Out of business

PM guidelines are offered by the Technology & Maintenance Council of the American Trucking
Associations: (703) 838-1763 or this site.

With high fuel prices, rising insurance and equipment costs and an often grueling schedule, finding success as an owner-operator is not easy. “The industry does not cultivate and nurture drivers,” says Owner-Operator Independent Drivers Association Executive Vice President Todd Spencer. “It simply chews them up and spits them out.”

Executive Vice President Todd Spencer. “It simply chews them up and spits them out.”

Owner-operators can be especially vulnerable in the initial period after they make the leap from employee to independent businessperson, experts say. “As company drivers, they made 32 or 33 cents a mile,” says John Turner of The Trucker’s Accountant in Houston. “Now, somebody is going to pay them 90 cents a mile, but they don’t realize that if they’re not making at least $1.40 or $1.50 a mile, they’re losing money, and they’ll be out of business in a year.”

The inability to understand the revenue-cost equation is just a symptom of a larger problem: lack of essential business skills, Turner says. “When they become owner-operators, they become owners of small businesses, and they either can’t or won’t understand that,” he says. Experience as company drivers helps potential owner-operators hone their driving skills and learn the ins and outs of trucking, but does nothing to prepare them for running their own business.

Beyond the overall difficulties of running a small business, there are three key factors – maintenance, taxes and personal health – that contribute to most owner-operator failures, according to the experts at American Truck Business Services, an owner-operator consulting firm in Denver. Whether you’re a newly minted owner-operator or a longtime veteran, being aware of these potential pitfalls and understanding how to avoid them can help you keep your business going – and growing – for the long haul.

Pitfall #1: A catastrophic breakdown and no money for repairs
For owner-operators, regular truck maintenance should be as automatic as breathing or shifting gears. But improperly or poorly maintained trucks are one of the primary reasons why owner-operators go under, says Dan Prime, general manager of ATBS.

“When a truck is not properly maintained, little problems become big problems,” Prime says. Big problems can require a considerable cash reserve. If it isn’t available – and it’s frequently not – the owner-operator is forced to quit.

“They might be setting money aside, but not enough, because things wear out faster when they’re not maintained properly,” Prime says.

Owner-operators can’t depend on their carrier to loan them money for repairs, either. “If you drive a $100,000 truck, and your engine blows, and you don’t have $25,000 for a new engine, the company you’re leased to might not loan you that money anymore,” says former owner-operator Johnny Clarkston Jr. of St. Petersburg, Fla.

A blown engine put Clarkston under. The company he was leased to looked at his spending habits before denying him the loan. “They wanted to know what happened to the money they already paid me,” says Clarkston, who’s now a company driver. “You have to put some back for a nest egg.”

Money isn’t all many owner-operators lack. Too many also don’t have the necessary skills or discipline to keep their trucks properly maintained in the first place. “That’s one of the biggest problems we see,” Prime says. “They say, ‘I didn’t know how to do it,’ or ‘I didn’t know when to do it.’ They don’t follow proper preventive maintenance schedules, and they don’t know what to look for.”

“I find it hard to believe that someone could be an owner-operator and not be able to repair something on their truck” says Robert Jordan, Overdrive’s 2006 Trucker of the Year. “I could not afford to do this if I had to spend money in the shop.”

You can’t neglect having an emergency savings account to handle unexpected breakdowns. Most owner-operators recommend a cash reserve of about $10,000. A good rule for major maintenance saving is to set aside so many cents per mile, based on your truck’s age:

New: 2 cpm
1 year: 3 cpm
2 years: 4 cpm
3 years: 5 cpm
4 years: 7 cpm
5 years or older: 10 cpm

Also, follow the preventive maintenance schedule in your owner’s manual. The Technology & Maintenance Council of the American Trucking Associations also provides PM guidelines. Not mechanically inclined? Establish a good relationship with a reliable mechanic and visit him regularly. Keep good records of all service.

Pitfall #2: Failure to pay taxes
Neglecting tax responsibilities is another key reason owner-operators fail. “They haven’t paid their quarterly estimates,” says ATBS President Todd Amen. “The Internal Revenue Service catches up and starts investigating.”

