One of the biggest questions people have for me is how much a route is worth. There’s a desire to have a hard formula that’s used around the entire country to determine if they’re buying something over or under valued.
The first rule people want to use is a multiple of earnings. Something like “FedEx routes should sell for 3x their annual earnings!” Then they find these routes that are earning $30k and selling for $40k. They think it’s a great deal because it’s multiple is only 1.3!
It’s counter intuitive, but a low-multiple route is probably the worst deal you could make.
Look at it, you’ve basically bought a job, and that’s fine if you’re unable to get a $15/hour job and this is your ticket out from under some terrible boss at your current company. Buying a job is fine, and that’s what a lot of people do with routes. The thing is if you’re buying a job like with a route, you better be making a lot more than you could at a “real” job.
Buying any business is pretty much buying a job though. But we need to dig a little deeper.
The difference between buying a job and a business is that with a business you can hire someone to do the job. You can’t hire someone for that $30k net route and expect to have any money left over for yourself. So, let’s agree that routes that make more money should be sold for higher and higher multiples since it allows more absentee ownership.
SO FAR WE HAVE TWO CRITERIA:
The Multiple: Sale price divided by the annual earnings
The Income: Higher levels deserve higher multiples
What if we had two routes for sale, and one is in Southside Chicago and the other is in Austin, TX? Obviously, the potential for getting shot every day, and declining population growth is an important factor for the overall health of you and your route vs being in a growing and vibrant city.
The Location: Places with higher population growth deserve higher multiples
What about the trucks? That has to factor as well. If one truck is breaking down constantly and the other one is fine, that’s important. Notice how I didn’t mention the age or miles of the truck! While older trucks DO tend to break down more, depending on the mileage, how they’ve been driven, weather conditions, and a huge list of other factors the truck that is older might even be better. This usually occurs with FedEx vehicles that are typically driven the hardest of any fleet vehicle. The important thing is to simply observe the current condition and ask about recent maintenance. If you have a 2005 truck that has been driven gently and rarely needs maintenance, it’s better than a 2012 that needs fixing up constantly because it’s been ridden hard on a route.
The Trucks: Trucks that break down less deserve higher multiples.
What about how long it takes? If one route has a ton of miles and takes 13 hours a day (and many do!), your turnover is going to be higher and it’s worse for you (and/or the wage you have to pay) for someone working all the time.
The Turnover: Low turnover deserves higher multiples
The Hours: Lower hours per week to run the route deserve higher multiples
Hardly any two routes are completely the same. If they were, few people would need the route consultation that I provide.
If you think you can just stroll in and think that you can tell a good deal from a bad one by looking at the price and the earnings, you’re about to lose your money in the long run.
I know of several routes that are so overwhelmed that the stress levels will kill you if the non-stop working doesn’t kill you first. You need to look at the bigger picture when it comes to your first route and there’s no set rule on exactly how much a route should be worth.
Just like a piece of real estate, you’re not just buying some boards and nails, but also the neighborhood, the annoying dog next door, the city, the school systems, etc. The exact same house in San Diego is going to sell for a lot more than in some city in North Dakota. Same principle applies to routes.
Take the time to really dig into learning about a FedEx or bread route before you look at the price and say “overpriced!” or “great deal!” Because it’s rarely ever that clear cut.