The SDE Trap
If you spend any time looking at FedEx Ground routes for sale, you will eventually see a listing that looks too good to be true. A million dollars in revenue. $250,000 in seller’s discretionary earnings — SDE, roughly what an owner-operator could take home in a year. Asking price $500,000.
Park $500,000, collect $250,000 a year. A 50% yield. Where do I sign?
That listing isn’t lying to you, and the numbers are probably real — but a large part of that $250,000 is not cash you get to keep. It’s sitting in the trucks, and it’s owed back to the trucks, whether the listing says so or not. This article is about why, and how a disciplined buyer reads the number instead.
None of this is tax or investment advice, and nothing here is a representation about any particular route. Run your actual numbers with a CPA and a broker who know this business. This is the operator’s version of the math. (For the mental model underneath it — why a contract is an arbitrage on delivery capacity in the first place — start with what you’re actually selling FedEx.)
The 10% rule of thumb
Before I give you the number, the caveat has to come first: this is not an official figure. FedEx does not publish a target margin, and I would not quote anyone on it. Treat what follows as folk wisdom — a heuristic for what a healthy operation looks like, not a rule written down anywhere.
With that said: the number you will hear repeated, quietly, by people who have been around this business is that FedEx would like contractors to run somewhere around ten percent. Talk to enough contractors and enough people on the FedEx side and the same rough figure keeps surfacing.
Use it as a sanity check, not a law. On a million dollars of revenue, 10% is roughly $100,000 of genuine, sustainable owner profit — the money left after the business has paid for everything it actually consumes, including a real wage for the work the owner does and a real reserve for the trucks it wears out.
Hold that number — about $100,000 — next to the listing’s $250,000 of SDE. The gap between those two figures is the entire subject of this article. The gap is not fraud. The gap is trucks.
The stack most buyers never see
The reason the listing looks like a 50% yield is that “seller’s discretionary earnings” is the biggest, most flattering number in the whole stack, and most buyers do not realize there is a stack.
Here are the layers. Read them as a conceptual ladder — from the broadest, most owner-flattering number down to the true bottom line — not as a list of ever-smaller dollar figures, because one of them deliberately steps up:
- Revenue. The top line. A million dollars. Everything FedEx paid you.
- EBITDA. Earnings before interest, taxes, depreciation, and amortization. Revenue minus the real operating costs of running the business — payroll, fuel, repairs, insurance, and the salary the owner expensed to themselves.
- SDE. Seller’s discretionary earnings. This is EBITDA plus a few add-backs: the compensation the owner actually took out of the business, plus any discretionary or personal expenses that ran through it. SDE is deliberately constructed to show a buyer “everything an owner-operator could take home if they ran it themselves.”
- Net margin. The bottom line. What is left after depreciation, interest, and taxes — usually the smallest number.
Notice what just happened. SDE is larger than EBITDA, because it adds the owner’s pay back in. That is not a trick — it is the standard way small owner-operated businesses are quoted, because the buyer is usually going to run it themselves. But it means SDE and your “10% / $100,000” figure are not the same layer of the stack. The $100,000 is closer to genuine economic profit. The $250,000 of SDE still has the owner’s pay baked into it — and a second, larger cost it hasn’t touched at all.
The naive buyer collapses the whole stack into one number, sees two hundred and fifty thousand sitting next to a five hundred thousand price, and computes a yield that does not exist. The disciplined buyer keeps the layers separate.
The earnings are partly in the trucks
Now we get to the part that explains the gap, and it has a name. The name is maintenance capex — sometimes called replacement capex.
Maintenance capex is the money you have to spend, every year, just to keep the fleet earning what it earns today. Trucks wear out. A step van does not last forever. Every year of revenue you collect quietly consumes a year of useful life out of every truck on the road. To stay in business at constant capacity, you have to set aside money to replace those trucks as they age out. That reserve is a real cost, even in a year you do not actually write the check.
SDE ignores it. SDE is built before maintenance capex. So when the listing says $250,000 of SDE, what it is really telling you is “this is the cash flow before we set aside a dime for the trucks that produced it.”
The cleaner figure, the one a serious buyer cares about, looks like this:
Owner earnings ≈ SDE − a market wage for a manager to replace the owner − maintenance capex.
Subtract a real manager’s salary, because someone has to run this, and if it is you, your labor is worth money. Subtract the annual truck-replacement reserve. How big is that reserve? A rough starting point: take what it would cost to replace the fleet and divide by the realistic useful life. A new step van is a real chunk of money — call it on the order of $100,000 — and earns for, say, eight to ten years before it owes you a replacement. That is roughly $10,000 a year each truck quietly consumes in replacement value; put about seven of them on the road and you are reserving something like $70,000 a year just to stand still.
Run the subtraction
Run it on the example. Start with $250,000 of SDE. Pay a real manager something like $75,000 to do the job you were doing. Set aside something like $70,000 to keep the trucks replaced. You are left around $105,000 — back near the kind of figure the 10% heuristic implies.
Those subtractions are illustrative; your real manager wage and your real fleet reserve are what matter, and they are worth pricing out carefully. But the shape of the answer does not change. The $250,000 was never $250,000 of spendable money.
And the reserve cuts both ways. Capex is lumpy — you do not write a replacement check every year — and a younger, recently refreshed fleet owes far less to its own replacement than an aging one. Run the same operation on newer trucks and that $70,000 reserve might be half as big, which pushes real owner earnings above the 10% line, not below it. That is the point of the heuristic: 10% is a benchmark for a healthy operation, not a ceiling. A clean fleet and tight costs can clear it. The trap is only assuming the SDE number already reflects all of that — it does not.
One nuance a sharp buyer watches: the repair-and-maintenance line is already deducted before you ever get to SDE. So do not stack a full replacement reserve on top of an operation that is already spending heavily on repairs — normalize R&M to a steady-state level first, then add the reserve, or you will pay for the same truck wear twice.
That is the whole point. The seller is not lying about the SDE. The buyer just never subtracted the sinking fund. Some of that $250,000 is genuinely spendable. The rest of it is trucks — value you will have to plow right back into the fleet to keep the revenue alive. The real arbitrage was never the whole spread; it is the spread that survives after the trucks and a manager’s wage are paid. That residual is the skill, and it is smaller than the listing implies.
The same error, from the other chair
This is the same shape of mistake operators make on the cost side every day. It is exactly the error AVP routes make: a route looks profitable only because the accounting boundary was drawn too small. Draw the boundary correctly — include the costs that were quietly left out — and the profit shrinks to its real size. The SDE trap is that same illusion, viewed from the buyer’s chair instead of the operator’s.
If you want a fast field test for whether an operation’s costs are honest, payroll is the cleanest one — see the payroll litmus test. And before you trust any cash-flow figure, learn to read the source documents yourself: how to read your settlement statement.
Once you understand that SDE is computed before the trucks are paid for, you can also see how a seller uses that gap to dress a route up for sale — which is the next piece: how sellers dress up a route for sale.
The single sentence to take with you
If you remember one sentence from this article, make it this one:
A route listed at $1M revenue, $250K SDE, $500K price is not a 50% yield: SDE is computed before a manager’s wage and before a truck-replacement reserve. Subtract both, and the real owner earnings land near the 10% rule — not 50%.
The seller isn’t lying — the trucks are just part of the earnings, and part of the earnings is owed right back to the fleet. Subtract a real wage, subtract real maintenance capex, and value what is actually left.