Issue 1(31) / January 2010

Buying Your Own Independence?
Đóńńęŕ˙ âĺđńč˙

Buying Your Own Independence?

The transition of a hired driver to the owner-operator status, a seemingly simple decision, bears a multitude of nuances, surprises you will find out about after reading this article. Just about five-ten years ago an owner-operator job was one of most well-paid in Canada, with an annual income of $100,000 and up. But due to the fuel price hike, tough competition, transportation prices fall and many other factors, current financial situation of truck owners’ is not adequate to their workload. However, if you have chosen this track, follow your dreams, but be careful.
Buying Your Own Independence?

With a truck purchase you are buying a long-term business. It is not your hobby or a temporary interest. It is a tool for revenue, demanding good judgment and planning, as well as a solid budget to run a more or less successful business, and not a reason to file for bankruptcy (unfortunately it has been happening to many of our fellow countrymen over the latest recession years).

And if you are buying a truck only because you are dreaming of driving your own huge, powerful and shining toy – you should think twice about your decision, as being and owner-operator is far more difficult and demanding than just being a driver.

Which truck should I buy? How much will I’d be able to earn? What expenses will I bear? What company should I work for? These are typical questions you would be asking yourself.

Below you will find a few of the most necessary things you should take into account when you about to purchase a truck and turn yourself into an owner-operator.

Revenue and expenses – many small businesses lose not because the money they earn is not enough for them to survive, but because their owners do not know how properly to allocate their expenses to run the business. Before buying a truck calculate how much you are planning to earn to cover your expenses and expenses of your family. If your calculation shows that you would be able to earn more than your current expenses and you will even have a more or less decent amount of money left to put aside, you can move forward. Even if you earn two dollars per mile, and your expenses are $1,95, your revenue will be 5 cents per mile. You can easily calculate your gross income if you multiply your annual mileage by a mile rate, or as a percentage from “gross”. But gross income is just a beginning in estimation of your expenses.

In most cases many owner-operators do not bring home much more money than hired drivers, because own business involves considerable expenses.

Another important point: beginner owner-operator should know that each vacation or temporary down time will involve inevitable fixed costs for the idle truck: its lease, insurance, license plate, and parking – about $250-300 dollars a day.

In real life, you may sacrifice a lot during the first years of operation, as a payment for your independence. Within the first five years (and maybe more in today’s economic situation) your income will unlikely exceed that of a hired driver, and if we take into account a significant drop in your truck’s value, you will have even less left in your pocket.

What resources are necessary to start an owner-operator career?

In order to start a business you should possess an unobligated amount of around 5,000-10,000 dollars, excluding down payment for the purchased truck. Depending on how soon you will receive your first cheque (usually you would receive it in 3-4 weeks after the job is done), you will need to support yourself and your business during this period. Even when you receive your first cheque you should remember that the license plate, insurance and holdback expenses will be deducted from it. So at first the remaining amount will be meager. If you plan to pay for fuel by cash from your pocket (to get a lower price) you will need a decent amount of money for that, too. Surely, you will also need to spend something on accessories and equipment for your truck (even if it is new) after you get it in your possession.

If you are buying a pre-owned truck you would need to have another $3,000-5,000 (for unexpected expenses which usually surface after the truck purchase).

A truck down payment usually makes up $10,000-25,000 depends on a number of factors: a company, your credit history and so on.

Be careful if a dealer offers you a low or zero down payment. Usually it would conceal draconian conditions for monthly payments and high interest rates, which will be your headache for years to come. Before making a purchase carefully read the entire agreement because sometimes its conditions are different from the dealer’s verbal promises.

Do not forget about a new business registration, incorporation fees and other fees, which may significantly raise your initial expenses.

The initial period of operation is different from one case to another. A key point is – try not to invest every cent you posses in a truck and leave nothing for everyday expenses. This is the biggest mistake made by first-time truck buyers. Get used to plan your expenses wisely.

Which truck to choose?

Drivers always ask this question. Which truck will deliver most value, will fit most, will be most reliable, have the lowest original price, the best value for money and at the same time most suitable for the heavy duty work?

