Why Tow Operations Fail & How You Can Avoid Failing
We get a lot of calls from towing operations that are in the process of setting up shop. These budding entrepreneurs are full of enthusiasm, and we hope the best for them in their pursuit of success. That being said, building a business is hard.
The Small Business Association (SBA) estimates that 66% of new business fail within the first ten years, 30% of those failing in the first two years. These statistics emphasize something you may have already suspected: the odds of your small business being successful are less than 50%. Those are not encouraging odds. With that in mind, understanding why companies in the towing space fail and how you can avoid their same mistakes will help you beat the odds.
Why do tow operations fail?
While there are a lot of different reasons that tow operations fail, we wanted to understand what the most common reasons were. We looked at what causes small businesses to fail and polled a Facebook group entitled “Tow Talk” which has over 8K members. The most common answers of the group included:
Not hiring or training new drivers well enough
Politics-- inability to get contracts because the same people have held them for a long time
The rising cost of insurance & equipment
Trying to grow too quickly
Not understanding the true cost of operation
Now that we understand a few of the reasons tow operations fail, we can start to ask how we can prevent it from happening. While there is no one-size-fits-all answer, these two recommendations may help you avoid failing and will help you make better business decisions in the meantime. This article is going to focus on the money—more specifically, your financial business strategy. In the future, look out for more articles centered around the politics of getting contracts, selling your services to others, and finding the right team members to scale your business.
Create a Long-Term Vision & Business Strategy
Having a long-term vision means that you have gone into the future and taken time to picture what you want it to look like. For example, you know that in 10 years you want to have grown your operation to X number of trucks, be making X money, and have X employees. That seems easy enough, right? Now you have your long-term vision, but how are you going to get there?
You need to create a business model that will in turn help lay out critical steps to eliminate as much risk as possible. Here’s a great one-page exercise to get you started: https://www.strategyzer.com/canvas/business-model-canvas
A key part of any successful business is being able to pivot and course correct as need. 99.9% of the time things won’t go exactly as you planned, but with the right amount of pre-work, you’ll be able to avoid several costly missteps. Following this process will help your vision become a reality.
What should this strategy include?
Goals (that build on each other): You should have checkpoint goals that are for every 3-6 months as your operation begins. While you can go back and change these, having realistic (and optimistic) goals is important to your initial success!
# jobs/calls per month (considering seasons)
# of trucks
# of employees
Plan for contingencies: Here are some examples of questions that you should answer before starting your towing operation. The more you think through these potential issues, the more you can focus on executing your plan (and not perpetually figuring out what to do).
Are you going to buy new or used trucks?
What are you going to do if business is slow?
How are you going to get business? (advertising, police, PPI, sales, etc.)
What are you going to do if you don’t have much volume and your trucks aren’t being used?
Now once you have a solid business strategy in place, you still need one more piece—a financial plan that will help you fulfill the vision you have for your company.
Make a Financial Plan
It is essential to understand how you are going to make money (and get into the details of it.) Here are a few questions you can start asking yourself:
Do you have money saved up for trucks when trucks are out of service?
How are you going to pay drivers?
What is the cost of running your trucks?
How many jobs do you need to break even on a daily, weekly, and monthly basis? (See below.)
An excellent article by the U.S. Small Business Administration has a great tool to help you get started on calculating the cost of your startup. To get you started, here is one break-even formula to help you see how many jobs you need to do on a daily, weekly, and monthly basis to get by.
Break Even Point = (Fixed Costs) / (Price Per Tow - Variable Cost Per Tow)
Fixed Costs: Costs that don’t change based on the number of tows you do in a month. These will include rent, insurance, electric/utility charges, office staff, software, etc. As a bonus, if you want to calculate how much it will take for you to make a specific dollar amount a month, you can add that amount to the fixed costs. And of course, don’t forget to factor in taxes.
Variable Costs: These are costs that can be different for each tow done. They include fuel, potential commission/ payment to the driver, and anything else specific to the tow.
Price Per Tow: This one is a bit harder to calculate—it should be the average price per tow. You may need to take into account average distance traveled, what the competition is charging in your area, and any other factors. If you are doing private property impounds the city or state might decide this.
Keep in mind, these numbers are just placeholders—
Sam is running a small operation. It’s just him and his one office staff right now. He only has one truck and a small yard and wants to know how many tows he needs to break even and meet his goals.
Sam’s has identified the following monthly costs:
$1,000 - Small Yard & Trailer
$100 - Electricity & Utilities for Trailer
$1,700 - 1 Full-Time Office Staff
$500 - Insurance on 1 Truck
$1,000 - Truck Payment
$100 - Truck Maintenance (He estimated he will need $1,200 for repairs for the year and divided that by 12.)
$1.00 a mile to run the truck (He found this by calculating the cost to fill the tank and dividing it by the number of miles per tank.) This is the only variable cost because its the only one that changes for the number of jobs completed.
Sam estimates that his average charge is $112.50 ($75 hook fee & 15 miles on average with a $2.50 fee per mile) per tow.
1,000 + 100 + 1,700 + 500 + 1,000) / (75 + (2.5 x* 15)) - (15 x*1.0) = 44.10 tows
Now, this example doesn’t take into account every cost that you might have, but it is a good start. Sam needs to tow 40-50 cars a month so he can break even. Now let’s calculate how many tows Sam needs to make 40K a year.
Break Even Calculation with Salary:
(1000 + 100 + 1,700 + 500 + 1000) + (40,000 / 12) / (75 + (2.5 x 15)) - (15 x 1.0) = 78.29 tows
So, Sam needs to tow ~80 cars a month to make a salary of $40,000 a year and maintain his business.
Using these tips will help you stay in business for years to come. Do you have more suggestions to help other owners build a successful business? What have you seen make a difference for your operation? Join the conversation in the comments, shoot us an email at email@example.com, or add to the discussion on social media!