So, you want to be an owner-operator

So, you think you want to buy a truck and be an owner-operator.

In good economic times, it’s a bad idea.

In the current economic climate, it’s now gone from a *really* bad idea, to just a “you’re nuts” kind of bad.

You might say to the two previous statements, “But Truckie-D, you’re an owner operator”. Yup. Sure am. Have been for a long time, which is why I know it’s a bad idea — at least it is for most people.

So, here’s the rundown on being an owner-operator, or o/o for short.

Have I mentioned it’s a bad idea? Well, if you’re determined to do it, here’s the scoop.

First, if you don’t have experience driving a truck, go read my page on being a truck driver. Get hired somewhere, then come back here in a year or so. Do NOT get sucked into getting trained and buying/leasing a truck immediately.  That’s a recipe for going broke quickly.  Trucking as an owner-operator is a whole lot more than just “steering and gearing”.  The important point to remember is, you’re not buying a truck — you’re buying a business.  You need experience in the trucking business, and some general business experience if you want to be successful at it.

Can you read a profit and loss statement and make sense of it?  Can you do a cost/benefit analysis of adding an APU to your truck?  If the answer is no, you might want to consider getting some basic business education, or at least read a book or two or ten on the subject.  There are also courses designed specifically to educate new owner-operators on the business aspects of trucking. While there are management and accounting services that can help, YOU are the one ultimately responsible for the operation and profitability of your business.

Ok, if you’ve made it this far, here’s the rundown.

As I say in my page for prospective drivers, trucking isn’t for everyone. This goes double for being an o/o. There are *lots* more headaches and responsibilities than being a company driver. I know many successful company drivers who have no desire whatsoever to own their own truck. They’d rather not deal with the extra work and risk involved.

The first consideration is, are you going to lease to a company, or be a true independent?

There are advantages and disadvantages to either way. For a first-time o/o, I’d forget about going the whole way to complete independence. Yes, if you have your own operating authority, you’re collecting 100% of the gross revenue on each load, but you’re also picking up 100% of all the expenses too — and there are a *lot* of expenses. In the current freight environment, I very strongly recommend against this approach. *Way* too risky.

That leaves us with discussing leasing on to a larger company. Especially for a first-time o/o, this is a far better way of doing it, since it gives you a support system. Depending on the company, it may be better or worse, but at least it’s something.

Now, you have to figure out who you want to lease on with. If you’re already a company driver, a good place to look first is the company you’re currently driving for. This has a number of advantages. It’s usually easier to get on, since they already know you. You’re familiar with the freight they move, the customers, and their way of doing things. While this is a good place to start, you should also investigate lots of other companies.  A company that may be good for company drivers, may be much less so for owner-operators. The deals vary widely from company to company, and you want a good (or at least reasonable) deal that is a good fit for your requirements. Some things to look for (over and above the things you’d ask as a company driver):

Does the carrier provide base plates & permits?

Does the carrier file and/or pay fuel taxes?

Is pay percentage or per mile?

Are loaded and deadhead/bobtail miles paid? At what rate?

What about fuel surcharges? How much are they, and how are they calculated?

What are their accessorial rates (for things like stop offs, loading, unloading, etc.)

Do they pay tolls and/or scales?

Is there upfront money required for escrow? (or anything else, like painting or lettering ).

What are their truck requirements? (age, number of axles, weight, sleeper, 5th wheel height, painting, lettering).

Do they provide trailers? Is there a charge for their trailers?

What other benefits do they give you? (such as discounted fuel, tires, parts, maintenance, etc.)

The above list is not comprehensive, but is only a starting point for investigating different companies. It’s important to look at the total package offered by carriers, not just mileage pay. Some provide a lot of things, other provide little or nothing. For first timers, more is generally better, even if the mileage rate is lower.

Now, the part you’ve been waiting for — actually buying a truck.

I know you’ve got your eye on that overchromed, extended hood LargeCar with chicken lights and a dayglo paint job, but hold yer horses.

Pretty trucks are nice, but chrome doesn’t put money in your pocket. As the saying goes, “lots of chrome, never home”.

The first, and most important thing you want in a truck is reliability. You don’t make money sitting on the side of the road. Personally, I’ve had the best luck with Internationals. Talk to other drivers, and they’ll swear by (or at) every make of truck and engine on the road. I would avoid trucks with Cat engines. Cat has quit manufacturing engines for trucks (due to emission regulations), so it’s possible that it could eventually become difficult to get parts. Probably not in the short term, but it may eventually become an issue.

Next, is emission regulation compliance. California recently put into effect some draconian emissions regulations. The regulations aren’t terribly clear in some areas, but basically, it seems that any truck with an engine older than 1995 won’t be allowed to operate in California after 12/31/2009.     **The regulations have changed since I first wrote this post.  BEFORE you buy a truck, contact the California Air Resources Board and check if the truck you’re looking at is compliant, and for how long. **  If you live in California, you’re going to want to closely monitor the emissions regulations and make sure the truck you’re buying is compliant with the regulations. If you live outside California, you have (at least at the moment) more flexibility, but you might not be able to haul freight to or from California. These regulations also affect the resale value of trucks, so you’ll want to watch them too.

Another important consideration is fuel mileage. As an o/o, fuel is going to be your biggest expense. Small increases in mpg translate to big differences in your take-home pay. Avoid older, non-aerodynamic trucks. Look for things like side fairings, tapered (the so-called “anteater”) hoods, streamlined mirrors, etc. Newer, aerodynamically efficient trucks are certified by the EPA as “Smartway” trucks. Avoid huge, fuel-sucking engines. Engines for OTR trucks in the 400hp range are adequate. You may not be the first one up the hill, but you’ll have a bigger bank balance when you get there.

