP contracts map out defined Contracted Service Areas (“CSA”) by street, stop or zip code. Going forward, overlap will be determined by zip code only. This means ISPs with CSAs that have partial zip codes will need to work with other Ground and or HD ISPs that also service the zip code. Remember, only one ISP will be able to provide service to a zip code under overlap (rural routes will see exceptions to this rule).

Is Overlap Required?

Yes, is the short answer. Depending on region and timing of existing ISP contract, the deadline to achieve overlap is no later than June 2020 (some regions earlier). This means if you purchase an ISP without overlap today, FedEx will require your business to achieve overlap by 2020. As a rule of thumb, it is theoretically easier for a Ground ISP to transition to overlap vs. Home Delivery. Ground operators have the inherent advantage of driving bigger trucks, working around scheduled pick ups and delivering within business hours. All incremental stops Ground operators will be taking are essentially 100% residential stops. On the other hand, Home Delivery operators will need to purchase additional trucks with larger capacity and learn to route trucks around scheduled pick ups/deliver within business hours

5 or 6 Day Operation?

For Ground ISPs, 5 day operations are still the requirement. However, Home Delivery ISPs and Overlapped ISPs (HD stops) are required to run 6 days. All Home Delivery packages are due for delivery on that 6th day of operations.

Is This Good or Bad?

Good! If done correctly, an ISP should be able to run more stops (more revenue), drive fewer miles (less time/fuel/maintenance), and require fewer trucks on the road (lower truck and employee costs).

Bottom-line: While there will be a learning curve to overlap, ISPs who plan well and adjust quickly should experience higher revenues, lower costs and expanded margins.

As a potential buyer of FedEx routes, one of the hardest things to understand is the language of FedEx. To help you get up to speed on FedEx routes, we have created a handy FedEx terminology “cheat sheet” for you. Here are some of the most common words and acronyms you will come across as you dig in and learn more about FedEx, routes and the entire FedEx ecosystem:

General FedEx Terms:

• ISP: Independent Service Provider
  • ISP is the new term for a FedEx contractor who is operating under FedEx’s new ISP agreement
  • Each ISP agreement will have its own unique ID number
    • A company, or entity as FedEx calls them, can have more than one ISP contract

• ISP Agreement:
  • The ISP agreement is being rolled out nationwide and will be completed by summer 2020. Under the ISP agreement, FedEx has mandated that contractors have a minimum number of stops/day or PSAs (defined below) to continue to do business with FedEx. Historically, this has been 500 stops/day or 5 PSAs, but is subject to local terminal variances
  • Instead of PSAs, the ISP agreement now uses the acronym “CSA” to describe the route area.
• CSA: Contracted Service Area
  • Under an ISP agreement, a FedEx contractor owns and operates a CSA. The contractor has the contractual obligation to provide both pick up and delivery services within the CSA. A CSA can be defined by zip codes or streets.
  • A contractor has the right to sub contract out stops or areas of a CSA to another contractor.
  • A CSA will be identified by a unique 6 digit number

• PSA: Protected Service Area
  • Under the IC agreement (described below), one PSA was considered one route.

• IC: Independent Contractor
  • The IC or Independent Contractor model, while still in existence in certain markets, will be going away by June 2020
  • An IC could have as few as 1 PSA or as many as 100 PSAs, but each route or PSA effectively had its own contract with FedEx

• WA: Work Area
  • Within the terminal each route is considered a WA or Work Area
  • Each WA will include a unique number such as WA 479

• Entity ID
  • Your company will have its own unique ID number to identify it
• ILS: Inbound Local Service
  • ILS is the metric FedEx tracks to grade your performance
  • Quoted as a % of total packages successfully delivered
  • Per ISP contract standards, an ISP must consistently attain an ILS of 98.5% of the terminal or district average, which ever is higher

FedEx Financial Terms:

• Settlement
  • The settlement sheet is the weekly sheet provided by FedEx to the contractor showing how much the contractor earned for the week of service

• Service Charge
  • This is a fixed weekly payment from FedEx to the contractor to provide service within the CSA
  • It is a negotiated amount
  • It can be found under “Other P&D Charges” on the weekly settlement sheet

