I hate capital investments.
When my wife, Polly, and I were house-hunting back in the mid-’90s, I kept saying that instead of buying we should invest our down payment in the stock market.
Let’s rent and “live light on the land,” I suggested.
We bought the house. And “light on the land” has become a catchphrase for my goofy thinking.
Capital investments in business are those big-ticket purchases such as new factories, big computer systems and vehicle fleets that cause companies to go deeply into debt.
Many are necessary to keep the business operating or expanding.
But the payments can kill you.
Entrepreneur Kevin Herb knows the feeling. He built a $5 million recycling plant in Manassas on the eve of the Great Recession, and it almost sank him.
But how he handled the crisis is a lesson for any businessperson or citizen facing a financial crunch.
Herb built the Broad Run Recycling plant because he was tired of paying landfill fees for his trash business, Industrial Disposal Services.
His trash service has 17 trucks and 550 dumpsters, and serves construction sites throughout Northern Virginia and the District. Commercial and residential builders fill his dumpsters with their junk, and Herb’s trucks cart it away for about $300 to $350, depending on location.
IDS would cart the construction waste to a landfill, such as the Lorton Landfill, where Herb was paying $140 or so in fees to dump the stuff. After driver costs, insurance, gas and vehicle maintenance, the business might yield a 20 percent profit margin on every trip.
Not bad, but spikes in fuel costs and price cutting by his competitors could wreak havoc on profits. And the landfill fees were killing him. In 2005 alone, he paid Lorton Landfill $1.7 million to dump his trash there.
“I said there’s got to be a better way,” said Herb, who worked on Oklahoma oil rigs and sold Sharp copiers before becoming an entrepreneur.
What if he had his own landfill? he thought. Better yet, if he built a recycling plant, he could even filter the metals such as copper and steel, cardboard, wood and other scrap, and sell it to scrap dealers, paper plants and mulch companies.
He could market it as an environmental incentive. With companies dying to show they were sensitive to the environment, a builder using recycling stations can gain crucial credit toward becoming LEED certified, which are highly sought credentials by developers and the tenants they serve.
“LEED is very, very hot in this area,” Herb said. “I saw where it was going.”
To learn about recycling, Herb toured plants in New York, Iowa and Chicago. He hired lawyers to guide him through the Prince William permit process. He borrowed $5 million from banks to buy the land, grade it and construct the plant. An additional $600,000 went to pay Caterpillar, the heavy-equipment manufacturer, for equipment to move the waste around the plant.
On top of that, he borrowed $1.8 million to pay a Canadian firm for the highly complex technology.
It was a risk.
It costs $4.3 million a year to operate Broad Run Recycling, so anything above that is profit. Because a big chunk of that is fixed costs, which do not change whether the recycler operates or not, the key to success was to keep the plant running 24 hours a day.
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