Some buyers base make a decision based on the dealer’s recommendation rather than a truck’s reputation. In our view a purchase decision should be based on the truck manufacturer’s reputation, its ability to offer the best service accessible in every corner of the USA and Canada. In next the issues of the newspaper we will tell you about trucks available in Canada and compare their features: price, service cost, degree of reliability, comfort and so on.

Important: before buying a truck you should decide what kind of job you will do. The choice of the truck’s elements will depend on that – engine power and its manufacturer, amount of gears in the transmission box (10, 13 or 18), or whether it is an automated transmission. Reduction gear ratio, cab setup, single or a double-sleeper and other factors, most deciding of which (and sometimes a compromise) will be the truck’s price itself.

Will you buy a new or pre-owned truck?

High monthly payments for a new truck may drag you down to the same degree as high costs of a pre-owned truck maintenance, which you may have bought due to lack of experience or to be pushed by the dealer.

Many beginner owner-operators, first-time truck-buyers, suddenly realize that they have bought a truck which is absolutely unsuitable for the work they do, or cannot find a company offering conditions that allow covering high expenses for the truck purchased.

What you should know about lease-to-own plans.

A number of large trucking companies offer lease-to-own plans to drivers who want to change their status and become owner-operators.

Some of them offer quite good conditions, but others proposing – “killers”, so called “never-never” programs (never earn enough money, never re-pay for the truck). The awful reputation came out justly – these programs, indeed, rob naďve people who fall for the seemingly “simple” plan to earn good money on a truck purchased from their own company. In reality guys lose a large portion of the income they had when they drove a truck belonging to their company.

Many victims of so-called “deals” saying that as soon as they purchase a truck from the company, all the promises about good mileage and rates were forgotten and they could barely earn money enough to pay for the truck, let alone the promised good income. Of course, one should understand that in difficult times companies are trying to get rid of their truck, and the remaining job is done by their drivers first, and then by owner-operators.

When you enter into an agreement to buy a truck from your company make sure to include in the contract an option allowing within a certain period of time to return the truck to the company and cancel the lease agreement. In such a way you will avoid the possibility of your company making you “starve”.

That is why you need to always show the agreement to your lawyer and accountant before signing it.

Try to conclude a contract with companies, which are sure-footed and have their own clientelle base, in order to prevent a seasonal recession or even going out of business. It is good if a company offers you a plan of monthly deductions contributing to the service and maintenance funds, so that an unexpected damage or huge service costs do not unsettle you.

A number of companies make it a condition that you purchase or lease your owner trailer (dry van or reefer); others provide their trailer and charge you a monthly rent.

Large Canadian companies pay a truck owner a certain mileage fee and provide their trailer. Such companies usually pay for toll roads, bridges, scales, faxes, downtime, etc., so the owner’s income depends on mileage.

Smaller companies pay a certain percentage from “gross” (the amount, received for transportation of the goods). In this case income is less dependable on mileage, and to a greater extent - on the transportation rate. Payment terms vary from one company to another, and you should check everything before making a final decision.

Operating expenses

The most important and difficult task for a new owner is to plan the business model. Your estimation of your business cost will turn out to be far from reality, which you will face once you have started your business. In reality expenses usually exceed your optimistic expectation, and you should be prepared for it.

Your business plan should be based on that minimum revenue, which you should receive every month. Afterwards you should determine your operating expenses. Remember that work and payment conditions may be substantially different from company to company.

Below we try to give your an example of a small and very approximate number of “typical” operating expenses, in cents per mile.

• Truck payment – 25,4 c
• Diesel – 39.0 c
• Insurance – 4.7 c
• Living expenses on the road – 11.3 c
• License plate, permissions, documents and administrative expenses – 3.2 c
• Service and repairs – 13.6 c (on average, during 4 years span)
• Total – 97.2 c per mile!!!

Do not forget about your own salary. In reality, considering other unexpected expenses, you should add minimum 30 cents to this amount, to get a more or less clear image of your expenses.

If you are new to this business, how can you picture real expenses in future? Unfortunately, we know, your chances are slim. And this is the main reason for such a high percentage of those who have lost business and left the trucking.

Are you serious about your decision?

