The good news is the American dream can indeed become a reality—for the right person. The challenges, however, are substantial.
And that’s why trucking business expert Todd Amen calls people just starting out as owner-operators “pioneers.” The characterization is appropriate: It salutes and flatters, invoking the spirit of those Americans willing to risk everything and strike out in search of a better life. On the other hand, as Amen points out, “about 90% of them didn’t make it because they didn’t know what they were getting into.”
“For the pioneer, we think the most important thing is to just think about it before you do it,” says Amen, founder, president and CEO of ATBS (formerly known as American Truck Business Services). “We’ve made it too easy in our industry to become an owner-operator.”
Typically, as Amen explains, a company driver might find himself sitting in a truck stop on a weekend layover, and he’ll decide he needs more control over his career. “Next thing you know, he’s an owner-operator on Monday morning and he really didn’t have to do anything to become that. He just went out and found a truck, but he’s got no business skills.”
Before a driver signs on the dotted line of a lease-purchase agreement, he or she needs to be prepared. Among its services, ATBS helps would-be owner-ops develop a “profit plan.” (Amen quips that telling drivers they need to work up a “budget” is like telling them they need a root canal.)
“It’s just sitting down and going through the numbers and really understanding what a business is going to look like. It’s understanding your insurance and truck payment, fuel costs, what to set aside for maintenance—a thousand questions that nobody really thinks about before they jump into this business,” Amen says. “How much money are you going to make, and is it going to support your household? That’s the most important thing someone can do before they take the step to become an owner-operator.”
The Internet is loaded with guides for coming up with a business plan (see the sidebar on page 19 for Web resources), but the concept is simple: The plan is your road map to success and needs to take a realistic look at your market, products and objectives. For ATBS, it’s a “constantly evolving document that projects several years ahead and outlines the route your company intends to take in order to grow.”
In launching a business, ATBS also recommends that you:
- Know how to create an entity. Every state has different rules as to how a business entity is required to run, but owners are typically better off by forming entities where their permanent home and tax address is located. Options usually are a partnership, S corporation, C corporation, or an LLC.
- Estimate taxes based on current revenue. Tax planning may not be the most exciting part of owning a business, but down the road it can help you save a lot of money.
- Don’t try to do everything yourself—delegate! The inability or unwillingness to delegate has led to the downfall of many business professionals and owners, regardless of the company’s size or revenue
So you’ve developed a plan and convinced yourself (and your spouse) that you should take the leap, but it’s still not time to get in the truck. Every business—whether trucking or making donuts—has to have some initial capital, as well as a structure for collecting revenue and paying bills. In other words, welcome to the real world of buying, selling, and bookkeeping.
And, fair or not, every business is going to be measured right off the bat by its credit score—or, in the case of someone just starting out, a personal credit score. This is the first thing a lender, a vendor, and even a commercial customer is going to check, so it’s critical that you understand your score. Basically, it’s based on the amount of debt you owe and whether payments have been made on time.
Yet all too often, would-be small business truckers don’t even make it to the first mile marker on their road map.
Tim Brady, who writes the “Business of Trucking” feature each month for American Trucker, is a long-time entrepreneur and consultant whose many professional hats include that of an insurance broker.
“As I’m writing insurance, it amazes me that the last three people I asked for financial statements thought I was asking them to give me their second-born child or something,” Brady says. “You’ve got to have a decent credit score. Going independent is not a solution if you’re not making money as a company driver or a lease operator.”
Brady insists you need money in the bank before you launch your business. “Realistically, you’ve got to have between $20,000 and $40,000 available, either a line of credit or cash. If you don’t have that, you’re soon going to find yourself behind the eight ball.”
Being late on your bills is no way to build that credit score, of course. So it’s all the more critical for truckers without reserve cash to understand how to get paid. Small carriers with their own authority need to be able to operate for up to 90 days without payment. Because self-brokered loads can have a lengthy time before they’re paid, truckers often turn to payment services providers. Factors will allow you to be paid early for loads, but using them just to speed cash flow comes at a much higher cost than sticking with standard terms.
Your new business can’t afford to give away those hard-earned percentage points. “That’s basically where your profit margin is,” Brady adds. But he also points out that factors, when used wisely, provide additional services such as screening a shipper’s credit history.
But as Brady has learned over the years, hopeful small fleet owners are too often determined to give the business a go, regardless. His latest book, Nicky Hammerlane’s Business Lessons from the Road, is a collection of case studies from Brady’s consulting work. Simply, failing businesses typically didn’t start with a realistic plan, or they didn’t stick to the good plan they started with. As the old saying goes, it’s hard to think about draining the swamp when you’re surrounded by alligators.
