'Legendary' Contractor Talks About His Successes
HVACChannel.tv, an Internet HVACR information portal, recently introduced "Life Stories" to its lineup of live and archived webcasts. The portal is operated and hosted by Ruth King and originates here, a suburb of Atlanta.
The contractors interviewed for the webcasts will also be profiled in The News each month as a means to spotlight successful businesspeople and gain some insight into what makes them successful. The April webcast (at www.hvacchannel.tv) features Michael Franke, a well-known Atlanta-area contractor who built a successful business, which he eventually sold and from which he retired at the age of 47.
"Mike Franke is a legend in the HVAC industry in Atlanta," said King. "He did very creative things when it was unfashionable to do so. Everyone told him that what he was doing wouldn't work - and it was incredibly successful."
Franke Talking FranklyThe News asked Franke some basic questions about his business career. What follows are his responses to our question-and-answer session.
News: What are your company's basic facts - market, number of employees, years in business, annual revenue, etc.?
Franke: Peachtree Heating & Airconditioning was created as The Plummer Co. in 1965 and became Peachtree Trane about 1969-70; then PHAC in the mid-1980s. I began running the business in 1972. It was then owned by The Trane Co., who employed me from 1966-1969 as a sales engineer, my first job after graduating from Georgia Tech University with a Bachelor of Industrial Engineering (BIE) degree.
Trane was gracious enough to sell the business to me in 1975 and financed the purchase almost 100 percent. Since I was 32 years old, married with an 8-year-old child, I didn't have a pot to you-know-what-in anyway.
The company had lost a considerable amount of money from 1970 to1972. My former boss at Trane approached me about taking over the business in 1972, which had annual sales of $1 million that year. Though we were not really successful during the first 2-1/2 years I ran the business for Trane, we did stop the huge losses, breaking even over that span.
When I began discussions with Trane about buying the business, one of their vice presidents asked me why they should think Peachtree would be more successful after they sold it to me than it had been for the previous 2-1/2 years under my leadership, just breaking even over this time. I told him that the difference would be that I would own PHAC and though I'd worked really hard for them, I wouldn't be their employee subject to â€˜corporate' dictates. My family and I would sink or swim based on my efforts, my decisions. I'd bet everything I had, as I'm sure a lot of HVAC folks did to start their businesses.
I thought I'd been a pretty good businessman for the 2-1/2 years I ran it for Trane, even though we'd just broken even over that period. I convinced myself that I worked hard to overcome prior problems that I inherited from my predecessor and those problems, or overcoming them, were why we hadn't made money. I immediately found out that I wasn't nearly as good a businessman as I thought. The first two months under my ownership, PHAC lost $42,000 from operations, cash flow was non-existent, and we were surviving by the skin of my teeth. That's when I became a good businessman.
At the end of the first year of my ownership, after losing $42,000, we ended up with a pre-tax profit of $100,000 on a little over $1 million in sales. We had about 300 maintenance agreement customers at the end of February 1975. By the end of 1975, we had over 1,000 maintenance agreement customers. The sale of those 700 agreements over 10 months saved our company and was a major component of our positive cash flow and $100,000 profit.
Not only did PHAC make a profit of $100,000 the first year, we ended up paying off our debt in less than 2-1/2 years, instead of the original six years called for. From that point onward, PHAC never had to borrow money from anyone again. We always paid suppliers on time, as agreed. When I sold PHAC in October 1990 the company had grown to about $5 million in annual sales, we employed 70 to 75 people [up from 22 to 25 in 1975], about 35 servicemen and 10 installers.
Our maintenance agreement customers grew to over 6,000 in 1990. PHAC made a profit every year from 1975-1990. I started a bonus plan in 1975 and a profit-sharing plan a couple of years later. Bonuses were paid to all employees every year from 1975-1990. Profit-sharing contributions were made every year from plan conception in 1977/1978 through 1990. At the start of 1975, PHAC was a â€˜do anything we could sell' business: new construction, residential and commercial; add-on; service, residential and commercial; and God-only-knows-what-else. And we probably weren't very good at any of it. By the end of 1975, we were 98 percent in the add-on A/C business and service, maintenance agreements and repair, almost all residential. We did almost no new construction.
The News: What would you consider the biggest reason (or reasons) for your success?
Franke: The reasons for our success were people, maintenance agreements, focus and attitude. All these things were important. When we lost $42,000 the first two months of 1975, I had to go to our employees and ask them to all take a pay cut and to give up their company-provided health insurance. They all did and not one person quit the company as a result of their personal losses.