• Brand Promotion
  • Under the ISP agreement, FedEx pays contractors a weekly brand promotion fee
  • Contractors can either opt in/out of payment -> this is a negotiated program
  • If contractors opt in, contractor assures FedEx vehicles will be decaled and employees will be wearing FedEx branded uniforms
    • Vehicle brand promotion is paid on a per vehicle/week basis
    • Uniform brand promotion is a flat weekly rate

• CSI: Customer Service Incentive
  • Every 4 weeks, FedEx pays a CSI through the contractor settlement
  • CSI is a “bonus” determined by 3 parts:
    • Inbound Local Service
    • Pick Up performance (Early/Late/Missed)
    • Customer Complaints
  • The CSI is a negotiated number and resets every 4 weeks -> for every service issue listed above, this will reduce the available bonus to you.
  • For example, if you had a customer complaint in the month, a set amount of money will be deducted from your monthly bonus pool

• Safety Incentive
  • Like the CSI, the Safety Incentive is a negotiated item which is paid every 4 weeks
  • Like the CSI, it is a set amount every 4 weeks with accidents/other safety violations deducted from the bonus pool
  • As an example, lets assume your 4 week bonus is $10,000 and you have 10 vehicles. If a driver gets into an accident deemed his/her fault, FedEx will deduct $1,000 from your bonus ($10,000/10) for 3 months ($3,000 total)

• Stop Charge
  • The rate FedEx pays you for every completed stop
  • It is a negotiated amount

• Package Charge
  • Similar to Stop Charge, this is the rate FedEx pays you for every package delivered
  • As such, each stop will generate both stop and package revenue
  • It is a negotiated amount

• Fuel Surcharge
  • This is paid on a per stop basis, but is dependent on current benchmark fuel prices
  • The base rate is negotiated, but will fluctuate up and down depending on fuel cost

• Surge Stop Charge
  • Under the contract, FedEx negotiates a threshold stop count
  • Any stops completed above and beyond the threshold, the ISP will get paid both a stop charge along with a surge stop charge
  • This is a way for FedEx to incentivize ISPs to bring on more capacity
  • It is a negotiated rate

Based on the questions we have received from prospective buyers, here are the key questions we answer the most.

Ground Vs. Home Delivery Routes: What’s The Difference?

This seems to trip everyone up initially. Currently, Ground routes operate a Monday – Friday schedule, have a higher mix of business stops vs. Home Delivery and typically have scheduled pick-ups. Home Delivery routes operate Monday – Saturday, have a higher mix of residential stops vs. Ground and essentially have no pick-ups. On average, Ground routes do fewer delivery stops, more packages per stop and return to the terminal with pick up packages. Home Delivery routes do more delivery stops, fewer packages per stop and return to the terminal empty.

As explained in our Overlap blog post, Ground and Home Delivery will be merged into one operation by summer 2020. With the merger, the difference between Ground and Home Delivery will also disappear.

Relationship between FedEx and FedEx route owner?

Being a FedEx route owner, you and your company are providing delivery services on behalf of FedEx Ground. FedEx Ground is essentially your client and pays you for providing delivery services within your contractually protected service area. It is you and your company’s responsibility to provide the employees, trucks, software, etc. to operate efficiently within the parameters of the contract.

Where Is the Business Based?

Typically, an ISP’s entire truck fleet will be based at the terminal. Your employees will start and end their day at the FedEx terminal. This makes life easier given that FedEx Ground loads and unloads trucks overnight. Because FedEx offers loading services, this eliminates the need for your employees to arrive earlier to work to load their truck.

Independent Contractor Vs. Independent Service Provider

Under the prior FedEx agreement, Independent Contractors owned and operated individual routes each with their own individual contract. Under the Independent Service Provider (“ISP”) model, the legal definition of a route goes away and replaced with a Contracted Service Area (“CSA”).

There are two significant points to make on CSAs. First, FedEx requires a CSA to be a minimum size (typically 500 stops/day/csa). The second point is FedEx now provides the ISP the flexibility to determine the number of “routes” within that CSA, not FedEx.

Is Financing Available To Purchase FedEx routes?

Yes, there are several banks that underwrite FedEx route purchases. Typically, this is done through various Small Business Association programs.