Credit Mastery & Strategies for Selling a Freight Brokerage | Final Mile #34

Freight 360

March 12, 2024

Nate Cross & Ben Kowalski answer your freight brokering questions and discuss:

  • How Credit Impacts a Freight Broker’s Relationship with Carriers
  • How to Sell a Freight Brokerage
  • Shippers Liability to Pay Freight Invoices
  • Do You Need Contingent Cargo Insurance?
  • How Freight Brokers Find Prospect Shippers

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Show Transcript

See full episode transcriptTranscript is autogenerated by AI

Speaker 1: 0:19

Welcome back everybody. It's the final mile where we answer your questions about freight brokering and prospecting and everything in that realm. This is we have five good questions today. Please take a moment. Check out the description box. Support our sponsors that helps support this channel. And Check out our website, freight 360 net, to get all of our content and check out the freight broker basics course to learn more about our training.

Speaker 1: 0:47

All right, ben, our first question Mostly this came from Facebook this week. The first one asked how does having good or any credit impact my ability for carriers to book loads with me? So Pretty hot topic. We did. We've done a couple episodes or we've talked through this in the past. Credit is so. Here's the reality, right, when you are a brand new freight broker and you have no credit. What that means is if someone goes to look at your ability to pay, whether it's a motor carrier or one of their factory and companies, some of them will say we won't work with you Until we see good credit and you've been in business for X amount of time. That's just a reality. Others may have work around. So how will it impact your ability? Well, that's how it'll impact.

Speaker 1: 1:40

It is that it's gonna be harder for you to find carriers or factor in companies that will approve carriers to haul loads for you, because they're worried that you have no payment history, at least not that's been reported and Therefore you're not seen as credit worthy. So what do you have to do? Pick up the phone, talk to somebody at the factor company that's denying you and find out. What do you need to see? Is it trade references? Is it you? Do I need to be quick, paying a bunch of loads at first. Would you approve that? Don't you put money up as a contingent? There's a ton of factor companies out there and they're all gonna have different responses. Human beings can oftentimes make exceptions if they have a good trust in conversation with somebody on the phone that you typically can't get over email.

Speaker 1: 2:27

So if you're getting that from carriers that say I can't haul for you, my factor company won't approve you find out who you know. What details can you find out? Is it Are they telling me, telling you I have bad credit or that I have no visible credit and what you know? What can I do in lieu of that? What? What's your take on it? And here's the thing I've never personally had to go through this myself. So what I mean? I've, by all means I've helped work with companies that started up from the ground level, and They've experienced this exact same thing. What's your take on it with the credit situation?

Speaker 2: 3:08

For sure. I mean, I think it's twofold right. The one is just, if you post up a load right, the carriers are gonna look at your credit rating on DAT or truck stop. So the first thing is they're less likely to call you Because, again, if you don't have credit one, there's a few things that need to happen.

Speaker 2: 3:28

If they have a factor in company they know it's gonna be harder to get onboarded To, they might just not be willing to take the risk to work with a new brokerage that doesn't have credit right, because they don't want to go through the the hassle. And third is the hassle because even if they want your load, it's usually not a fast process To get approved to their factor in company, to get that carrier to actually be able to work with you. So for all those reasons, they'll usually just take the next best load right. So what that looks like from the brokerage standpoint is like you just don't get phone calls on load postings and carriers Don't reach out because they see that you don't have any credit on your load posting right.

Speaker 1: 4:09

Yeah, so it's far or it's impacted, to like, right now, when there's, when there's not a lot of free, it's probably a little bit easier, I would imagine, to have those conversations because carriers are looking for work.

Speaker 2: 4:21

Yeah, for sure, but again, you do have to work through it tediously because it's not a fast process.

Speaker 1: 4:26

And I, so I wanted to highlight the good episode to listen to. If you haven't, is episode one of you five. We had Desmond Clark on. This was about a year ago that we did this and he talks about. He started his business up and, like it wasn't the the Freight boom, right, I think. I think he started in 2022 when things were still hot and we talked with him about his experience having to cross this hurdle of the credit discussion. He did it in a time when carriers were Hard to get, so it was even harder for him and hard.