At the end of that year, everyone's pay was restored, the money they'd lost in salary was repaid, the money they'd paid for health insurance was repaid to them, and it was reinstated as a company paid benefit. They all received raises and bonuses.
They also provided the attitude that our company needed to be successful. Where they had not sold anything before, they all began asking customers to take a look at our preventive maintenance program. Where we, as many contractors felt then, thought service was a necessary evil, PHAC developed the attitude that providing service to our customers was important and rewarding to all.
Several years later we began to offer a money-back guarantee to our customers. If we were unable to satisfy their service needs, their money would be cheerfully refunded. While many doubted the wisdom of this policy, they all took the attitude that they could make it work. And they did! Not only did we not have to refund very much money, our callback and warranty expenses decreased.
So our folks and their attitudes were vital to our success. It may sound simplistic, but we had to convince our people to believe in what we were trying to do. Once they believed and made the company's goals their goals, too, it was only a matter of time until they and the company would be successful.
Maintenance agreements became the foundation upon which our success was built over the years. Not only did they save our company the first year, they allowed us to build a great customer base. This base renewed their agreements at an 85-percent rate year after year, providing upfront cash flow, strong margin business, allowed us to see our customers several times a year and let us become their friends, and then provided us with millions of dollars in replacement sales in future years.
And because we became friends with most of them and did a great job for them, they referred us to many of their friends when the opportunity arose. Lastly, when they moved, which Atlanta is noted for, they took us with them to their new homes. But as important, they left behind a home in which all the thermostats and equipment - water heaters and electric panels, too - were prominently marked â€˜to call PHAC if in need of service.' A lot of folks did and then bought a new maintenance agreement, too.
We focused on the things that we could do well. Instead of trying to be all things to all people, we decided to be the best residential HVAC service and add-on A/C company in town, not the cheapest, but the best. Later, as the market changed, the focus became service and replacement. We didn't try to sell burglar bars, or swimming pools, or alarm systems, too. We stayed focused on HVAC items that provided benefit to our customers. We didn't bid on the new 100-home subdivision when the developer called and asked us to. We didn't bid on the new 50,000-square-foot office building when the general contractor called and asked us to. We stayed focused on residential HVAC service, add-on, and replacement, and it paid off by allowing us to be very, very good at a few things, instead of being mediocre at a lot of things.
The News: What has been your biggest roadblock, or roadblocks, to your success?
Franke: I think always people, or really lack of properly trained and motivated people, was the biggest roadblock to success. Everyone I knew in the business was always complaining about finding enough good, qualified people. We had the same problem. We eventually quit advertising for help in the classified ads because mostly what it seemed to do was find us someone that would work for us in the winter when we did a lot of our maintenance work, and then leave us for $.50 an hour more pay when summer rolled around and we really needed him.
We tried to get new folks, who might not be the most experienced, but showed a good attitude, with a desire to learn. Then we trained the dickens out of them at our expense, paying them to attend in-house training, and paying them when we sent them to manufacturer- or utility-sponsored schools. We did tech training and we did people training. We tried to treat them as we would wish to be treated. We paid bonuses, profit sharing, and incentives; but we paid them at the end of the year. If you left before then, you got nothing. So finding and keeping qualified people with good attitudes was most important.
All the other problems - with codes, government regulations, liability insurance, health insurance - were small in comparison, and really were more about how much do I have to charge my customers to cover the extra costs these things generate. I think if I were in business now, I would be focusing my attention on hiring Hispanics and other minorities, planning on doing a lot of training in all areas, including paying them to improve their English so they could effectively communicate with our customers.
The News: What are your goals and how do you plan to achieve them?
Franke: I had a goal early in life to be successful. Coming from modest means, as many folks in this great country have come from, I grew up with many goals. With God's blessing, I have achieved most of them.
I retired when I was 47. I have been all over the world, many times to some places. I have two great kids and a wonderful stepson. I am married to the sweetest woman in the world, and I can't tell from day-to-day if I love her more than she loves me, or vice versa.
I had a goal to own my own business. It succeeded beyond my dreams, but what I think means most to me from the success of PHAC is not the financial success it brought to me. It is the success that so many people that worked there had for themselves. They got married, raised children, and bought homes for their families. I'd like to think that working at PHAC helped them reach their goals, and reach them easier and more enjoyably than had they worked somewhere else. Many of them now own their own HVAC businesses.
I'd like to think that their success in business and life comes partly from what they experienced at PHAC.
Publication date: 04/26/2004