One Step at a Time
by Jim Park
It must be something in the human spirit: most of us want to be masters of our own destiny. To take a few calculated risks and profit from the venture. And let's face it, we encourage ourselves by believing there's nothing anyone can do that we can't do better.
There's a downside, of course. While we can all conceive the grandest of plans, fewer of us can actually carry them through to a successful conclusion. Our belief in what we think we can accomplish often blinds us to the difficulty of achieving the goal. Still, we try. That's human spirit.
And no more spirited bunch exists than 'wannabe' owner-operators. Driving someone else's truck just isn't enough for them. Even after reading the statistics and listening to embittered folk teetering on the edge of financial ruin, a little spark of optimism remains. No bed of roses maybe, but owning a truck is still an achievable dream.
With profit margins as slim as they are today, however, there's no room for even a minor mistake. If you're new to trucking, it would be wise to spend the first couple of years learning the ropes before you commit yourself to a finance contract that you won't be able to walk away from. During that time, you can monitor the cost of operating the company truck you now drive. Watch the fuel, repair and maintenance costs. Get a sense of what kind of dough it takes to keep the truck running. Then you'll at least be aware of what you're getting into. Experience is, by far, is the best teacher.
Once you've got a general handle on the costs, you'll need to ask yourself why you want to be an owner-op in the first place. It's a fundamental question, and the answer might give some indication of your prospects of success.
Buying a truck is buying a business. Period. It's not a hobby or a pastime. It's a for-profit venture -or at least it should be. If the only reason you're dreaming of becoming an owner-op is to drive a bigger, shinier truck, then you might want to re-examine your objectives, especially in the context of current economic conditions. You can plan your way into that big shiny truck, but it may take you five or 10 years to do it properly.
If it's a big shiny large car you're after, you're going to pay for it. If you're prepared to settle for a more modest fleet-spec truck, then you can practically write your own bill of sale. But who the heck wants a fleet truck? The answer, and we offer no apologies here, is 'anybody who wants to make money.'
Fleets buy trucks not because they look good, but because they expect the truck to earn money. Modest power trains, aerodynamic styling and long-life components are the hallmarks. If it can make a fleet money, it should make you money too.
According to veteran independent trucker Herbie Walker too many owner-ops get themselves into trouble by buying the truck they want, then not being able to find a job that will support the thing. Walker has been at it for nearly 30 years, and he's owned two - count 'em, two - trucks over that time span. He says a truck is a tool, first and foremost. The most common mistake made by prospective owner-ops, as Walker suggests, is losing sight of the true reason for buying your own truck.
Now is actually a great time to be thinking about taking the plunge. The market is soft and dealers are awash in used trucks. If you're in a position to buy, you can launch your own small business with better than even odds that some degree of prosperity awaits. The key to success is a business strategy, and that starts with the purchase truck itself.
"The old-fashioned rule in any business is to start out with a small investment, build equity, and when you ultimately can, you buy a new one, and use your equity as the downpayment," said Freightliner president and CEO Jim Hebe in speaking to a group of truck journalists recently about the current glut of used trucks. "The key reason for the current situation is that new trucks have been too easy to buy in the past few years."
Hebe said that first-time buyers won't succeed with a $100,000 truck, financed over five years, with no money down, and a 30% balloon payment at the end. "It (won't) work," he says. "It's not healthy."
Hebe went on to suggest that owner-ops carrying payments of more than $1600 - $1800 are in over their heads. He was speaking about U.S. dollars, but in these terms the difference is slight. So, how do you find a $1600-a-month truck? The used lots, of course.
Look through any used truck listings and you'll find four-year old fleet trucks advertised at $40,000 or so. Remember, that's list price. The smell of money can get those prices dropping fast in a market like this one. If you go in with $10,000 down and finance the balance over two years, you'll come away with a monthly payment of less than $1600.
By the time it's paid for, it'll still be worth roughly $20,000, which now becomes the downpayment on your next truck. Assuming no repair catastrophes (you just have to put some cash in reserve to deal with that risk), you've also managed to add $10,000 worth of equity in the truck over and above your original downpayment.
If you shop around for another fleet truck, you can find two-year old trucks selling for $50,000. You're still only financing $30,000, again over two years. Your payments stay about the same, but maintenance and repair costs should decrease marginally. And when you trade that one in, you'll have increased your equity even more. Your four-year old truck might still fetch you close to $30,000. If you've managed your business carefully, there might even be a little profit in there as well, bringing your equity up to $40,000.
A one-year old truck might cost you around $70,000 these days, and we'll assume the same price four years down the road. That's a bit risky, but who knows? Anyway, you then buy truck number three with your $40,000 in trade and cash, and you can comfortably finance that one over two years with the same monthly payment.
Compare your situation to your buddy's. He bought a brand new big truck five years ago, and now he's looking at a $30,000 buy-out on a machine that's only worth $25,000. Nobody will finance his next deal. Where's his equity? He's in debt. You, on the other hand, are about to trade your third truck, which is three years old, for $50,000.
You should be able to see a pattern developing here. You use the equity, or residual value, in your previous truck to enhance your buying power on each subsequent and slightly newer one. You can increase the downpayment and/or shorten the financing term each time you trade, and eventually you'll be able to buy new with half or perhaps two-thirds of the price taken care of with your trade.
It's not unusual to find owner-ops who've taken a decade or longer to get into their first new truck by building equity and managing their costs very carefully. And for some reason, they aren't the guys you hear complaining about being one pay cheque shy of going broke. They've planned their way into the big shiny truck they've always wanted, and they deserve it by that time.
Which is something else worth noting about the human spirit: we thrive on this kind of achievement.
We'll delve a little deeper into the strategy of becoming an owner-operator in future issues. Contact us if you have any specific issues you'd like to see covered.