Summary: Many owner-operators enter the trucking business hoping to expand their carrier into a large trucking fleet. But few owner-operators grow their companies using a methodical approach. Instead, they jump at the chance of growth without understanding how to grow the business. This approach seldom works and often ends up in financial failure.
We recently spoke to Joel Baker about how to transition from being an owner-operator to a fleet owner. Joel, an owner-operator with more than 30 years of trucking experience, recently moved to the insurance side of the business. He runs Learn to Truck and welcomes reader questions. The information in this article is the result of our conversations with him. We cover:
- The wrong way to expand your fleet
- A smarter, more methodical approach
- Start with leased drivers
- Develop your plan
- Execute the plan and add drivers
- Things to keep in mind
Note: This article is intended for informational purposes only. It does not provide financial or professional advice. Seek a professional if you require specific advice for your situation.
1. The wrong way to expand your fleet
Here is a story that is all too common in the industry. An owner-operator has been in business for a few years and is looking to grow. They notice that the company operates at total capacity and even turns away some loads. The owner-operator decides it is the right time to expand the fleet and capitalize on this opportunity.
The company buys or leases its equipment, which adds to its debt. Finding reliable drivers is more complicated than expected. Instead, drivers are unreliable, leave quickly, mistreat equipment, and waste fuel.
The new small fleet owner realizes they need to work harder than before just to stay afloat. They have to keep driving their usual routes, and they also have to manage their ever-changing drivers. The owner was unprepared for this scenario and lacked much-needed back-office support.
Soon they realize that their drivers are not as profitable as they had hoped. There are many potential problems. Maybe the cost of employee taxes, equipment repair, and insurance is higher than expected. Perhaps they don’t have as many high-paying freight loads as they had assumed. Either way, the fledgling small fleet is losing money fast. Money they can’t afford to lose.
Eventually, the business runs out of cash and is in serious financial trouble. There is little the owner can do since they have no money left. The company will have to close, leaving the owner saddled with losses or debt.
2. A smarter, more methodical approach
The approach in this article helps minimize your risk while increasing your experience level. It requires incremental steps that eventually lead to your final objective. Each step is a calculated risk. There are several opportunities to get out before you make the final commitment. The approach is similar to the approach we describe in our guide about getting started as an owner-operator.
a) Strategy summary
The strategy includes three steps. The first step involves growing your carrier by adding leased drivers. This step gives you an idea of the challenges you will face in the future.
If the first step meets your expectations, you move on to the next step. The second step is the planning stage. In this step, you work out all the details of your business. Once this step is complete and you are satisfied with the results, you move to the final step. The third step is launching your fleet expansion plan. You take this final step only if all the previous efforts were successful and you feel comfortable with the risk.
3. Start with leased drivers
A leased driver owns a semi-trailer truck and usually operates as an independent contractor. You pay them to haul loads for your shippers while using your trailers. Working with leased drivers during the initial stage has several advantages, though it is not perfect.
Leased drivers allow you to expand your fleet without having to hire additional drivers as employees. They work as contractors only – and only when needed. It also saves you the expense of owning and maintaining trucks, though you will own the trailers.
Run the business the same way you would run a small fleet. This step helps you familiarize yourself with the challenges of operating a larger trucking company. Start with small manageable steps and increase the number of freight loads once you become comfortable with this model.
The main challenge for many owner-operators is managing the drivers while keeping your shippers happy. Use leased drivers until you have learned everything you need about operating a larger fleet. This process may take some time, and it’s best not to rush this step. Get as much experience with the advantages and problems of owning a trucking fleet.
a) A word of caution
Keep your accounting up to date and review your financial statements often. This step is essential, as it enables you to catch potential problems early on.
You may notice that your profit margins go down. That is simply the cost of learning the business this way. However, you should not lose money. Losing money clearly indicates that the plan is not working and that you should stop this business model immediately.
4. Develop your plan
You should have experience running a small fleet of leased drivers by now. Are you comfortable with the prospect of managing a fleet of trucks? If you are not comfortable with this increased responsibility, consider changing strategy and staying as an owner-operator.
Use everything you learned in the previous step to develop an action plan. Here are some important things you need to consider for your plan. Note that this list is not all-inclusive.
We strongly suggest working with a CPA since they are familiar with tax rules and know how to build business models.
a) Do you have a steady source of freight loads?
Fleet owners need to have reliable sources of high-paying freight loads. The best way to secure these loads is to get trucking contracts with direct shippers. Ideally, you should pull specialized loads for a niche industry. These loads pay the highest rates, and many large carriers avoid them.
b) Do you know your cost per mile?
You probably have a good idea of your cost per mile as an owner-operator. However, your cost per mile as a fleet owner is higher. You need to account for items such as employee taxes, increased maintenance, overhead, incidentals, etc.
c) Do you know your expected rate per mile?
By this point, you should also have a very good idea of your expected rate per mile. This figure is important. Your rate per mile must be higher than your all-inclusive cost per mile. If it’s not, your business risks losing money.
d) Do you have a fuel strategy?
Diesel fuel is one of your carrier’s highest costs, if not the highest. Developing a strategy to buy diesel at the best price can lead to savings that drop to your bottom line. Become familiar with IFTA, pump prices, pre-tax prices, and how you can use them to optimize your fuel purchases.
e) Have you considered insurance costs?
As a fleet owner, your insurance costs increase and must be worked into your expected cost per mile. You may also need additional insurance to cover worker’s compensation and other requirements. Consult an insurance agent that is familiar with the trucking industry.
f) Have you considered taxes and overhead?
