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.
Broad Run has a permit to operate around the clock, but right now it operates 91 / 2 hours a day, Monday through Friday.
“You can see the room for growth,” he said.
Broad Run Recycling opened Jan. 8, 2008. It took three months to run the business at an efficient level. Herb had to find reliable and conscientious employees willing to stand for hours and pick through trash while it moved swiftly past them on a belt. He had to fire some heavy-equipment operators who crashed into light poles, catwalks and walls.
By summer 2008, as Herb was working the kinks out of the business, the recession had started.
“It all went south in September,” he said.
Broad Run was squeezed from two sides: Because there were fewer construction projects, dumpster trips dropped from 19,000 in 2008 to less than 16,000 in 2009, a 20 percent decline.
In September, the bottom fell out of the commodities market, decimating prices. Recycled cardboard went from $120 a ton in July to $17 six months later. Metal went from $220 in July to $75 by Thanksgiving of 2008.
Herb moved quickly.
He negotiated with his banks, which allowed him to stop paying principal for six months.
“That helped a lot,” he said.
Caterpillar waived principal payments for six months on the equipment he had bought. His monthly bill went from $10,000 to $4,000.
He laid off two salespeople and began making sales calls to contractors himself. He reduced his administrative staff and laid off some drivers. He pressed his insurers for better terms, threatening to leave if they did not drop the prices. He saved $120,000 a year. Advertising in the Yellow Pages was cut from $60,000 to nothing. He even got the uniform vendor to reduce its monthly price from $2,500 to $1,500.
Broad Run weathered the storm — barely.
Commodity prices have come back, and June was Broad Run’s best month ever. Herb said the company will gross about $5 million this year. At a 10 percent profit margin, I estimate that the company will earn about half a million this year. Most of that will go toward paying down the debt.
The dumpster business will break even this year, thanks to an expansion of service into the District. The two businesses together employ 55.
Herb gets downright giddy when he talked about his recycling plant, which sits on 4.2 acres and is a warren of belts, tubes, cables, tunnels and dirt.
“It reminds me of Dr. Seuss and his contraptions,” said Herb, who studied business at Old Dominion University in Norfolk.
He speaks in a drawl and sounds so laid back that I thought I woke him when I phoned him recently. But that masks an aggressive sales streak and a head for numbers. Herb is happiest when he has a giant spreadsheet before him.
“I enjoy numbers, but I don’t have a choice,” he said. “I have to know my costs. I am the president, owner, human resources director, sales manager and the guy who can’t sleep at night because his receivables aren’t where they need to be.”
Most definitely not light on the land.
Follow me on Twitter at addedvalueth.