Wednesday, February 11, 2015

Leap of Faith

Working in a struggling landscape and snow removal business at age 25 gave Mike Jones a few“a-ha” moments that ultimately changed his life. When the company’s financial woes prompted employee layoffs, they lacked the resources to honor their contracts.

“Back then, most landscaping companies used their own employees,” Jones says. To help save the business, Jones and his colleagues started outsourcing work to meet their obligations. They soon noticed that profits were better when they outsourced than when they self-performed services. “We started using 90 to 95 percent contractors, which was a very upside-down approach at the time,” Jones says.

Although that company eventually failed, Jones gained a lot from the experience, including the realization that he loved the snow removal business. “Having played sports in high school and college, I loved the all-out battle,” he says. The adrenaline rush, preparation, plus the pressure to win and get things done in a short timeframe were all familiar to the former athlete.

Two years later, Jones went out on his own, and founded Kansas City-based True North, starting with snow removal services and the outsourcing principles he learned through his former employer. True North was the fulfillment of an idea he had been nurturing for a long time. “I was passionate about the business, I thought I was good at it and I knew I could utilize other people’s assets to make money,” Jones says.

By his own admission, it was a modest start, but Jones caught a lucky break in his first year. “Our office was an RV that we parked at one of our properties,” Jones says. “I was reluctant to sign a lease, but it so happened that we hit the third-largest snow removal year in the history of Kansas City.”

With its low-cost, outsourcing model, True North was soon a profitable business, ready for growth. Jones leased the company’s first office space, and expanded into landscaping and parking-lot sweeping, but never lost the focus on snow-removal.

By 2004, True North was a large, local company offering several exterior services. About that time, Jones noticed the snow-only competitive trend in the marketplace. He also read Good to Great, by Jim Collins, a book that stoked his desire to be the best in a core business. Jones knew where True North could excel: snow removal. He began selling almost everything that wasn’t connected to snow removal, which became True North’s primary business and expansion mission.

During the past decade, True North has executed an ambitious growth plan, garnering snow removal accounts in a nine-state area. “For year one, we went into St. Louis, a market that’s very similar in weather pattern and snowfall to ours,” Jones said. “We then ventured further north into Omaha, Nebraska, and the Twin Cities the next year, having learned how to manage a remote business, and how to handle projections.”

One of the biggest growth challenges was finding and hiring the right people. Jones says a snow-oriented business takes a different type of person than one that pairs snow with something else. “We had to find the people who would have a sustained career, and a passion for what we did,” Jones says.

Learning to manage a business with multiple locations wasn’t a slam-dunk, either. True North had to learn how to price and pay for work in cities with various snowfall patterns and economic conditions. Hiring local people with real-world experience helped True North meet all of those challenges, Jones says.

The path toward growth changed more than True North’s business practices; it also transformed its leader. In the beginning, Jones says he was focused on growing a large company. Later on, that mattered less. Building a company based on excellence and profitability became more important.

“There’s also been a transition from being a young entrepreneur, where it was all about me, to making it all about us,” Jones says. As someone who fell into the entrepreneurial role, Jones admits that his early ownership was about realizing his personal vision by delegating things he thought were necessary. Eventually, the company’s retention pattern motivated a change in his management style.

Realizing the need for his own development, Jones became a conscientious reader of business and leadership books. “I wanted to create a sustained relationship with our staff, so the company wasn’t about me having my DNA all over it, but allowing others to have the same opportunity,” he says.

Jones compares the way his company is managed to an NFL team: A new coach can make changes in policies, personnel and systems, but he can’t transform the entire brand. “Our branch managers don’t get to do anything they want, because there would be no cohesiveness to the branches,” Jones says. “But they do have a tremendous amount of latitude to put their own stamp and DNA on the branch.”

As Jones loosened the reins, he says True North’s retention rate improved. That allowed the company to tap a deeper bench of experience than most in the industry. All but one branch manager—a recent hire—has been with the company between seven and 13 years. Their longevity allows Jones to be confident about including branch managers in decisions about how things are done.

Giving people a voice, he says, has been an effective employee retention tool, but True North’s success also stems from two practices Jones adopted: 1) offsetting the industry’s crazy hours with policies that help employees lead balanced lives, and 2) a profit-sharing program. “We let the people who create profits to share them,” he says.

Offering employees the kind of work-life balance he wants for himself forced Jones to be less “over-the-top” about control. “If you do that, I think you get people who have to pull themselves away from work because you’re not creating such a rigid structure,” he says.

In the demanding business of snow removal, True North’s employee policies are achievable because everyone understands the business goals and what they need to do. During winter, the company’s work is as relentless as any other snow removal contractor’s, Jones says. When there’s a break in the action, comp time helps employees manage the ebb and flow of work. “I want you to get your job done, enjoy it, love what you do and make money at it,” he says.

Crystal Hammon is an Indianapolis-based writer and frequent Snow Magazine contributor.

Monday, February 9, 2015

The Explosive World of State Taxes

Every snow and ice removal contractor faces an interesting challenge: what happens if you do business in more than one state? The state that the snow removal operation calls home generally wants to tax every dollar of income. Every other state where you do business wants to tax income earned in their state. Does that mean paying taxes on the same income twice?