Your taxes and overhead increase substantially. At a minimum, you have to cover all the required state and federal employment taxes. Your overhead increases because you may need financing, someone to run payroll, accounting help, phone answering, etc.
Some of your overhead can be outsourced through payroll companies and CPAs. A CPA can help you develop an exhaustive list of the overhead expenses you should consider.
g) Do you have a financing strategy?
Most owner-operators who expand their fleets need financing to accomplish their objectives. Develop a financing strategy to acquire the trucks and trailers. The most common options involve using loans and leases. Each option has its pros and cons, which have to be carefully evaluated.
Check your financing contracts to ensure that the companies financing your equipment secure their loans against the equipment only. Some companies secure their positions against all company assets, which may affect your ability to get additional financing further on.
Additionally, you may need financing to help with cash flow. Most trucking carriers have cash flow problems because shippers operate as net-30 accounts. However, many expenses must be paid sooner than that. This situation becomes a problem if your cash reserve is not sufficient.
Carriers can improve their cash flow by using freight factoring financing. This solution allows you to finance slow-paying invoices and improves your cash flow. To learn more, read “What is Freight Factoring?”
Have your CPA (or similar expert) help you develop a financial model for your business. These forecasts are an essential planning tool and can alert you to potential problems ahead of time.
h) Do you have an emergency cash reserve?
Consider building an emergency cash reserve before you expand your trucking business. Few owner-operators do it, but it is a vital step that improves your chances of success. It helps you manage the inevitable challenges you will face as you grow your company.
i) Speak to colleagues in the industry
Your fellow small-fleet owners are one of your best sources of actionable information. Speak to your industry colleagues who are already fleet owners and ask as many questions as possible. Their information is valuable.
Direct competitors may not be too eager to help you. However, you can speak to industry colleagues who aren’t direct competition. They are a great source of details that help you adjust your expectations to ensure they are realistic.
j) Does your plan make business sense?
You have spent a lot of time and money planning your business. Now it’s time to determine if you should take the next step. Here are some questions you can ask yourself:
- Does your plan make sense?
- Is it realistic?
- Does it have a good chance of success?
- Can it handle the inevitable problems that will arise?
- Are you willing to put in the effort to make it work?
- Can you afford to take the risk?
You are the only person who can make this decision. It may help you to discuss this with your CPA or an industry colleague. Proceed to the next step only if you are sure you want to expand your carrier. If you are unsure, this is your chance to return to being an owner-operator.
5. Execute the plan and add drivers
It’s time to implement your business plan. Executing your plan should be straightforward if you spent the necessary time in step 3. It won’t be easy, but you should know what to do and expect. This execution stage includes three phases:
a) Set up your systems
Your first step is to set up the systems you need to support your growing carrier. This step includes:
- Getting all the software you will need to run the business
- Setting up a proper accounting system
- Setting up all support systems
b) Acquire equipment
Your company has two ways to acquire equipment. You can get a loan to purchase the equipment. Alternatively, you can lease the equipment. Leases can be structured so that you can buy the equipment for a nominal price at the end of the lease.
Experts tend to have strong preferences and opinions about which option is better. Follow your CPA’s advice since they are most familiar with your financial situation.
c) Find and retain drivers
Finding and retaining quality drivers is the hardest task. It is an ongoing industry problem, especially for small fleet owners. You are competing against larger companies that can commit substantial resources to find, train, and retain drivers.
Consider ways of differentiating your company from others. Ask yourself, “Why would a driver come work for you?” More importantly, ask yourself, “What can you do so that drivers want to work for you?” Ultimately, it’s about what you can give them that others can’t.
6. Things to keep in mind
Here is a list of five important things you should keep in mind. These are some of the common challenges that expanding fleet owners regularly face.
a) Employees vs. contractors (1099s)
Many fleet owners assume they can save money by hiring their drivers as contractors (e.g., 1099s) rather than employees. They assume this step can save them a lot of money, especially in employee taxes and worker’s compensation. In most cases, they are wrong.
The only suggestion we can make is to consult a CPA and an employment lawyer. The Internal Revenue Service (and state taxing authorities) has precise rules about who qualifies as a contractor vs. an employee. Getting this wrong can expose you to substantial penalties. We have seen companies go out of business because they got this wrong. Don’t let that happen to you.
b) Equipment and fuel costs
Every new fleet owner learns that no employee takes care of their equipment as well as they do. Also, no employee is as careful saving fuel as you are. It’s a reality of owning a carrier. You may want to increase your fuel and repair estimates to account for this reality.
c) Overhead costs
Having a fleet and employees increases your overhead costs dramatically. New fleet owners tend to underestimate these costs initially. Eventually, these costs creep up and decrease your profits.
d) Review financial statements often
New fleet owners are often busy driving and handling the logistical details of running a carrier. Unfortunately, they don’t keep their accounting up to date and don’t review financial statements regularly. The owner may miss important details, such as certain costs increasing or profitability decreasing, until it’s too late to fix the problem.
The solution is simple. Make sure your accounting is up to date with all your financial information. Review financial reports regularly and keep an eye on your cash flow. Cash flow problems can creep in when you least expect them.
e) Keep an eye on cost per mile
Your carrier’s expected cost per mile is one of the most significant financial assumptions you made when you expanded your fleet. This figure is essential, as it determines how much to charge clients to avoid hauling loads at a loss.
A fleet’s cost per mile constantly changes as market conditions and your business evolve. Adjust this cost regularly to ensure that your trucking company always knows which loads will be profitable and by how much.
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