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So You Wanna Be an Owner-Operator?

by Jim Park

We receive a lot of mail here at highwaySTAR from people with questions. They ask the darnedset things sometimes, but many of the enquiries stem from an interest in switching gears from company driver to owner-operator: How much can I make? What kind of truck should I buy? Which are the best carriers to work for? How much vacation time can I expect to take each year? The questions run the gamut.

And as naive as some of those questions may seem, We'd rather answer a hundred like that than one asking if we know a good bankruptcy trustee. We're here to help with those issues because, frankly, there's nowhere else to go for answers. This month's Careers installment is a primer on setting up an owner-operator business.

How much can I make with my own truck?

Most small businesses fail not because they don't earn enough money, but because they don't have a good handle on the cost of running the business. If you were earning two bucks a mile, and your costs totaled $1.95, you'd still only be earning a nickel a mile profit. You can pretty easily calculate what your gross earnings would be by multiplying your annual mileage by the mileage rate, or by working out your gross revenue based on the percentage split with the carrier. But gross only matters as a place to begin working out your costs.

The question you should be asking while you're planning your way into a truck, is how much money you need to earn to cover all of your family and personal commitments. If, after all the costs are accounted for, you find there's more than you need left over, you can proceed. Most owner-operator businesses won't provide much more than a driver's wage. The business shouldn't cost you money to operate.

Realistically, you may find that in the first few years there's a need to make a few sacrifices. Over a five-year period, you should come out ahead of where you'd be as a company driver, and we're looking at both cash in your jeans, and/or some equity (value) still left in the truck. It's not what you make, it's what you keep.

How much money do I need to start up my business?

Not including the downpayment on a truck, you'll need somewhere between $5000 and $10,000 in your pocket the day you start. Depending on when the first cheque arrives, you may have to carry the household expenses for up to a month. You won't be getting that weekly pay cheque anymore. And even then, the carrier may have deducted costs like holdback, plates, etc., which could shrink the first cheque to almost nothing. If you plan to pay cash for your fuel, you'll need money for that, and you may want to spend a little money on the truck after you get it home. If you're buying a used truck, you may want to have another $5000 close at hand, just in case.

Your downpayment could be anywhere between $10,000 and $25,000. Beware of the low- or no-money-down deals. They're dangerous unless you're really good at managing money. Usually, it's the payment required at the end of those deals that kills you. There are also the fees to register the business, incorporating costs, etc., which could gobble up another few thousand dollars.

Start-up needs will vary from driver to driver. The key is to avoid throwing every cent you have into the truck, leaving nothing for the day-to-day expenses. That's a mistake many first-timers make, and it's a very difficult mistake to recover from.

What kind of truck should I buy?

We're repeatedly asked by relatively new drivers which truck is the best, Kenworth, Freightliner, Volvo, or some other. From a quality and cost standpoint, they're all pretty similar, but each manufacturer will offer deals and perks that might help to sway the buying decision. There are numerous differences between the makes and models, but there are more similarities than differences in the important stuff, which appears to bring the buying decision down to what kind of cab you want to sit in. But that's a decision you can make after you decide what you're going to be doing with the truck, which engine and drivetrain is best suited for your application, and how much truck you can afford to buy.

These days, if you want a particular engine and/or transmission, note that you won't necessarily be able to get every combination in every truck. Most truck manufacturers are more limited in the options they offer than ever before, and some are actually quite restrictive.

Then there are warranty issues. Who offers the best one? Maybe more than other considerations, this one demands lots of study. Not just on the truck, but on the engine and drivetrain too.

It might also depend on the nature of the dealership you're going to be using. If there's one handy to you, or one that offers especially good service, you might base your decision on those factors. Ask around, do a little research to find out who treats owner-operators well in your neck of the woods.

The other question is whether to buy new or used. The high payments on new trucks can sink you as quickly as the high cost of maintaining a poor-quality used truck. Many first-time owner-ops get themselves into trouble buying the truck they want, then not being able to find a job that will support it. A truck is a tool, first and foremost, but it's also the reason many drivers dream of becoming owner-ops in the first place. Don't lose sight of the real reason for buying a truck: to make money.

