Starting a Drone Business: 5 Financial Mistakes
This article first appeared on DroneLaunchAccounting.com
Unmanned Aerial Vehicles are the future. Jobs that humans have done for centuries are being replaced with robots and automation. It’s happening. The reality is that you either have to get on the train or get run over by it.
Maybe you want to be flying one of the 600,000 commercial drones that the FAA predicts will be out in the first year of the new commercial drone rules. Maybe you are a go getter who is jumping on the UAV train early and wants to get a big bite of the market share before everyone else rushes out there. Getting started early is good. You can get in, see whats working and what isn’t working, and then adjust. That way you are already more knowledgable and prepared than when your competitors get to market.
But when jumping into the mix – make sure that you aren’t jumping into something that could end up costing you more than it makes you. If you are going to start a drone business (or use drones in you business), make sure you avoid these five, potentially costly financial mistakes….
1) Failing To Set Up a Separate Legal Entity For Your Business
First off let me say, I am a CPA, not a lawyer. So don’t take this as me “officially” giving you legal advice, but more of a real-world business tip. If you want official legal advice, go talk to your attorney.
One of the most common mistakes new businesses make is not setting up a separate legal entity for their business. I could (and probably will in the future) write an entire blog post on this one topic alone. Many people ask: “Why do I need a separate business entity? Whats the point? Isn’t that just going to make me pay more money in startup costs? None of my customers seem to care, so whats the point?”
When you conduct business without first setting up a separate legal entity, in the eyes of the law you are the
business and the business is you. So you are personally exposed to all of the legal risks from operating your business. For example, lets say that someone hired you to use your drone to create a highlight reel of an upscale office building. During the course of shooting, you are flying up the large atrium lined with glass walls that peer into each fancy office. You make a mistake and crash your drone right into one of the glass panels, causing it to shatter. The drone propeller also breaks, causing the drone to fall 60 feet onto a maintenance worker, breaking his arm. To make things worse, there were several prospective tenants touring the office building that day, and they saw this entire thing go down. The company that owns and manages the building – the one who hired you – is obviously furious. In addition to not paying you for the job, they bring a lawsuit against you for the damages to the building, lost rent for the time that the repairs were being made, injuries to employees, and damage to their reputation.
In this scenario, they would be suing you PERSONALLY and could go after your PERSONAL assets – your car, your house, your savings accounts – possibly forcing you into bankruptcy. On the other hand, if you had been operating under a separate legal entity, they would bring the lawsuit against your BUSINESS ENTITY, and your losses would be limited to the assets of the business and not your personal home, car, etc. There are a myriad of legal complexities that you could introduce to these scenarios, but this gist is… no separate legal entity, no personal asset protection.
In addition to providing asset protection, having a separate legal entity adds to your legitimacy as a real business. If you are going up against a competitor, and they have an official company name like “Aerial Films, Inc.” (I just made that up) versus your John Doe I-do-business-out-of-my-Ford-Pinto operation, the business with the official company title and legal entity is going to look more professional and likely win the bid.
Ask any experienced business person anywhere – the right way to run a business is to have a separate legal entity.
2) Not Getting Liability Insurance
Insurance is a must if you plan on operating any type of business where there is potential liability. When operating Unmanned Aerial Vehicles (UAVs), there are all sorts of risks and liabilities that are potential hazards for you and your business: your equipment malfunctions and you break something, hurt someone, or both (as in our example above).
Let’s hope you never have to use it, but you need insurance in the event that you ever do experience a situation where you or one of your employees causes damage, injury, or some other type of harm with financial consequences. Insurance can also help you replace your own business equipment if it were to break or need repair. If you experience an accident and don’t have insurance, you will be paying out of your own pocket to repair the damage, or worse – pay the court ordered judgement (if it comes to that).
The insurance game for drones is evolving rapidly at the moment. Traditional aviation insurers were used to writing policies for multi-million dollar aircraft. This was a relatively low volume, but high transaction cost business (as compared to say, auto insurance). Drones introduced a huge opportunity, but a huge challenge for aviation insurers. The amount of coverage that a drone requires is much smaller than an airliner (drones cost less to replace and can cause less damage), but the volume and speed at which drone operators are requesting coverage is taking off.
While traditional insurance options for UAVs are a dime a dozen (TransportRisk is a popular one), new types of on-demand insurance offerings are popping up. A company called Verifly offers on-demand liability insurance to drone operators. Rates start at $10 per hour for $1,000,000 in liability coverage. The rates are determined based on the risk factors in the area you are operating. The insurance is limited to UAVs that weigh 15lbs or less and operations within a 1/4 mile area. This may be an attractive option for some folks who do more limited flying.
For reference, I recently got a few test quotes for a DJI Phantom 3 Standard in order to get benchmark. I was quoted about $800 per year for the same $1,000,000 in liability coverage, which breaks down to about $67 per month. So if you plan on flying more than 6 hours a month, it may make sense to go with the standard insurance option.