Taxes can be confusing. Depreciation, deductions, exemptions, leases, business structure and simple record keeping all come into play. A home office and a self-employed spouse increase the complexity. But shirking this responsibility will lead to legal trouble, steep fines and interest charges, overdue taxes and, ultimately, business failure.

To avoid these problems, plan for the big bite the taxman takes. This can be difficult because most owner-operators started their careers as company drivers and their employer deducted all required taxes from their paychecks. But as an owner-operator, you don’t have an employer to take taxes out of your settlement.

Instead, you must make quarterly and year-end tax payments. These are payments of the self-employment taxes (FICA and Medicare) and federal and state income taxes based on estimates of the profitability of your business. Married owner-operators often fall into the 15 percent tax bracket; many singles fall into the 25 percent bracket. Self-employment tax is about 15 percent. So the total is 30 to 40 cents from every dollar. Most states have income tax, too.

Because estimating taxes is complex, most successful owner-operators seek help from an accounting professional who specializes in trucking. Without such guidance, certain factors affecting your tax situation, such as depreciation, can be difficult to understand, Turner says. “At the end of the year, they say: ‘What do you mean I owe $12,000? Last year I didn’t pay anything,'” he says. “That’s because the first year they’re able to write off the truck, and other years they might write off major expenses like a new transmission or a major engine overhaul.” But those write-offs don’t happen every year.

Even with professional help, good record keeping is essential. Experts say doing nothing more than tossing receipts into a shoebox and holding them until tax time is a surefire way to sink your business. Keeping track of allowable business expenses helps you and your accountant determine your business’ profitability and make key adjustments when certain costs get out of whack.

Owner-operators must ask themselves: “Where do I stand financially with my business?” Turner says. “Did I make money or lose money last year?”

The inability to answer those questions is one of the biggest reasons owner-operators go out of business, he says. “Virtually all of those who fail don’t find out they’re operating at a loss until it’s too late.”

Turner likens starting an owner-operator business to visiting a foreign country without knowing the native tongue. “They need somebody who speaks the language, and the language of small business is accounting,” he says.

Avoid tax problems by working with an accountant or business consultant who understands trucking and who will remind you of quarterly tax payments – and who will warn you if your operation isn’t generating the income to make those payments. A good trucking accountant can explain the ins and outs of estimated taxes and depreciation, as well as provide regular financial statements to let you gauge the success of your business.

Pitfall #3: Chronic health problems and no medical insurance
Poor health, sometimes caused or aggravated by overeating, smoking and lack of exercise, can lead to business failure. “They just can’t drive anymore because they’re not healthy, or they have a family member who’s sick and, as a result, they can’t be away from home anymore,” Prime says.

The trucking lifestyle contributes to many owner-operators’ health issues. “Look at the demands of the job,” OOIDA’s Spencer says. “If there were such a thing as a typical, legal work week for truckers, it would be 60 hours.”

Just getting proper rest can be difficult, Spencer says. “It’s a nightly challenge for truckers to get off the road and find someplace safe to sleep.”

U.S. Department of Transportation regulations defining acceptable physical conditions for truck drivers also play a role, Prime says. A trucker who fails his medical exam can’t get his CDL renewed, and the recent, more stringent blood pressure requirement makes it even tougher for some drivers.

The other health-related problem is that many owner-operators have little or no health coverage for themselves or their family. “And they have an illness, or somebody in the family does,” Amen says. “That forces them off the road. They can’t make enough money, and they have to give up the truck.”

It’s never too late to take control of your health. If you smoke, stop. If you’re overweight, focus on taking in fewer calories than you burn off each day. Incorporate some type of daily exercise – even if it’s just walking around the truck stop parking lot – into your routine.

And if you don’t have health insurance, check with your carrier or an independent insurance agent to see what’s available. It may be expensive, but you can deduct 100 percent of your premium from your taxes, provided your spouse doesn’t qualify for insurance through his or her employer. If you can’t afford much, you can at least get a high-deductible policy that will protect you from the catastrophic costs of a major surgery or illness.