Speaker 1: 5:01

They had they had, they could pick whatever load they wanted to and, you know, charge whatever they wanted to per se. So definitely check that one out. But it's a realistic thing, realistic thing, so Good stuff. Next question oh, how can I sell my brokerage? It's basically inactive, with no customers or software, just a clean history. Well, I'm gonna talk about selling a brokerage in a second, but I answer this guy's question. You're not all. You're selling as an emcee number here. If you don't have any, if you're not running any freight and you don't have like any, like a, you don't have like a TMS that you own a license for. That's part of that sale. You really don't. You're not selling anything but a business entity and a license. So right.

Speaker 1: 5:41

I mean, I there's, there's a market out there to buy emcs, but let's so I Don't know, I guess in. I guess let's answer this one first. How would you sell an inactive brokerage?

Speaker 2: 5:53

Well, here's the first thing, right, if it's inactive? Right, that means value there.

Speaker 1: 5:58

I would just shut down your emcee.

Speaker 2: 5:59

Yeah, because I'm also and I'm not for sure we've talked about this off-air like I would like to be able to get some on the FMC SA to explain Exactly how their guidelines follow fall. But, like from my personal experience, for what it's worth again Dealing with that is, if it's inactive when you go to sell it it's gonna start back from zero anyway, right? So what happens typically and again the FMC SA if you've got an emcee even if you've got business running through it, right, if you just sell it to someone else and called the FMC SA and say I sold my, I want to sell my brokerage, there is an alert that basically goes out to all the credit reporting agencies and all the factoring companies and they say, hey, there's new ownership of this brokerage and they start the credit back at zero and Basically, your emcee then looks to every carrier and every factoring company as if you're brand new, even though you might have been in business for 20 years, right? So how this is typically done when you see larger freight brokerages sell, right, to get around that FMC SA thing is basically what happens is is Nate, if you own a freight brokerage and let's say it's you know, a 20 million dollar freight brokerage and you're gonna sell it to me, right?

Speaker 2: 7:16

What I will do is I will create another company, another LLC, right? Say it's called ABC LLC and yours is Nate cross brokerage. Right, you will be the majority owner of this new company. Right, I might be a minority owner if I want to buy it for me, saying like 10%, you owe 90%. You are the majority owner of this new company.

Speaker 2: 7:36

You will then take that corporate document to the FMC SA and say, hey, I'm changing the name of my company to this new corporate entity. Here's my documents. I'm the majority owner. I want to change the name, you change the name, and now that name has changed, even though you're still the owner to the new company, and then, after a certain amount of time has passed, I then buy you out of the new company. I become the majority shareholder, and then I go back to the FMC SA maybe six months later or eight months, I'm not exactly sure how the time frame typically plays out and go back and say, hey, like Nate's now retired from the business, I bought him out. I need my name under the FMC SA because the company already owns it. We just changed the ownership of the company because, to prevent fraud, the FMC SA Doesn't allow the change of ownership without notifying everyone that there's a new owner, because of the fraud and all the other things that we're seeing in the industry.

Speaker 1: 8:31

I'm curious, like I would want to hear, because I mean, we see brokerage gets sold all the time but usually, like when I've seen a brokerage sell that I worked for, they did create a new business entity about six months before the sale went through and yeah, I mean, and who knows how this could change, like it the the way that you change contact information at the FMC SA for the point, like the main point of contact has changed Recently just simply because of fraud, like you mentioned right it's getting more difficult.

Speaker 1: 9:05

They're more stringent but outside of the, because that's this stuff can change as far as, like the, the business part of it. But in General, how would you sell a brokerage? I would say you've got to figure out what the evaluation of it is and sometimes, depending on the size, you might need to go to a Business broker or a business analyst, someone that can give you an evaluation. And it's normally going to be a multiple of your bottom line, like the company's bottom line net profit, and depending on what kind of freight market we're in, that multiple can change so significantly. Yeah, like it could be, you know, three to five X and one market and it could be like 8x and a different market. It just really depends on because, if it, if a, it's always something about this Just yesterday actually, about how it is hard to get a high multiple right now because you don't have a three-year track record of growth, yes and doing well, they're seeing you've actually you've had a soft market the last three years, so it's hard to get a high dollar amount for a brokerage right now if you're trying to sell it For sure.

Speaker 1: 10:18

But you get an evaluation of it and then how do you find someone to buy it? There really isn't like an open market for selling and buying brokerages. But there are people that are well connected and know, like I've seen in social media groups, people asking about buying and selling brokerages there. I know there's. Well, what do you got?