So, don’t be careless. Get insurance. It’s not that expensive and can literally save you thousands (or potentially hundreds of thousands) of dollars if anything ever goes wrong while flying your UAV.
3) Not Keeping Good Records
Some of you may roll your eyes at this one. But DON’T! You may dread this part, may be tempted to ignore it, may want to put it off, but don’t give into the temptation. Solid record keeping is the backbone of your business. That may sound ridiculous, but stay with me…
When I mention record keeping, I’m referring to flight records (flight logs, maintenance logs), business records (lease agreements, contracts), financial records (invoices, bookkeeping), and other records pertaining to your operations. Keeping organized and clean records helps you meet compliance obligations, such as flight logs and maintenance records that the FAA may want to see. But more importantly, keeping accurate records will set the foundation to help you grow into a successful business.
Some of the most important records you can keep are your financial and operational records – income and expenses. Where is your money coming from and where is it going? The key to every successful business operation is to plan, execute, measure, adjust, and repeat. Having good financial records help you know how to plan, how to set goals, and to know where you’re going. Once you are executing that plan, you can see how you are tracking along your goals. Are you missing your targets? Why? What can you be doing better? If you don’t have solid and up to date financial and operational data, there is no way to know. Its like driving without a map and hoping you end up at your destination. Can you get there? Maybe. Is someone with a map going to beat you? Most likely. If you want to succeed in business, keep accurate and up to date business and financial records.
For flight records, there are a ton of good apps out there to help you do this. The most popular one is probably Skyward. For financial records, we recommend either hiring a competent accountant or bookkeeper (if it makes sense for your size and plans) or purchasing a subscription to a user-friendly accounting software like Quickbooks Online, Xero, or FreshBooks. If you want to go really cheap, you can even use an excel spreadsheet. Just use SOMETHING.
Keeping good records is likely to save you some money come tax time as well. If you are more organized and have your information recorded from throughout the year, thats less time your tax accountant will need to burn in reconstructing your financial history for the year.
4) Failing to Properly Plan For Required Startup Capital
As we touched on in the previous section – if you fail to plan, plan to fail. When setting off into any new business venture, you need to make sure that you have enough money to get up and running. One of the beauties of the drone business is that you can actually start with a fairly lean and cheap setup. However, you can also spend a lot of money right out of the gate with very little to show for it.
If your business plan is to offer aerial photography and videography services to realtors and property managers, maybe you don’t need that much money to get going. You will likely need to have the following:
- a drone with a decent, gimbal-stabilized camera ($1,000-$3,000),
- a tablet or smartphone to link to the drone ($500-$1,000),
- a laptop or computer to process the video and images ($1,000-$2,000)
- some software to edit the photos and videos (lets just say $200),
- state fees for incorporating your business ($100-$500, depending on your state),
- insurance ($800, see above), and
- FAA knowledge test fees ($150 – to get your remote pilot certificate).
We are looking at a minimum of about $3,500 to $7,500 to get up and running in one of the lowest barriers-to-entry options in the UAV-as-a-service industry.
Some industries can be much more expensive to break into. For precision agriculture, farmers and UAV pilots can utilize drones for applying chemicals and fertilizer to very specific trouble areas within their crop. The drones used for precision spraying are larger, carry heavier loads, and are more technically complicated than your standard photo drone. These UAVs can run into the tens of thousands of dollars, depending on what you get. DJI makes the Agras MG-1 which can hold about 20 lbs of liquid for precision spraying. The Agras MG-1 comes in at around $15,000.
If you decide to start down a path, make sure you have the right amount of startup money to get you there.
5) Failing to Add Value Through Specialization
It’s common for new drone service operators to want to be all things to all people. It’s tempting to want to offer services for cell tower inspection, real estate marketing, agriculture planning, and 3D modeling services for engineering firms. But the reality is, no one can be an expert in every single one of those areas.
You may be able to create a 3D map or take pictures of a property, but if you can do that with very little training or experience, whats to keep someone from doing the same thing for a lower price? Sure, you could lower your prices too, but then it becomes a race to the bottom and you either force yourself out of business or now you’re not in a business worth being in.
What clients want is for you to add value. What else do you bring to the table besides just being able to take a picture from the sky? The people who are really successful are not the ones who offer every different type of drone service, but are the ones who focus on one industry or application and become experts that are able to offer their clients amazing value above and beyond just an aerial image.
Be able to tell the farmer how the aerial map you created for them will help them have better crop yields and make them more money. Become a master cinematographer that can help a film studio visualize and capture the perfect scene for their upcoming movie. If you can only offer what the masses offer then there is no compelling reason to hire you, and you’re business will be stagnant.
Become the expert. Charge expert prices.