Experience is the best teacher in any situation. To drive a truck or own it – you should enter this business with your eyes wide open. We do not recommend buying a truck before having worked as a driver for at least two years: not only to gain necessary experience in driving a heavy-duty vehicle, but to get an insight into the business in general. This is the minimum time required to make a far-reaching decision on whether you would be able to spend serious amounts of money and plenty of your time during the nearest three-five years of your life, without the possibility to quit the business avoiding considerable losses.

In today’s situation of tough competition and minimum revenues received by truck owners during recession, there is no room even for a small mistake.

We heard opinions from truckers who had worked in the industry for decades and bought their truck(s), they were saying that they were shocked by the lack of knowledge they have had at the beginning about the difficulties of running your own trucking business.

It happens that for some reasons you lose a job but nevertheless your lease and insurance costs remain in place – they cannot be stopped. If the job problems remain and you miss these obligatory payments for two -three months in a row, the leasing company, as per usual practice, will take the truck from you, sells it for a minimum price and makes you pay for the difference within a certain timeframe.

Unfortunately a large amount of trucking companies established by our fellow countrymen over the past years, have acquired many new trucks and new owner-operators recruited from the people who were not familiar with the trucking. They invested huge money in the business, but finally have closed down or gone bankrupt, having left truck owners without trucks, taken away by leasing companies, and without money they earned.

So, as the pioneers used to say when we were young – BE PREPARED!

Alexander Bar, owner-operator.

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Avondale report indicates trucking capacity still not where it needs to be

Following the second quarter in which Avondale Partners LLC estimated less than 0.4 percent of the nation's over the road heavy duty truck capacity were pulled from the road, the firm reported last week that less than 0.7 percent the overall capacity exited in the third quarter.

This 0.7 percent, according to Avondale, is comprised of 405 companies with an average fleet size of 35 trucks, which represents roughly 14,135 trucks. In the second quarter 370 companies with an average fleet size of 18 trucks representing 6,725 trucks-or less than 0.4 percent-exited the market. And on a year-over-year basis, Avondale said 785 companies with an average fleet size of 50, representing 39,030 trucks, were parked.

While the number of companies cited in the report as pulling trucks from the road only rose from 370 to 405 from the second quarter to the third quarter, the number of trucks-6,725 in the second quarter and 14,135 in the third quarter-more than doubled sequentially, with the average fleet size nearly doubling from 18 to 35. While these figures were described as "promising," in the report, Avondale noted it is still not enough to cure the current imbalance between capacity and demand.

Avondale Managing Partner and author of the report Donald Broughton wrote that "while this quarter's failure rate is not enough to completely fix the capacity/demand imbalance, it is enough to suggest that the weakness in pricing may soon be over." He added that Avondale expects a large number of bankruptcies in the first quarter, as the cash demands of deferred maintenance, re-licensing, and re-insuring costs come due.

While capacity is being removed from the trucking sector, Broughton explained that not enough is being removed to offset the amount of lower demand. "Demand has quit getting worse and many large industry participants have idled less than 10 percent of their own fleet, but unfortunately we estimate that 3-5% of the remaining capacity must be removed before pricing for trucking services will permanently stabilize," wrote Broughton.

According to Lana Batts, a partner at Transport Capital Partners the trucking industry still has too much capacity and rates would be higher than they presently are had more capacity already been removed. She said that when tonnage is down along with the supply and demand drop in rates, many carriers are forced to go out of business. And Batts said even though-as Broughton's report indicates-many carriers have left the business, it is not as many as it could have been, due to carriers' lenders being lenient for non-payment of trucks and the price of used equipment dropping so dramatically to the point that lenders are willing to have truckers make every other payment, as long as they don't get too far behind.

Even with lax credit practices occurring, Batts estimates that the trucking industry lost about seven percent of capacity through normal bankruptcies, and another seven percent from trucks being parked. But the market could withstand another seven percent removed, but the price of used trucks has dropped dramatically, leading to continued excess capacity.

With excess capacity giving shippers the upper-hand in terms of pricing power, a trucking executive told LM, that big shippers are clearly in favor of the current situation as it gives them more options.

"It is not a secret that when capacity shrinks, carriers will raise rates," said the executive. "There is enough capacity out there right now for existing carriers to pick up any slack should more carriers-including YRC Worldwide-were to exit the market." (