Fortunately, only rarely does anyone wind up paying tax on the same income twice. "Rarely" is the operational word because the way states handle the problem is not uniform.

In other words, if you do 45 percent of your business in state A and 55 percent in your home state of B, doesn't mean that 45 percent of your snow removal or ice management operation's income will be taxed in A and 55 percent in B. Depending on the rules in each state, the contractor may wind up paying slightly more or less. In fact, depending on the rules in each state the snow removal operation could wind up paying state tax on less than 100 percent of its income.

Paying state taxes on less than 100 percent of your income obviously depends on the states where you do business. It also takes a sharp snow removal professional with a clear understanding of state tax laws. Unfortunately, not only are state laws every bit as confusing as our federal tax laws, there are 50 of them to try and understand.

When is a snow removal contractor required to file a tax return in another state? Even that becomes a complicated question, one that depends on the rules in the states where the business operates. If your snow removal business simply sends supplies into a state and no employees actually work in that state, the operation probably won't have to file income or sales tax returns in that state. Even if the operation sends independent sales reps into that state, it should still be able to avoid filing income tax returns.

If, however, the snow removal business has a sales office and takes orders some states exempt the operation from filing income taxes. Of course, once a contractor has property in a state, has employees or performs services in a state (or some other similar connection) they are usually required to file tax returns and pay taxes in that state. Not filing could result in penalties, interest and a host of other tax problems.

Many state taxing authorities have developed a more formal approach to dealing with corporations, partnerships, etc. It is often referred to as the "Massachusetts formula" (where it was first introduced) although it more commonly bears the descriptive title "three-factor formula" because it uses a business operation's sales, property and payroll to apportion its income between states. Although the general theory is almost universal, some states have modified the formula.

The concept is simple. The snow removal and ice management contractor computes a percentage for sales based on the sales in a state to the operation's total sales. The same is done with property and payroll. Add the percentages and divide by three. The result is the operation's apportionment factor. Apply that factor to the operation's pretax income for the year (after making any required adjustments to the income for the rules in that state) and the result is the income reportable to the state.

Although, at least in theory, the formula appears simple, not every state uses the same approach and, in practice, the rules are more complicated. Some states, for example, weigh one factor heavier than others. Some may double-weight the sales factor. That is, the sales factor is included twice and the total percentage is divided by four.

Generally, where a sale is allocated depends on where delivery takes place or the services are performed. If, for instance, the operation's only connection with New York is that it has an equipment servicing facility there, the income received for services performed for customers in the state count as sales.

If the operation is not subject to income tax in that state, most states consider that the sale belongs to the state where the operation is headquartered or goods are shipped. The same rule also applies to sales to the federal government.

Obviously, if a contractor does business in more than one state, it must keep careful records of where goods are shipped or where services are performed. In the case of services, sales are allocated to the state where the services are performed.

Property such as furniture and fixtures, machinery and equipment, computers, etc. as well as real estate including land and buildings as well as intangible property (bank accounts, stocks, etc.) is generally excluded from many formulas. And no, you can't escape by renting property. Every state has a method for including rented personal property and real estate in the factor, usually by taking the annual rent and multiplying it by eight.

Most states use an average of the beginning and ending values for property. Thus, even if you don't have any property in the state on January 1, but do have some at the end of the year, you'll have to include 1/2 of the year-end amount in your property factor. Inventory is included as part of your total property and property in a state but the rules vary on how inventory in transit must be counted.

Property is generally valued at net book value. That is, cost less depreciation. New York allows taxpayers to make an election to value the property at fair market value. Massachusetts requires taxpayers to use original cost with no reduction for depreciation and can require monthly averaging (rather than annual) if necessary in order to properly reflect the average value of the property.

Payroll usually includes not only salaries and wages but also bonuses, commissions, etc. Some states include amounts paid to independent agents, room and meals (e.g. provided by employer), etc. As a starting point, consider anything that you've got to include on an employee's W-2 as wages or amounts reportable on payroll returns as compensation.

While most contractors will apportion income using the general approach outlined above, many states allow businesses to use "separate accounting." Separate accounting is pretty much what it sounds like. The snow removal operation computes its net income based on the income and expenses in the state. Unless the operation in the state is almost a separate entity, this generally isn't easy. It can also be expensive.

Overhead, salaries of employees who work both in and out of the state, etc. must be allocated. However, despite the problems, it can result in significant tax savings if the operations in the state produce little or no income and the state has a high tax rate.

Many states impose a franchise tax as well as an income tax. The franchise tax is based on the property used in the business. Most states that have such a tax usually use the same factor for apportioning income to apportion the franchise tax.

It should go without saying that not all income is subject to apportionment. Certain items of income such as capital gains on the sale of property should be allocated to the state in which the property is located.

Of course, just because a snow removal operation has sales in another state doesn't guarantee that it can apportion some of its income to that state. Many states subscribe to a so-called "throwback rule." The theory is, even if an operation has sales in another state, if that state doesn't tax the income, the income belongs to the contractor's home state. If for example, a supplier has catalog sales in 10 states but only has employees and property in state A. State A will not allow the business to apportion its income.

