Over the last few years, contractor acquisitions and consolidations have been taking place “under the radar,” so to speak. More and more contractors - as well as groups, networks, and consolidators - have been “quietly” growing their respective businesses by purchasing or merging with other firms.

Over the past six months, here are just a few examples.

• On May 1, 2007, The Kerner Group announced it acquired Vassars Service, an HVACR and plumbing business that has been providing service throughout the greater Richmond, Va., area for more than 20 years.

“We are very excited to add Vassars Service to the group and to build on its successes to deliver the products, solutions, and quality their customers have come to know and expect,” said Amy Hansen, president and CEO of The Kerner Group, a compilation of contractors that provide a full range of services and turnkey projects throughout Virginia and Florida.

On Sept. 18, 2007, Clockwork Home Services, Inc., announced its acquisition several successful HVACR and plumbing businesses. The newly acquired are:

• Mitchell Heating and Cooling (Avon, Ohio);

• Climate Select Inc. (Rocklin, Calif.);

• Myrtle Beach Heating and Cooling (Myrtle Beach, S.C.);

• Candlelight Heating and Air (Denver);

• Candlelight Plumbing (Denver); and

• Candlelight Electric Co. (Denver).

“The completion of these acquisitions brings us one step closer to achieving our goal of becoming one of the most dominant home services companies in North America,” said Rebecca Cassel, group president, consumer services.

On Nov. 12, 2007, 24/7 Service Co., which specializing in air conditioning and plumbing services in Las Vegas, announced the acquisition of ASSAP Services, a residential firm that services the Las Vegas market. Kenneth Goodrich, president and CEO of 24/7 Service, is particularly pleased that the acquisition will enable 24/7 Service to represent nine Home Depot stores in Las Vegas, expanding its partnership with Home Depot’s At-Home Services division. “ASSAP Services acquisition contributes to our expansion across the Western United States,” he said.

On Nov. 15, 2007, EMCOR Group, Inc., announced its acquisition of Performance Mechanical, Inc. (PMI), a privately held industrial mechanical construction and maintenance company headquartered in Pittsburg, Calif. Founded in 1985, PMI, with annual revenues of approximately $90 million, is a full-service industrial mechanical contractor that provides process piping and equipment installation; and civil, structural, instrumentation, and boiler installation and repair to electrical generating plants, food and beverage producers, pipeline compressor and metering stations, manufacturing facilities and water treatment plants.

“We are pleased that PMI has joined EMCOR,” said Frank MacInnis, chairman and CEO of EMCOR. “PMI has leading positions in the refinery and power plant markets and a long-standing reputation as a premier mechanical construction and services company.”

On Nov. 21, 2007, Harris Cos., St. Paul, Minn., announced the acquisition of Climate Control, a Phoenix-based residential and commercial mechanical contractor. This purchase marked the fourth major market for Harris Cos., which now has offices in St. Paul and Rochester, Minn.; Salt Lake City, Utah; and Phoenix, in addition to satellite offices in Northfield and Austin, Minn. Harris Cos. employs 620 with anticipated revenues of $190 million in 2007. Climate Control employs 100 with revenues of more than $14 million.

“This is a perfect match,” said Greg Hosch, president of Harris Cos. “We’re both companies driven by integrity, creativity, and a desire to win and overcome obstacles to make it happen for our clients. While our company was founded in 1948, Climate Control was established in 2005 and has grown exponentially in that short time. They bring to us great people, assets, and an exceptional reputation in residential and commercial construction.”

PROS AND CONS

The advantages of this kind of consolidation include the economies of scale from combining billing and accounting operations. Accounting groups can usually add more work without adding substantially to staff. Costs in proportion to revenues go down, and profits can certainly rise.

At the same time, acquiring companies also speeds growth. Instead of possibly slugging it out, acquiring new customers one-by-one, you buy a company and pick up the thousands or more customers that company has.

Of course, this type of growth pattern isn’t perfect. To acquire other companies, one has to put down cash. A down payment can run anywhere from 10 to 35 percent of the purchase price. One needs to know about financial management, too. To pay off the acquisition, one may need to get a loan.

In the end, you need to determine how much debt and interest you can afford. It is possible to cover new debt without compromising an existing business.

Another reason for acquiring, said Alan Mintz, is ego. Mintz is CEO and director of Buckeye Ventures, which is in the business of acquiring, integrating, and operating HVAC contracting companies.

“Ever since consolidation started in 1996, the independent contractor, by and large, has learned how and why to grow, expand, buy, sell, and prepare for retirement. Many of those contractors feel the best route to fulfilling the ultimate goal is through acquisition,” he said.

“I get calls from contractors who ask me for advice of what they should be doing to sell to people like me in three years at maximum value. There is more local or contractor acquisition and merger activity than in the 35 years I have been in this industry.”

Combined with fellow Buckeye board member and chairman Al Roach and member Ron Smith, Mintz said together they have been involved in hundreds of acquisitions, have spoken (and continue to speak) to thousands of contractors, and have personally been involved with four of the original consolidators.

“We all still get calls from individual contractors almost on a weekly basis to discuss buying, selling, or merging,” he said.

For those looking to acquire growth by buying other companies, Mintz provided six tips:

1. Make sure you have your own house in order first.

2. Have a good handle on your financial information and reporting processes.

3. Have a good No. 2 person “who will allow you to take your eye off your own business while pursuing another.”

4. Target the area and type of business that will best suit your company’s culture.

5. Get the word out through suppliers, trade associations, and other contractors. “Consider doing a mailing.”

6. Once you identify the target(s), “take your time and do the proper due diligence.”

ROBINSON'S WAY

Two contractors that firmly believe in growing by acquisition are Dan Thayer of Thayer Corp. (Auburn, Maine) and Scott Robinson of Apple Heating and Cooling (Ashtabula, Ohio).

