Operations

How To Move From A Small- To Mid-Size Operation

Posted on March 28, 2015 by Tom Halligan - Also by this author

Note To Readers: This is the second of an ongoing series focusing on how small, mid-size and large operators can grow their businesses. The series will examine making the jump from small- to mid-size fleet operations, from mid-size to large, and large to top-tier.

The “hell zone” is how Jeff Rose sums up the move from a small to mid-size company. Rose, founder of Attitude New York in 1986, has systematically grown his operation to 40 vehicles today, and can testify to the growing pains from launching a bare-bones company at his kitchen table to a well-regarded Manhattan luxury transportation provider.

“I call it the hell zone because if you have one to five vehicles and make the move to the 10 to 15 range and beyond, that multiplies your obligations because you may not have the revenue to hire staff to handle the growth to run the operation — and the problems,” Rose says.

Matt Assolin, vice president of Houston-based Nikko’s Chauffeured Services, adds, “When you’re small, you analyze dollars. When you get up to the 20-30 range you analyze pennies. I think I made more money when I had 10 cars,” he muses.

Running an international operation, including a new Austin office, Assolin says the company posted a 40% jump in revenue in 2014 compared to 2013. But his cautionary words about growing to the mid-level range stem from his degree in finance and experience growing the company.

Growing Pains

Houston operator Matt Assolin believes a detailed tracking of all aspects of a company’s finances should determine the timing and stages of fleet growth.
Houston operator Matt Assolin believes a detailed tracking of all aspects of a company’s finances should determine the timing and stages of fleet growth.

Rose and Assolin know first-hand the trials and tribulations of scaling from small to mid-size, but they differ a bit on their approach to managing a company on the rise. As in any business or industry, there is not one universal business plan or operator blueprint that will work for a unique operation or market. But both offer strategies and lessons-learned that worked for them that yield general insights and pearls for success.

For example, Rose doesn’t believe in devising long-term business plans because you often have to “zig and zag” depending on unexpected business and market factors — and opportunities. Assolin, however, says, “You have to figure out what kind of company you want to be and then stick with that and have a clear picture about your money in order to grow.”

Rose says, “My best friend’s Italian grandmother says, ‘Man plans, God laughs.’ A lot of times people have a plan and when conditions change they try to stick to the plan. I know that is counter to conventional wisdom, but I believe more in preparation that sets you up to be in a position to play the cards that you are dealt. If things change for whatever reason, sticking to a business plan can set up false expectations rather than being flexible to zig and zag — not because the plan is faulty — but life is fickle,” Rose says.

Both agree that growing from a one-owner, jack-of-all-trades, operation, to mid-size is the hardest hurdle because it requires hiring staff for the first time, coupled with ensuring cash flow to pay for all of the additional costs.
“I don’t think there is much difference in growing from, say, 20 cars to 30. By then, you have staff on board and you know your fixed costs. You’ve passed that initial ramping up milestone,” Rose explains. “So adding 10 more cars may not be as difficult to get to the next tier.”

New York City operator Jeff Rose has been through what he calls the limo-growth “Hell Zone,” and lived to tell about it.
New York City operator Jeff Rose has been through what he calls the limo-growth “Hell Zone,” and lived to tell about it.
Tipping Points

Rose recalls one lesson he learned from growing his company is there are certain “tipping points” along the growth curve. “Different thresholds come up at different times that you have to deal with, such as when do you hire that second dispatcher, or an overnight guy? Or now you need a bigger garage. Say you have 10 cars and have a 20-car garage, then 20 is your tipping point because that’s your threshold. But if you have a 25-car garage and you’re going from 20 to 25 vehicles, that’s not a big deal.”

The 20-to-50 vehicles range resembles a financial plateau since net profit can stagnate while a company adds vehicles and staff, Assolin says. “The dynamics change at certain levels because you are now adding car washers, office staff, maintenance people, benefits, and you may not see the return on that investment for a while but you now have everything in place to go to the next level.”

He stresses that growing your business hinges on what kind of operation you are running. “Are you a high-end professional company with well-trained staff and chauffeurs and the best vehicles? Or are you a second-tier company that does the bare minimum? That will affect when you see more profit.”

Growth and profits depend on your market, Assolin says. “Are you doing demanding airport transfers, road shows, or runs that require more staff and overhead? Or are you doing low-maintenance hourly work? That will affect your staffing, expenses — bottom line.”

On The Money

For money management, Assolin advises looking closely at profits in detail. “A lot of companies I admire will turn away business if they’re not making a least 30% profit. They really focus on what they are making per client. They might have 35 cars but 95 headaches because you have more cars, drivers and maintenance issues. Unit costs are important. What are you making per hour per vehicle? Is buying that additional sedan cost effective? Or should I farm out the business?