Speaker 2: 10:41

Because I know you kind of dabble a little bit For sure, and we're going to be. I'm going to be doing a lot more of this. In fact, I got a call with one of the guys who's been doing M&A work in this space for like 40 years, the Tenney Group, Spencer Tenney. I'm going to be talking with him Friday and if you are interested in selling your brokerage, reach out to us. I would like to talk to you. I want to learn a little bit about why you want to sell it. What you have there Again, an emcee with no customers, no revenue, no tech and inactive. Again, I think about, like you said, opportunity cost. Well, if I'm starting from zero and I'm just getting your emcee, what does it cost me to get a new one? If it's basically the same as a new one and it only cost me, you know, 500 bucks and 1000 to get the LLC, I'm not going to pay any more than a cost me to get a new one.

Speaker 1: 11:25

The trade off is. So let's look at buying existing versus getting a new emcee. If you're buying an existing one, it's got age, which is a good thing, but it also has anywhere.

Speaker 1: 11:38

Your emcee has been blacklisted anywhere on the internet or out of promoter carriers in the past that you don't know about. That comes with that too, the flip side. With a new emcee, you get a fresh start but you also have no history, that's. We talked about the credit issue. We talked about some companies have requirements. You got to be in business for so long before we'll work with you stuff like that so let's trade off for sure.

Speaker 2: 12:00

For sure, Right, and one of the reasons why I'm really interested in this is we've got a lot more people reaching out to us. So we're going to work to develop either a pipeline or at least a referral source to be able to help folks that do want to sell their companies, that they can reach out to us and we can help. But there's a lot to it, right. A great episode on this. Paul at Freight Caviar just interviewed Spencer last week on Freight Caviar and I just listened to this episode yesterday and we're going to have him on our show soon to talk more about multiples, what the market looks like. But if you listen to the episode on Freight Caviar literally the one that just dropped, like this week Paul has a great conversation with Spencer. They talk about the multiples, the difference between a freight brokerage and an asset company, what margins are expected.

Speaker 1: 12:46

What did he buy? What kind of multiples were because I didn't hear Paul's episode yet, but what multiples was? He ballparkered.

Speaker 2: 12:54

So Freight brokerages, he was like you know, if you don't have gross margins at least 15 or higher, you're not going to have a lot of buyers. Typically is the first thing. The second thing is they tend to work with companies that are about 20 million and up. So again, these are the larger companies. But multiples of the bottom line number not gross margin, but EBITDA, like what is your net income after you pay everything. Right. It's that number times. Typically four to six is about what a multiple is for a freight brokerage. You will see them climb up to maybe 10 or 11 when you get to the really big companies that are really efficient and they have very, very good margins between revenue and the very bottom line or a tech package or something in there. As companies, on the other hand, you're going to see closer to like three to five because they're capital intensive businesses. Freight brokers, on the other hand, do not require a lot of capital to operate or investment for growth.

Speaker 1: 13:55

You made a good point there. The tech package, like if you're a large brokerage that has a proprietary TMS, I mean you're in the big leagues if that's the case, but those are going to be in a way, different ballpark than just selling a book of business. Essentially, yes.

Speaker 2: 14:11

So what you've got to do to sell it right are also different. He has a great list and again, my call Friday is to get some of these things to put on the show, but just a list of the things that are expected from buyers, right, that they expect in 24 hours. You need to be able to kick out your books, your income statement, your balance sheet, the normal things, but you also need to be able to send over a breakdown of your customers revenue per customer, right Anything that outlines how long you've been dealing with these customers. There are things that are expected from people that are going to be buying a company that you really need to have done ahead of time, and if you don't, that's fine. You can't get them in place, but it's usually going to take you a few months to get your books cleaned up, to make sure they're structured in a way that the people buying it can review quickly to see and I think Spencer said that I really was. A really big takeaway, too, is he's, like you know, when you see these companies sell and again, he's talking about companies 20 million and up, but I would say it's still pretty true, because I've been involved with some that are 10 to 20 million and the most recent requests are 10 million.

Speaker 2: 15:12

Brokerages that I've been talking to people about is there's usually the buyer is talking to a handful of other brokerages too. Right, they're usually not just talking to one potential company they want to buy. They'll pick a handful that they want to buy and the best one, by the time they get to the end of it, is the one that they're actually going to put an offer in. So I mean it is a longer process. I mean typically six to nine months for bigger companies. On the shortest end, probably four to seven months, probably closer to six or seven for any of these sales. So it's not an overnight thing. It's not something, you see, that turns around that quickly. But it isn't that really interest me and I want to do more content on it this year. So I'm going to be digging in with folks and bringing more people to talk more about it.

