To begin with, opening a company because you believe you can earn a living undercutting everyone’s prices is about the worst idea you can have.

But there are a number of other reasons why so many service companies close their doors within three years.

WHY DO SO MANY COMPANIES GO OUT OF BUSINESS?

I mentioned price first. That’s still the main reason. But it’s a little vague. Why do so many service contractors think they can make a living undercutting prices? They don’t understand their costs. There are a lot more expenses to running a service company than simply hourly wages on billable calls and the cost of the parts. Many of these costs are hidden to the company employees. Many are unpredictable. Many are unavoidable.

For instance, the legal fees of one minor lawsuit can wipe out a company overnight. If one of your employees even accidentally offends someone, you’ll pay for it. If one of your employees sexually harasses another employee or makes a racial slur, you could end up closing your doors.

Are all of your restrooms accessible to the handicapped? Does your entrance have a wheelchair ramp?

Who pays for all this? Where does the money come from? You might say, “The boss pays for all this,” or, “the company pays for it,” but the fact of the matter is, it’s the customer. That’s right, the customer pays for everything.

That’s why it’s almost laughable when, during my live seminars, I ask, “Why do so many service companies go out of business?” and a lot of people say, “Their prices are too high.” In most cases, the exact opposite is true. In fact, there is hardly a problem a contractor can have that can’t be solved with higher prices.

What is the average net profit of a service company? What percent of the total income the company brings in is the net profit they pay taxes on? In other words, what percent of all the money the company brings in, after the cost of parts and labor, rent, employee benefits, insurance, utilities, computers, advertising, legal expenses, trucks, uniforms, warranty calls, mistakes and re-do’s, refunds, write-offs and employee theft, is left over to pay taxes on? Is it 10%? 5%? 2%?

If you want to open your own company, you should at least know that, shouldn’t you?

The average net profit for an hvacr service company in the United States is between 1% and 2%. Think about that a second. That means that when you run a service call and charge the customer $100, the net profit, if they pay their bill, is a lousy $1.50 to $2.

Unbelievable, isn’t it? Hardly worth your while.

Some techs think they’re smarter than everyone else, and, even though their boss and other contractors have been at it for years and have cut expenses and done everything they can think of to increase profits, still believe they can make more profit than everyone else with lower prices. Now, does that make sense to you?

Employee theft is another very large expense, and if you go into business for yourself, it will become your problem. You know those side jobs some people take, where they use the company truck and whatever they can find in it to make a little extra money on their own, doing a job that should have been turned over to the company in the first place? Who pays for all that?

You do, when you’re the boss. And let me tell you something, once you’re the boss and the cost of that truck and everything in it comes out of your pocket, you take a whole new perspective on employee theft and the personal use of the company vehicle.

Let’s not forget the bookkeeping and, specifically, the bookkeeper. Embezzlement is always a possibility, and we often see service companies that are ripped off by their bookkeeper for tens of thousands of dollars.

You’ve also got government regulations to worry about. They’re always coming up with new ways to spend contractors’ money. Things like this are meaningless to you now, because when it happens, even if you know about it, it doesn’t really affect you, because regardless of the financial challenges the company may be going through, as an employee, you still get your paycheck.

It doesn’t work that way when you’re the boss.

The point here is that there are a lot of expenses to running a company that can’t be avoided, eliminated, or cut down. But they can be planned for. That’s why you’ve got to keep your profit margins high, which means you’ve got to keep your prices high. It also means that, even when things are going your way and you’re making lots of money, you’ve got to save your money, because you just never know what’s going to happen.

NEXT WEEK: What you need to know in order to launch a successful business.

Greer travels the country running calls with hvacr service technicians, demonstrating his methods in the field. He’s the instructor for the “HVAC Closers Academy” held in Ft. Myers, FL. For information call HVAC Profit Boosters, Inc. at 1-800-963-HVAC (4822) or visit his website at www.hvacprofitboosters.com.

Publication date: 05/28/2001