Magazine for the professional limousine, charter and tour industry.
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38 LIMOUSINE, CHARTER & TOUR JANUARY 2017 WWW.LCTMAG.COM MONEY: COVER STORY Q&A: TAKEAWAYS TIPS FOR STRONGER OPERATIONS LCT asked veteran operator and finan- cial expert Dan Goff a mix of common financial related questions from newer operators over the years. Q: What is the biggest financial mis- take operators make? A: The failure to focus on short-term re- turn. Using some hope of future benefits such as business from a client, name recognition, relationship building, or reputation enhancement to justify losing money now is rarely a successful strat- egy. It can become the corporate culture if an owner isn't careful. I believe invest- ments should deliver nearly immediate cash returns AND future benefits. New vehicles, shop equipment, and software will be worthless in future years — they have to pay off now! They can still be great ideas but unless you can forecast the net bottom line benefit in the next 36 months, it's a crapshoot. I have seen operators obsess over the cost of car washes then seem flippant about a six- figure purchase on the show floor. That's why a dashboard is so important — it keeps things in perspective. Q: What financial information should you bring to an RFP? A: It's about two things: risk and com- petitive advantage. The larger the RFP, the more risk the contracting agency is taking. They know the TNCs are hitting the industry bottom line. They do not want to have problems with a vendor who can't hold the receivables, defers maintenance, or can't invest in equipment upgrades. When they make a decision, they want to make sure they don't have to make it again until the next contract. Strong companies can use fi- nancial strength to their advantage. We not only present our financials with most RFPs, we also present FICO printouts on the own- ers and screen shots of lawsuit searches. Then we encourage the decision makers to compare our information with competitors. The decision maker has more to lose than up. We want our "take-home" pay to be 12 to 18% after everything. We start with that, then add the costs of doing business, and the result is our price. We do not compete on price, but on service, and we look for those clients who value quality over price. Luckily for us, that is about 30% of the $6 billion market, which is plenty. Q: Houston operator Erich Reindl is an advocate of buying "newer" used vehicles with cash. What are your views of this vehicle purchasing approach? A: Erich is one of the smartest people in the business and won the Best of Boston Coach recognition this year. His approach has been successful for many years. There is no one best philosophy for everyone, and simply paying $150,000 for a new minibus does not change the transaction. Accountants have a concept called "opportunity cost." If an operator could use leverage to buy four minibuses at 25% down AND had the market to take advantage of it at 15% annual profit, the lost opportunity cost would be $40,000- $60,000 a year in net profit. Buying a two- year-old SUV from top notch operators can be a good investment. Flipping them every two years can make it even better. Buying newer vs. new vehicles is even more common in the bus space where just one bus can be over $500,000. Q: What is your view itemizing each vehicle as a separate P&L unit? A: I devised a vehicle cost calculator tool years ago that I called "Sara's Challenge" based on a 1991 article by LCT Publisher Sara Eastwood-Richardson. She called for an industry standard method for tracking fleet profitability. What she wrote then is just as relevant today. The tool I made is available on the LCT website for free. Op- erators should take, modify, and use it. I don't know if month-by-month accounting by vehicle is required, but it is essential to forecast net profit return anytime you consider a new purchase. Q: In what situations would you agree with keeping a vehicle as a "loss leader?" A: My advice is simple; never knowingly choose a losing vehicle or client. If it turns out you have one, evacuate promptly. I have had many unprofitable or barely prof- itable vehicles over the years. Limo buses in the late 90s, CEO SUVs with fax ma- chines inside, etc. At one time I had seven Rolls-Royces. I ended up calling them "personality-enhancers." Everyone agreed I looked slimmer, younger, and had better hair when I was driving one. Ultimately, I chose to be older, balding and, ahem, un- slim to go along with the big house, private school for the kids, and commercial build- ing ownership. Take the money you would forgo on losers and put it towards a down payment on the building you rent. You'll be much happier in the long run. gain on a contract. To save a few dollars on the contract rate benefits them little. On the other hand, a contract failure, especially one that could have been caught using our recommendation, may cost them a promotion or job. We know this approach has resulted in our company being chosen even when we're not the low bidder. Q: What specific fleet vehicles best contribute to profit margins? A: Bottom line profit for us comes from minibuses #1, coaches #2, and sedans #3. Other vehicle types are bunched in the middle with limousines trailing the pack. SUV's have been ascending since the de- mise of the Town Car but they may recede again, particularly competing against the four-wheel drive Lincoln Continental. Q: What are ideal loan and lease terms and percentage rate for an operator? A: Ha, that's easy — ones they can afford! As you know, I have entered the financing space with our new venture, American Business. I partnered with ex- perienced financiers and wickedly smart web programmers to make a product easy for operators to use. Along the way, I was able to understand the issues facing the person on the credit desk, who decides if an owner gets a loan and on what terms. The operator on the credit desk is hit directly in the pocketbook if the loan is not paid as agreed. They can be your best friend in the business. If asked, the credit desk can be your consigliere, your rabbi, your confessor, and your partner. A good credit partner will help you decide at what level you can in- vest with moderate risk, how long you need to own the asset to be above water, and what you can reason- ably expect to recover at the end. Credit partners experienced in the livery busi- ness are essential and several can be found at LCT shows and in the magazine. A good credit desk is interested in mak- ing you several loans for years to come, not killing an operator on one deal. Q: How should an operator calculate rates for a local area/home market? What are best ways to preserve and promote price integrity? A: Years ago I was given the task of moderating an affiliate pricing round-table at LCT in Las Vegas. While each market is different, the most common markup at that time was 30%. I think that has come under a bit of pressure with the increase in players like Blacklane, Mozio, Limos. com, Rental Limo, Shuttlefare, etc. Even still, most operators fear to price based on profit but rather price based on local com- petition instead of inbound affiliate rates. We have always priced from the bottom