Speaker 1: 15:55

That's cool. Next question Can a shipper be pursued if a broker fails to pay the carrier? So this is obviously coming from the carrier's perspective. Yes, the answer is yes, but the reality is they probably just going to tell you to go pound. You know, go kick dirt right, go pound salt, whatever the phrase is. So let's run through a scenario. So the customer works with a broker, the broker hires a truck and broker goes out of business.

Speaker 1: 16:31

Broker got paid by the customer that shipper is not going to. You could send them to collections or report on them, all you want. They're not going to pay you and they're going to have an explanation for any broker that sees that on their credit report. Now the more realistic one that we're seeing now is fraudulent double brokering. Right, someone scams a freight broker, rebrokers the load to a carrier, gets paid by that broker for it, and then you get this motor carrier who actually hauled it, who never got paid, and you can't find this scammer. They're not going to pay up.

Speaker 1: 17:07

So now this poor little owner operator who wants to get paid is going to go to the shipper and say where's my payment? And they're just going to say no, I already paid. This invoice Just went to ABC Logistics and if you're ABC Logistics, you have the option to tell them like legally you don't have to pay them. And you're end up in the same scenario as before, where the carriers basically get pissed at you and they're going to the customer. The customer is going to tell them to go F off and maybe nicer words, but the reality is to keep a. The customer could end up being liable and they could say, all right, I've got to pay this and I'm going to fire my freight broker over. Or they might say go F off, this broker is going to end up paying you.

Speaker 1: 17:54

So but, yeah, the customer is legally liable for the freight payment.

Speaker 2: 17:59

I would say you're right and in the standard scenario that's what the broker's bonds for. So call the broker's bond company right If they're not paying you.

Speaker 1: 18:07

Okay, if we're not talking double brokerage.

Speaker 2: 18:09

Not double broker. A standard situation Broker gives you the load. It was legitimate. They don't pay you. You file on the brokerage's bond. They'll dispute it and that should resolve it right.

Speaker 1: 18:20

Yes, but when a company goes out of business and that bond gets chewed up really fast and then there's nothing left, this first company we're served. Then you could end up in the situation too. But you're right, the bond is.

Speaker 2: 18:30

That's what it's meant for Now and the second one, though, right, like to your point. Like the way the law reads, right, is that that shipper has to pay the care that moved their freight. They benefited from it, it was their cargo, they did the work. They owe them, regardless of who got paid or didn't get paid, or how many brokers were involved. Right Now the question comes into is how do you get the shipper to pay you? Right? Because Nate's point of they're going to direct you at some other broker in your planned telephone and nobody wants to give you a straight answer, right? And this is where it's hard, because, like you don't want to pay an attorney thousands of dollars to recoup a couple thousand dollars, like that doesn't leave you anywhere, right? This is why I think it's really good to have an attorney that you can reach out to when things aren't going wrong. So I really suggest that anybody a carrier or a broker you should find a transportation attorney that you can talk to and ask hey, if these things happen, is this something you can help with? For one, because most of them, at least that I've been involved with, they get resolved by a demand letter from an attorney, which isn't really that expensive. So if you have an attorney that you've been working with, they can typically, for a letter and a hundred bucks or whatever 200 bucks, send a letter to the shipper. That demand letter usually resolves it without them having to go through further legal action because it's only a few thousand. But again, finding that attorney once things are wrong becomes very difficult to do that quickly.

Speaker 2: 19:54

I've used Legal Shield in the past. I've suggested clients do it, because Legal Shield is really just a centralized legal service that connects you with an attorney for what you need. So if you don't like, I use it, and for business I think I pay like a hundred bucks a month, but at any point in time I have a certain amount of hours for whatever topic I need and they'll connect me with an attorney. So again, it's a good way to get connected with one.

Speaker 2: 20:18

But if you don't have an attorney, you really should reach out and make some phone calls when you have some time to find one and see if they can help if these things do arise, because there's fraud to your point. There's fraudulent brokers, there's fraudulent carriers. Now, like this, stuff happens more and more often and you don't want to be caught flat-footed with no ability to solve it after you're screwed and you paid for gas and you paid your driver and you've got no ability to recoup this without finding an attorney and spending hours calling them to find a transportation attorney that can help with this Right. Yep.