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. A venture that requires a great deal of planning and budgeting to be even modestly successful. 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 priorities. You can plan your way into that big shiny truck, but it may take you five or 10 years to do it properly.

How much will it cost me to operate my truck?

The single most difficult exercise for the first-time owner-op is the business-planning model. To begin with, you're not familiar with the cost of doing business, and you've likely got no realistic numbers upon which to base your estimates. Then, the next challenge is believing the numbers you come up with.

Your business plan has to begin with determining what you need to take home for the family - that's called your wage. Then the operating costs can be considered. These will vary dramatically from operation to operation, but we'll provide a sample here of some normal, realistic costs. You likely won't believe even these numbers, but they're realistic.

Here's a snapshot of a typical owner-operator's numbers:

  • Truck Payment - 25.4 cents per mile
  • Fuel Cost - 39.0 cpm
  • Insurance coverage - 4.7 cpm
  • Cost of life on the road - 11.3 cpm
  • Plates, permits, and administration - 3.2 cpm
  • Maintenance - 13.6 cpm average over four years
  • Total cost to run a class 8 tractor in 2002 - 97.2 cents per mile.

We haven't included many of the administrative costs in this exercise, or the wage. Realistically, you'd need to add about another 30 cents to these numbers to get an accurate picture. Are you thinking what we're thinking? If you're new to the business, how will you be able to realistically forecast the numbers you'll need for your plan? Chances are you can't. And that's why there's a tragically high failure rate for small trucking businesses. If you don't believe us, just ask your bank manager.

Are the carrier-sponsored lease-to-own plans a good deal?

Some are fine, but others are killers. The so-called never-never plans (never make any money, never get the truck paid for) have received a bad name over the years due to the spectacular rip-offs that some of them were proven to be. Many of the victims tell tales of getting close to making the deal work, only to have the carrier turn off the tap and cut the miles back, forcing the owner-operator to miss a payment, and possibly forfeit the truck. With others, it was simply impossible to get out from underneath the buy-out. But in a lot of other cases, the owner-ops didn't manage their affairs that well, leading to the inevitable failure of the plan.

In shopping for a workable plan, look for a deal that gives you first option to buy at any time in the deal; that way you're protected from the carrier starving you out. If you can finance the balance, you can buy it and walk away. Look for opportunities where other owner-operators have been successful in completing the deal.

Always, always, always have a lawyer and an accountant look at the contract before you sign it. Don't ever sign anything without seeking professional advice.

Choose a plan with a carrier that has a wide customer base to avoid seasonal slowdowns and possible loss of business from a fractured relationship. Consider a plan that requires you to make monthly installments to a maintenance fund to prevent a cash shortfall in the event of a major repair. Actively seek out carriers who require their owner-operators to take some form of business management course. It's in your own best interest.

And a final note, take whatever steps possible to ensure that your investment is protected by establishing escrow funds for your maintenance account, and to protect yourself in the event the carrier defaults on its payments to the finance company for the truck that you're buying.

I can't get hired as a company driver because I have less than two years' experience, but some carriers will hire me as an owner-operator. What should I do?

Experience is the best teacher in any situation. Driving trucks or owning them, you'll fare much better if you go into the business with your eyes wide open. We wouldn't recommend ever buying a truck of your own until you have at least two years of experience under your belt. It'll take you at least that long to decide if you enjoy trucking enough to sink a ton of money into a business that you won't be able to walk away from for about three to five years. With margins as tight as they are today, there's not much room for even a minor mistake.

Investing a lot of money into a business you don't understand, then making a bunch of costly mistakes as you learn is a one-way ticket to financial ruin. Think about it: if the carrier doesn't want you driving one of his trucks because you might cost him money, how will it be any different if you own the truck and carry all the risk yourself?

We still hear comments from drivers with 20 years of experience who've just bought their first truck, saying how surprised they were at how much they didn't know about running a business. We also hear from folks who have been successful owner-ops for 20 years saying it's never been tougher. So by all means follow your dream, but go carefully - with your eyes wide open.

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