He cautions growing operators that if they farm out some business they have to make sure the vendors have the same quality vehicles that you do otherwise, that’s a problem.”

Assolin advises operators to study their markets when looking at growth and costs. “For example, some markets run 24 hours, like New York and Los Angeles with flights coming and going at all hours. My last flight might be at 1 a.m., so you have to weigh the market and hours of operation. My last fight is around 1 a.m., so my use of the fleet is 15 hours a day.

Maybe in Milwaukee it’s only 10 hours a day. You have to look at the time of vehicle usage because that obviously affects your vehicle wear and tear, maintenance, and replacement costs.”

Determining your chauffeur labor-business model also should be a major factor in business growth, he says. “You have to decide if you want chauffeurs as employees or independent operators. The IO model doesn’t cost you much; maybe some inspection and regulatory fees. You can invest the money in other things besides fleet. But, at what cost? Are you sacrificing quality of service because IOs are not employees and don’t have your high standards? Again, you have to decide if you want to be a first or second-tier company.”

Growth Spurts

Rose’s business philosophy has been to grow slow and steady. “We have always been a tortoise rather than a hare. I think it’s worse to grow too fast than too slow. Here’s an example: I had the opportunity early on when I had three cars to take on a big account, but I turned it down because I knew I was not ready to handle it. I realized if I took the contract and performed poorly, I’d never get another chance.”

Rose notes that because contracts are renewed every two years or so, there is opportunity when you are ready to take on larger accounts. Being prepared to take on new accounts is important. However, he cautions eager operators not to get into a situation where they rely on just one or two big accounts that total 40% to 50% of your business.

“That’s dangerous because if you ramp up to handle one or two new big accounts and they go away or downsize you, that’s big trouble,” he says. “My revenue is made up of all 5% to 6% accounts, so we are not highly concentrated on a few big accounts, so there is lower financial risk if an account leaves.”

But there are times when you have to invest although you may not see the return on investment for two years, Assolin cautions. “For example, we just added a 40-passenger Grech bus — the largest purchase in the history of the company. It doesn’t make a profit yet, but we know it eventually will. It’s the same when we opened an office in Austin (ranked one of the fastest growing cities in the U.S.) Although it put a strain on our finances, it’s now paying off. My point is that you can’t always expect an overnight ROI when you are trying to grow your business.”

People Are Your Greatest Asset

Hire smart: When staffing your growing operation, New York operator Jeff Rose gets right to the point. “Be careful of hiring people like you. Don’t be afraid to hire people smarter than you who will challenge you because they have strengths that you don’t have. Keep your ego out of it. I have people who are better than me at certain things and hae strengths I don’t have. I love that.”

Bank on trust: “If I had a choice between hiring a person that ranked 10 on the skills scale and another who ranked [lower] but I knew he was more trustworthy, I’ll take trustworthy every time. No matter how many non-compete and confidentiality agreements you sign, the lesson learned is to be careful whom you trust because people are going to burn you at some point. Just make wiser choices when you hire. The three things we look for in hiring are competence, reliability and character. We don’t worry too much about experience. My current chief of staff never worked in the industry when he was hired but we saw his skill set and he was trustworthy and he moved up the ranks,” Rose says.

Dollars sense: Matt Assolin advises small operators moving from small to mid-size to hire a financial person. “It’s important to have a clear picture about your money because if you don’t — it just goes out the window. Owners of small operations have an emotional tie to the business and that can create a clouded picture. You need someone — a part-time financial advisor or bookkeeper — who is not part of the operation who can step back and examine your numbers and present you with a clear financial picture and statement. And it shouldn’t be from the 40,000-foot view, but maybe the 10,000-foot view to see what you are spending too much on and maybe cut back. It just gives you an objective view of your money without your emotional ties to the business.”

For example, “You may have an account that you worked very hard to get where you provide 20 rides a day. But your financial person looks at the account numbers and says you are losing $5 per ride. So when you multiply $5 x 20 per day, per week, that loss adds up pretty quickly. The owner is very attached to the account but his emotional cloud doesn’t give him a clear financial picture. The financial person does.”

Respect: Rose also offers this gem: “It’s very important for staff to respect the prerogatives of ownership because I’m the only one who can’t quit.”

Chauffeured Fleet Breakdown
1. Small fleet operators (1-10 veh).........65%
2. Medium fleet operators (11-50 veh)...31%
3. Large fleet operators (51+ veh)..........4%

Median Fleet counts
Small..........5 Vehicles
Medium......23 Vehicles
Large..........87 Vehicles
Industry Median.........10 Vehicles

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