A snow removal contractor should be aware that in some cases it may make sense to establish a presence in another state just so income can be allocated outside the home state. The higher the tax rates in the home state and the lower the tax rate in the other state, the more advantageous this becomes.

Doing business as an S corporation or partnership (or LLC), means state rules very similar to those for regular corporations. However, since the income of a partnership or S corporation is passed through to the owners, in most states there is no tax at the entity level (i.e., S corporation or partnership). At higher gross or net income levels, some states do impose a tax on the entity.
While personal income taxes may have been reduced in many states, the same is not true for corporations. State income taxes can cost a snow removal or ice management business 5 percent to 8 percent or more of its pretax income. That's not insignificant. Some planning can save substantial tax dollars. But beware, multi-state taxation can be tricky.

Mark Battersby is a Ardmore, Pa.-based financial writer and frequent Snow Magazine contributor.

Wednesday, February 4, 2015

The Total Package

Being a snow-only operation is a business model applicable for only a minority of companies in the industry. The vast majority -- around 65 percent -- operate landscape businesses during the months they're not pushing snow.

The following figures are taken from research conducted by our sister publication, Lawn & Landscape. It provides an interesting look at the snow and ice management plays in the overall business picture for the majority of companies in the industry. For this purposes, when appropriate, data was compared against all respondents, and those companies reporting gross sales of less than $200,000 in 2014, and those reporting $200,000 or more.

Monday, February 2, 2015

You Gotta Live It

Case Snow Management’s reason for pursuing ISO9001/SN9001 quality management certification was simple: to grow their business. And not only did they achieve the certification, they became the first company in the snow management business to do so.

“When you’re growing your business, you know you need to have processes in place,” says Bill Carello, vice president of Case Snow Management. “But when you’re small, you don’t need all those processes, and they actually get in the way. In order to grow our business, we knew we needed ISO.”

When Carello and the other leaders at Case discussed the concept with Kevin Gilbride, Executive Director of the Accredited Snow Contractors Association (ASCA), consultant John Allin and others a couple years ago, it just made sense to him. And with a background as a CPA, he already had a good understanding of ISO.

“It’s a quality management system that’s all about customer satisfaction, and that’s what we do,” says Carello. “We looked at it and said, look, we know we want to grow, and it’s a quality management system that’s all about safety, training, customer satisfaction, crossing your T’s and dotting your I’s and the whole nine yards. It was perfect.”

Gilbride admits there are many benefits to becoming ISO certified, but the initial driver for ASCA creating the SN 9001 quality management system (which works in conjunction with ISO 9001) was risk management. “The ASCA was looking for ways to reduce risk because of the skyrocketing insurance costs out there,” he says. “We wanted to give professional snow and ice management companies the tools to manage risk themselves to reduce that risk for insurance companies.”

Gilbride continued, “Of the slip and fall lawsuits that are lost or settled, more than 50 percent of the time, they’re lost or settled due to a lack of documentation. ISO 9001 plus SN 9001 ensures that you have that documentation and that it’s verified by a third party.”

After hiring an outside internal auditor to examine his quality manual, Carello says he set up Stage 1 with Smithers where the auditing company looked at Case from top to bottom. After Case fixed a few minor things, Stage 2 was scheduled, where the company passed and Merriman was witnessed and accredited.

From start to finish, the process lasted roughly six months. Carello estimates it cost $8,000 to $10,000, including the internal auditor he hired outside of Smithers because he felt he was too close to the process itself and an outside opinion was needed.  “At the end of the day, you will be more efficient, and that will correlate to customer satisfaction. But [employees] have to take the steps in place in order to get to that point,” says Carello. “By implementing and living ISO, the product is better at the end and the customer is satisfied.”

Carello says Case had no trouble with employee buy-in as they had already been doing a lot of things ISO requires anyway. “We hold ourselves to a higher standard and employees know that, so they bought in 100 percent. If someone had acted out and said, ‘This is ridiculous,’ they wouldn’t be with us.”

What Carello loves most about ISO is that it’s auditable and never-ending. Every year, the company will be audited to see that it’s conforming to the ISO standards. “Every single year, we could be audited any day, so we have to be 100 percent. That’s what I like about ISO – you have to keep on top of it. With ISO, it’s not just a piece of paper. If you’re not living it, you will have nonconformities and you could lose your certification.”

Other benefits aside, Gilbride emphasized that the risk management advantage of ISO 9001/SN 9001 is huge in the snow world.  “Plaintiffs’ attorneys are running a business just like everyone else, and they ask three questions when a case comes in: can I win it, how much can I win it for and how quickly can I win it?” says Gilbride. “They’re going to find out very quickly when they’re filing claims against ISO 9001/SN 9001 companies that they’re not going to be able to answer yes to all those questions. Therefore, in time, there will be a reduction of lawsuits because ISO 9001 and SN 9001 will be like a neon sign to these guys saying these companies are going to have their documentation and be able to paint a picture from two years ago.”