Dan Holohan: Work for someone else first
An acquaintance wrote to ask this question:
“I am considering obtaining HVAC licenses and opening up a business. I have been interested in this for years and I am seriously thinking of pulling the trigger. I am 51 and have rental income that covers my living expenses as they are all paid for. My thoughts are that it would be a handy sideline to the rental properties. I had owned a boat building business as a sideline but it proved to be more hobby than financial boon. It’s satisfying to see a boat come alive but hard to bill more than $25 an hour for handcrafted wood boats. My son is 24 and a maintenance tech for a large national retailer. He is interested in the possibilities of moving into HVAC, as well and taking over as I wind down. I could see myself working a few days a week after 65 and helping get my son out on his bigger projects. I am wondering how long, on average, it takes for a one-man shop to be viable. What would be the rough cost of overhead, such as insurances and advertising, and how much cash flow should I expect?”
Since I’ve never been a contractor, I sent him to a place where there are many successful contractors — he posted his question on The Wall at www.heatinghelp.com. What followed was very insightful.
One of the guys wrote: “First of all, do you have technical knowledge of HVAC systems? It takes a while to learn the stuff, as it covers a vast field. The only way you can learn it in a short time is if you are passionate about it, and then it will consume your life.
“If you can do the above, you may expect five years of dedication to the trade before you are in a desirable and profitable position. As with most businesses, the first five years determine the winners and the losers. The winners are the ones who applied themselves and didn’t give up.
“As far as overhead costs and such, that varies wildly based on the individual and geographical location. Right from the start, you will have to keep accurate records of time worked, profit and loss per job, and so forth and so on. This will give you a track record to adjust your charge rate and become solvent and profitable. Watching your bank account tells you literally nothing about what’s going on with your business.
“If you want to do it short-term for some extra cash, forget it. If you want to do it long-term, you must be prepared to dedicate yourself. The rewards are great, but the battle must be fought.”
How’s that for tough love?
Another Wallie added this:
“I tried it for five years. My accountant told me at the start that my hourly rate had to be three times what I wanted to pay myself. I thought he was nuts. He wasn’t! That was 30 years ago. A recession hit after five years, so I got out. I don’t know if the numbers have changed since then.
“I do know that insurance is a big deal. You estimate how much business you think you’re going to do and the insurance company sends you a bill. At the end of the year, if you find you did more business than you estimated, they send you another bill.
“Workers’ compensation is costly and you’re going to have to incorporate it to protect your other assets, such as your apartment building. You can’t duck workers’ comp. You’ll also have to file yearly corporation reports.
“Oh, and you’ll need to put up a lot of money for tools, your truck and other things. And then you’ll wait a while to get paid. It’s just the way it is.
“If you really want to do it, get a license and get trained. But first, work for someone else to learn the business. Maybe you can find an owner who wants to retire in four or five years. Offer to buy the business from him and have him teach you how it all works.”
That Wallie had 45 years in the business, mostly working for others. He really knows his stuff, and I think he gave good advice.
Here’s some insight into the things that can go wrong from one of the other Wallies:
“Many callbacks happen because a customer doesn’t understand how to switch the thermostat from heating to cooling. Would you charge them for that, knowing they just paid $9,000 for a new system? I wouldn’t and I know that costs me money. I should have included something extra for these situations, but I didn’t, so I have to eat it.
“And what about that call that comes in at 3 a.m. on a Sunday? The customer is shouting that ‘your’ new system isn’t heating. What are you going to do? And then there are the wrong parts that you should have returned but you were too busy. So those parts stay on your shelf until the window for returning them closes. Now you own some white elephants.
“Customers are going to shop your price around and try to bargain you down. You need the work this month and now you have to make a decision. What will you do? These people will come out to the woodwork the day you hang out your shingle. They’ll seem honorable, but once you’ve done the work they’ll say they’re not happy with something and they’ll say they’re going to pay you only a fraction of what they owe you. You decide to put a lien on their property, only to learn that yours is the fifth lien on that property.”
Add it up
Good things to know, and it sure seems to me that it pays to work for someone first so you can see all these things firsthand. Then you can decide if being an owner is really what you want. I don’t think you can do this well if you begin as a part-timer with no experience.
This great advice is about the numbers. It comes from a guy who has been in business for himself and for others — and for many years:
“Suppose you want a $70,000 salary before taxes. Maybe you want to work 45 weeks a year, 40 hours each week. So, 1,800 hours per year. I think all knowledgeable tradespeople deserve $100,000 or more, but that’s just me.
“So let’s divide $70,000 by 1,800 hours. That’s $38 per hour just to cover your salary. Now add into that your truck, tools, licenses, insurance, advertising, etc. Also of those 1,800 hours, probably one-third is billable. You have bids to work on, jobs that you bid and don’t get, parts to chase, callbacks, days when the phone doesn’t ring, and so on.
“Typically, most one-man shops end up working 2,500 or more hours a year just to stay ahead and probably end up paying themselves more like $40,000.”
That’s the real world. It pays to learn business before you go into business.
One last Wallie sums it up beautifully:
“I’m all for self-employment and have been for many years. Still, I’d consider going to work for a good shop and learning the ropes in that relatively safe environment. Trying to learn both the trade and the business side of this at the same time sounds like a recipe for stomach aches.”
To which I can only say: Amen.