Speaker 1: 20:50

Next question is contingent cargo insurance absolutely required, or can I just vet my carriers carefully? I'm not sure this person really understands what contingent cargo does. Yeah, so you should vet your carriers carefully, but contingent cargo. The only time you would need a contingent cargo is if your customer requires it and a lot of bigger customers do.

Speaker 1: 21:13

but if no one's telling you that you need it, there's no need to have the policy. Contingent cargo is a policy that is benefiting your shipper in the event that the primary cargo policy from the motor carrier falls through. And there's like, very depending on how it's underwritten, there's a lot of exclusions potentially. Where I have seen one pan out is where the primary cargo policy from the carrier lapsed mid I think it lapsed mid shipment or something like that and the contingent did pick up on it. But if a cargo policy denies a claim, it doesn't mean that the contingent cargo is gonna cover it. So and a lot of customers don't really understand this they're just being told from their lawyers like, hey, require this via contract on all your brokers.

Speaker 2: 22:17

That way the questions were. It leads me to believe that the person believes that if the carrier doesn't have the right cargo insurance, the contingent will cover it.

Speaker 1: 22:27

Oh, maybe.

Speaker 2: 22:28

Is the way. When I read that, it seems like the intent and that is not true. If your carrier does not have cargo insurance, your contingent will not cover it. Part of your job in fact probably the most important part of your job other than finding the truck, is finding the truck that has the insurance that your customer is requiring and that covers the entire load value. They also do not stack on top. If your carrier has a hundred grand and it's a $200,000 shipment, your contingent doesn't go on top of that carrier's cargo to cover the next hundred thousand. They are not at all the same, or do they cover the same thing?

Speaker 1: 23:09

We did a good episode on insurance. Just go to and search insurance in the content bar at the top right. You'll find all of our good stuff there, all right, last question when can I find prospects on a daily basis? I think everybody has a little bit different methodology of what their go-to is. I like using Apolloio. In my opinion, it's like a Zoom info. I know some people like Zoom Info, some people like seamlessai. Right, yeah, seamlessio.

Speaker 1: 23:38

I think, yeah, if you just look up seamless lead generation, I'm sure you'd find it. But there's searchable databases that you can find from data axels from, or used to be referenced to, usa. That's typically free through your library online. Hey, some people are lucky enough to have a giant database inside their brokerage. Google's also your friend too, and a lot of the new AI, like the chat GPT, for example. You could type in there like give me the top 10 or the top 100, blah, blah, blah shippers in the United States. You'll probably get a list of 100 leads right there as a start. So don't overthink it.

Speaker 1: 24:27

When you're trying to find prospects, I would say be intentional. So if you've been in brokerage for a while, I would stick with what's working for you, whether that's a certain niche commodity that you're successful in or a certain region that you've got good carrier capacity in, no need to reinvent the wheel. There's a ton of databases out there, resources I mean, we've gone through a full episode on how to generate leads Google databases, linkedin, google Alerts, trade associations, chambers of commerce I mean there's a ton, so just don't overwhelm yourself. You know, pick a couple and use them.

Speaker 2: 25:10

So Trade yeah, trade associations I mean anytime there's like an event, those are really good to find. Leads Data Axel we talk about a lot, which used to be ReferenceUSA. You go with your library card is a great place to see lots and lots of companies by industry type, and then you can take those companies and then plug them into like an Apolloio to find a person or a phone number. Or you can take those companies. You can use just Google right, just Google Maps, and type in Steel Companies, houston and get a list right and you'll have phone numbers there right. So there's really no shortage of ways to find companies. It's really more. I think the harder part is trying to figure out what you want to call. Once you've got a topic, then you can kind of narrow it down right. And again you outlined my go-to is I first go into either Google or Gemini now and just go top 100 Steel Companies, smallest Steel Companies, and then I'll take some of those lists and just start working through them and just start adding to it right.

Speaker 1: 26:14

Yep, it's great man, good stuff, cool, great episode, good questions. That puts a lid on this final mile. Any final thoughts?

Speaker 2: 26:24

That does. Whether you believe you can or believe you can't, you're right.

Speaker 1: 26:29

And until next time go bells.

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