“[Business owners] read all this information, but when they go out and actually have to do it, suddenly it seems as if it was all written in French,” Brady says.
For Amen of ATBS, independents who’ve survived the pioneer phase become “hired guns.” They’ve been successful enough to get past that first lease-purchase truck and replace it with one that better fits their needs. “You’re going to live with that decision for the next four or five years, so you’ve got to get a good truck,” he says.
Hired guns are also free to select a carrier to lease on with. Once you’ve been in the market long enough—and listened to other owner-ops brag about what their loads are paying—you’ll want to get your own authority and find your own freight. But Amen warns against relying too heavily on brokers and load boards, sources that have freight when times are good, but not so much when the economy struggles; success is often a matter of timing. The solution? Develop your own customer base.
“The ultimate goal is to get freight directly from a shipper,” Amen says. “It’s going to be higher paying and consistent. Find that customer that can be your head haul and core freight.”
Among the key business items specific to starting a small trucking company, ATBS suggests:
- Know what to do when a truck goes down. When operating several trucks, it is a good idea to make sure that fixed costs (truck note, insurance, salaries, etc.) are covered if a truck is sidelined due to maintenance or staffing issues. If there are loan or insurance payments, you will have to cover all fixed costs until that truck is back on the road. This is part of the reason owner-ops want to grow beyond one or two trucks, according to ATBS. With five trucks, there is a good chance to maintain sufficient cash flow.
- Know how to find and pay drivers. You can’t drive more than one truck at a time, so how do you find another reliable driver—one who will take care of your investment? ATBS suggests it’s best to find a driver before finding a truck, and maybe even bring them on as a co-driver first. This gives them a good idea on how they drive and what working together will be like. It also gives owners the opportunity to teach and correct any issues before putting someone behind the wheel. You’ll also need to decide if drivers will be independent contractors or employees for tax purposes.
Mastering the bottom line
Both Brady and Amen emphasize the importance of understanding costs and building profit into your rates.
“You’ve got fixed costs, you’ve got operational costs, you’ve got load-specific costs,” Brady says. “But there’s one other cost that if you don’t calculate it on the front end and look at it as part of your rate structure, you’re basically going to go out of business,” Brady says. “If the guy who runs the company isn’t getting paid, he’s going to eventually lack the motivation to do anything. You’ve got to include a salary for the owner.
“Here’s another way to look at it: If you’re living off the profitability of your company, you’re stealing from its sustainability and growth. Profit needs to be reinvested. So pay yourself what it would take to hire someone to do the job that you’re doing. If you’ve not included a salary, you’re not going to be able to find the money to pay somebody down the line—whether it’s driving the truck or dispatching.”
As another example, he cautions that adding a second truck isn’t just a matter of having sufficient customer demand: The fixed and operating costs will to have to be supported by the business without bringing in new revenues for up to 120 days.
“A lot of people don’t understand what it takes to grow, especially from one to two to three or four trucks,” Brady says. “I’ve seen more businesses destroy their operations with just one more truck. It’s much more than just purchasing and licensing that truck.”
To help the business owner better understand his profit and loss statement (P&L), a CPA is “absolutely” required from the start, Brady adds, as is “a great relationship” with a banker and an attorney.
You can’t set the correct rates if you don’t understand the true costs. Brady’s business writing emphasized this again and again. And since the clock is running on fixed costs whether the truck is running or not, any rate equation that doesn’t consider the time factor will be flawed.
ATBS advocates for an “average revenue per day” model. Average revenue per day is a combination of revenue per mile and miles. If revenue per mile is low and miles are high, then revenue per day will be lower than it should be while at the same time some costs will be higher. Similarly, your revenue per day is hurt if revenue per mile is high but miles are low. Simply, if Load A pays $700 and Load B pays $1,000 but requires a layover and an extra day, the revenue per day of the former is better. Sometimes the lower price is more profitable.
And based on information gleaned from subscribers to its bookkeeping service, ATBS has found that the drivers who place a high value on average revenue per day are doing the best financially.
More interestingly, ATBS draws from its database of 20,000 P&L statements to deliver very specific benchmarking information, Amen explains, which helps a small carrier owner better understand his operation—what he’s doing well and where he could improve.
“We help these guys benchmark against other guys like them,” Amen says, and he cited data such as average miles, rates, fuel and maintenance costs. “This is a business of pennies. We’re just trying to get some data on how guys are making the money they’re making. So many folks just happen into trucking, and they don’t give a lot of thought beforehand. This gives them a chance to step back and think about what they’re doing.
“We get so busy just trying to survive that we never take a minute to understand where we can be better,” Amen concludes. “There’s plenty of guys out there doing well. It just boils down to paying attention to your business and treating it like a business—not just a truck driving job.”