Unless you’re an established team, DO NOT go out and buy a brand new truck. While new trucks are (at least in theory) more reliable, a solo driver will find it extremely difficult to make the payments — even in times when freight is good. The way freight is right now, it could be nearly impossible.  A good, mechanically sound used truck is the only way to go for a solo o/o.

There are *lots* of trucks for sale, especially right now. A good starting point to look is www.truckpaper.com. They also have paper copies available for free at most truckstops. Take a look, and you can get a good idea of what the particular brand and model of truck you’re interested in is currently selling for.

Now, you need to figure out where to buy a truck from. There are dealers, auctions, online auctions, private individuals, remarketing companies, trucking companies, and others, who would all like to sell you a truck. Each has advantages and disadvantages. Dealers will generally be priced higher, but a good dealer will stand behind what they sell. Warranties are a very good thing to have. Even a limited warranty, that only covers engine, transmission, and axles is a good thing to have. Those are the components that can be *very* expensive to fix — especially engines. There are aftermarket warranties that you can buy. I’ve never bought one, and I’ve heard both good and bad things about them. Investigate the company offering the warranty, and the terms of the warranty very thoroughly.  Make sure you check the BBB about them too.

Auctions and private individuals are generally the cheapest place to buy a truck, but “ya pays yer money and takes yer chances” when you do that. You can get a good (or even fantastic) deal,but you (or somebody knowledgeable that you trust) have to check out your prospective purchase very carefully.

Remarketing and trucking companies usually fall somewhere in the middle on price. They will frequently have easy financing options, often with little or no money down. A well maintained former fleet truck can be good value, but again, you need to make sure you’re getting a good one, not one that was poorly maintained and beat to death. Avoid trucks that were used in tanker service — surge from tankers is hard on drivetrain components.

Wherever you buy a truck, have somebody hook a computer to it, and compare the electronic engine odometer with the one on the dash. Speedometers break, or are turned back, but it’s hard to do that on an engine computer without replacing it. When you’re pretty sure you’ve found the truck you want, if possible put it on a dyno, and have the blowby (and everything else) checked. Blowby gives you a pretty good idea of the engine’s internal health.  Having an oil sample analyzed is also a good idea.

No matter how pretty the truck looks, if it’s not 100% mechanically and DOT, look elsewhere.  Trucks that need work can be a good deal, but they’re a very risky proposition.

Now, let’s deal with the least fun part of buying a truck — paying for it. You can either buy, lease, or rent. Forget rent. Yes, it’s deductible, but you never have any equity in the truck. Leasing is a popular option. Lease payments are deductible in full (check with your tax adviser on this), and they normally come with a buyout clause. Buyout clauses normally range from $1, up to 10-20% of the total price. Leasing does give you some tax advantages, but you normally don’t have any equity in the truck until the lease is completed. Buying makes more sense to me, especially for a first time o/o. Since you’re not buying a brand new truck, you’re not going to have to eat a big chunk of depreciation as soon as you drive it off the lot. Even with a used truck, there will be a little, but not nearly as much. So, effectively, you have at least a little equity in the truck, particularly if you’ve made a down payment. If you decide you really don’t want to be an o/o, you can always put the truck up for sale, and will (at least hopefully) be able to pull at least some of your equity back out — something you can’t do with renting or leasing.

A short lesson on spending and tax deductions:

There is always someone trying to sell you something for your truck.  Whether it’s a salesman at a parts counter, or an ad you’re reading in a trucking magazine, they will often tell you “it’s deductible”.  They may even be right about that.  Just because something is deductible, doesn’t mean you should spend the money on it.  Here’s a very simplified example:

We’ll say that your income is $100 and this puts you in the 25% tax bracket.

You have the choice of spending $50 as a deductible expense, or not spending the money, and paying the taxes on it. expense for the same thing.

The first option comes out as: $100 – $50 = $50 – 25% = $37.50 take home after taxes.

The second option comes out as $100 – 25% = $100 – $25  = $75.00 take home after taxes.

While this is greatly simplified, it serves to get the idea across. Just because something is deductible, doesn’t mean it’s a good deal. The bottom line is, your bottom line. Consult your tax adviser about what is more profitable given your particular tax situation and income bracket.

Whatever way you go, look at the total cost. All of that money is going to come out of your pocket. Make sure it’s within your ability to earn with a comfortable profit margin left over.

If you can buy a truck outright for cash, that’s the best way. Then, even if freight gets even worse than it is now (which could happen) you won’t have to worry about making those easy weekly payments.

Now, you’re the proud owner of your very own truck. This is when the headaches really begin.

Your wife isn’t going to get an anniversary present this year because you had to replace your turbo.

Little Johnny’s not going to get a new bicycle for his birthday because you need a new steer tire.

You missed Little Mary’s soccer game because you had to change the oil.

The dog is going to have to wear a ragged sweater so you can put on a new muffler.

The list goes on and on.

Then, there’s all of the paperwork, and the money that has to go with it. Estimated taxes. Self-employment taxes. Federal Heavy Vehicle Use Tax. State income tax. Ad Valorem tax. Fuel Tax. Taxes that you never knew existed. You’d better have been putting aside a chunk of money every week. The government has NO sense of humor when it comes to not paying taxes on time.

You’d also better be *real* careful with birth control, because the exorbitantly priced medical insurance you had to buy doesn’t cover pregnancy for the first two years.

Are you sure you want to be an owner-operator?

If you read this and it helped you, or you have questions this page didn’t answer, please leave a comment. If you don’t want your comment published, add “not for publication” at the beginning.

Comments and questions welcome.