Beware of Turnkey Freight Transportation Businesses for E-2 Visa

There are few companies in the USA that offer a turnkey freight transportation business. Some of them promote those business opportunities as a qualifying investment vehicle for E-2 Visa applicants.

They frequently post on groups on diverse social media platforms and their posts generate a lot of interest from the group members that are lured to believe this is the best investment option for their E-2 Visa application. This is a reason for concern, and it has motivated me to write this article and provide you another perspective for your consideration.

At a glance the offer seems very attractive but there are some fundamental aspects and market trends that should not be overlooked.

The Offer

The offer typically calls for low investment ($150K – $200K), high-margins (up to 20%), you invest in your own company (freight carrier), the turnkey seller will assist you with the implementation of the business including the acquisition of the truck and will provide you with freight contracts (freight brokerage).

The turnkey seller highlights how important the freight transportation industry is for the US economy and informs that the demand for transportation services is greater than the offer.

From the E-2 Visa investment perspective, there is nothing wrong with investing in your own company and buying a productive asset (truck) but this business model, as proposed, has some fundamental problems you should be aware of.

You do not control the customer acquisition process.

Your newly formed company heavily relies on contracts flown down by a freight broker (very often the turnkey seller, or an affiliated company).

Your company does not have its own marketing and sales capabilities, resulting in inability to attract new customers on its own. It is like having only one customer: the freight brokerage firm.

How do you like a business that only has only one customer? Sounds risky, right?

By the way this is the same type of risk of those local UPS route businesses that you may see listed in the “business for sale” websites. Yes, essentially you would be putting all the eggs in one basket and voluntarily becoming hostage of one single customer. If they change the way they want to do business, that would directly affect your operation.

For an E-2 Visa investor, who moved his/her family to the USA with the sole intent of managing that business, a risk of that nature could mean to pack the bags and go back to home-country, in case the business does not make sense anymore.

Having to rely on 3rd parties to get freight contracts creates an unnecessary risk that a regular business that has its own marketing and sales capabilities would not incur and it may be subject of scrutiny by immigration officials reviewing your E-2 Visa application.

Small Margins

The freight transportation segment is highly competitive in the USA, which puts pressure on the profit margins.

Even though there are multiple subcategories of freight transportation including some specialties (i.e. reefer trucks), you should think of freight transportation as commodity service. Is it so commoditized that there are innumerous freight bidding platforms out there, so yes, it is a price war! Not much room for differentiation.

Back to the freight transportation turnkey offer abovementioned, if your business setup heavily relies on contracts flown down by freight brokers, your margins should be even smaller, since the broker must make a profit.

Owner-operated business

By investing in the freight transportation turnkey business, you will be buying yourself a job, not a business. The economics could work for an owner-operator but with small margins it will be somewhat challenging to scale up that operation into an Executive business model.

The Executive business model is the ideal business model for an E-2 Visa application because the investor retains the administrative functions (very often marketing and sales as well) and hires the employees that will perform the services that are being offered and/or produce the products that are being sold. Using the freight transportation industry segment as an example, the investor should be able to hire the drivers (configuring an Executive Model), instead of being the sole driver (configuring an Owner-Operator Model).

Beware of businesses that look like “self-employment” as they run greater risk of being considered “marginal enterprises” by the immigration, which would result in E-2 visa denial.

Industry trends that should not be overlooked

The freight industry is going through market consolidation (merges & acquisitions). Large players benefit from economies of scale, which is key in a market segment with small margins.

Disruptive technologies such as driverless trucks and electrical trucks are up and coming and they aim for cost efficiency.

Apps that match shippers with carriers such as “Uber Freight” are here to stay. It allows independent (owner-operator) truck owners to get freight jobs but again, the same challenge as relying primarily on contracts flown down by freight brokers apply. The app will bite your margins.

There are increased regulations in the freight industry. Here are some examples:

Reclassification of Independent Contractors

A good example is the “Dynamex Operations West, Inc.  v. Superior Court of Los Angeles” ruling has made it harder for companies to misclassify workers as independent contractors going “against the grain” of an industry trend that since the 70s has been shifting from “employment model” to “independent contractor model”. Assembly Bill 5 (AB 5) is a new California state law that redefines and limits the way businesses classify workers as independent contractors. Great chances are that other states will soon establish their own versions of California AB 5.

Federal Motor Carrier Safety Administration Drug & Alcohol Clearinghouse

FMCSA Drug & Alcohol Clearinghouse will serve as an online database that will allow relevant parties to identify whether a Commercial Driver’s License (CDL) holder has violated any federal drug and alcohol testing program requirements within the past five years. Safety always comes first! Even though the initiative is welcome, it will increase the complexity of running a freight transportation business.

Proposed changes to hours of service

While having commercial drivers electronically tracking their hours of service in a digital recording device synced up with the trucks’ engines has increased compliance to maximum hours of service (again, increasing safety!), it has also created some secondary challenges and there are proposed changes to those regulations, again, adding complexity to running a freight transportation business.

If you are seriously considering investing in a business or gain knowledge about franchising so you can later decide if this is the right type of investment for you, we can definitively help you. Prospective E-2 Visa investors are welcome, and we have a lot of experience with investment visas.

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