Over the last several years, Robinson added five firms into his fold: Fischer Heating & Cooling (1993), Read Refrigeration (1993), Kubichek Heating (1997), Alpine Heating and Cooling (2005), and Gallo Heating and Air Conditioning. The desire was to grow the customer base and sales, along with geographic expansion, and to “increase the value of our business for sale at a later date.”

“In all cases, we absorbed the customers and employees and the selling firm name was not used,” said Robinson.

In his estimation, the purchase of Alpine has been beneficial for growth of customers and sales, and has worked out well financially. The purchase of Gallo was a larger investment of resources, “so time will tell about financial results. The deal was just completed in August 2007.

“We have added a significant amount of customers and, for the most part, the new customers are from desirable demographics - good neighborhoods, high income, multiple systems per home, and appreciate good service,” said Robinson.

“With Alpine, we got several good employees. The Alpine customer base took some time to warm up to us, but we have successfully converted many to service agreements. We have been very successful at converting the Gallo customer base to service agreement owners.”

The latest purchase - Gallo - has proved to be very challenging for Robinson.

“It included the purchase of a building and remodeling of same,” he said. “Also, four of the employees that worked at Gallo and hired by us have not worked out. We have hired two replacements, both in training, but it has been a struggle to serve the new customer base, as we have been short-handed.”

Both of the companies were Trane dealers, and because Apple has been with Trane for 23 years, “that helped,” he admitted.

“However, we have also been ‘private label’ since 2003, selling about 75 percent of our brand to 25 percent Trane, so that has also added to our list of ‘change’ items,” said Robinson.

In all cases, Robinson said the biggest challenges have been about culture change. “There has always been an enormous amount of training involved to get our newly joined co-workers to do things our way,” he said.

“And, in some cases, there has been significant price shock to the customers. When we acquired companies that were charging significantly less than we do, we tended to lose a significant portion of the customers after they tried us. But when the pricing of the acquired company was closer to ours - we have always been higher - that was less of a problem.”

In each acquisition, Robinson said he used a professional consultant - in this case, Brandon Jacob of Contractors Financial Opportunity (CFO), a Houston-based firm that specializes in providing financial services, including buying and selling advice, for contractors that cannot afford a full-time chief financial officer.

“We had engaged Brandon to help us value our company for our buy-sell agreement two years earlier and had a lot of confidence in him. His help was invaluable. We also got a lot of help from our accountant,” said Andre P. LaSalle CPA, of Ashtabula.

According to Robinson, in all of the deals prior to Gallo, the selling contractor was in bad financial condition “and we purchased for low amounts of money.” He added that the Gallo deal was different as the selling contractor was financially successful; just ready to move on.

“He owned the building outright, as well as his inventory, tools, and vehicles. So the Gallo deal involved a lot more money, and the involvement of attorneys, accountants, etc.”

If the novice contractor was looking for advice, Robinson was uncertain if there were set guidelines. “It depends,” he said. “If the seller is going out of business and you don’t pay a lot, there is less need for the lawyers and attorneys, in my experience. But if there is a lot of money involved, I would recommend the use of a consultant like CFO and, of course, involvement of attorneys and accountants.

“CFO has an industry-specific matrix for valuing HVAC companies, and Brandon has been involved in the purchase/sale of over 30 HVAC firms.”

THAYER TALES

Thayer, on the other hand, stepped into acquiring firms somewhat by accident. In 1989, the sheet metal subcontracting company handling virtually all of Thayer’s business was in debt.

“We stepped into his shoes and paid off the debt,” Thayer said in a recent issue of Contractor Excellence, the quarterly magazine of the Air Conditioning Contractors of America (ACCA). “That’s how we got started.”

It was an eye-opener for Thayer. Since then, he has made acquisitions varying in size from companies with four employees to 50 employees. Today, Thayer Corp. grosses about $12 million per year and employs 100 people.

He is quick to point out that one of the biggest disadvantages in acquiring growth through acquiring other companies is that you can make a big mistake. Thayer’s made them. In fact, one company refused to integrate into the Thayer system.

“The people just weren’t willing to change,” he told ACCA. “We fought constantly, and their stubbornness began to endanger our existing business. Finally, we concluded that we couldn’t make anything out of it, and I returned the keys and took a loss.”

Thayer also is a firm believer in getting professional expertise. In his estimation, the best way to find a compatible acquisition target is through a third party.

“A broker can approach me and say that a competitor in my market is considering selling,” said Thayer. “Are we interested? I might respond that I don’t want to get into an acquisition. By doing it this way, the broker has prevented me from learning the company’s name. Otherwise, it could adversely affect that company’s ability to sell.”

Thayer does some heavy thinking and evaluating before committing. One way, stressed by Jacob, is via EBITDA: earnings before interest, taxes, depreciation, and amortization.

“That’s a cash flow measure, and it is usually recast after a company changes hands,” he said. “If you sell me your business, I will also get your fleet of 10 trucks. You bought this fleet over 10 years ago, and you are depreciating them. I may be able to recast the value of those vehicles and have a new depreciation schedule on them, therefore extracting more net profit.”

The transition or the merging of the two companies into a single entity is the final step in an acquisition and can be the most difficult, according to both Jacob and Thayer. “Our goal is to bring the people that work for the companies we acquire into our culture,” said Thayer. “We want them to be a part of our team, part of our family.”

Doing that requires a transformation or culture change, he admitted. “You want to take ownership of the mission you have - which is adding value for both new and existing customers,” said Thayer. “If the personnel of the new company don’t take ownership, you are viewed as a big company forcing changes they don’t understand or want. This is the biggest challenge of the entire process because it can affect your reputation with customers.”

Publication date: 02/25/2008