BRENTWOOD, Md. - In September 2006, John and Tim Kirlin made a gut-wrenching decision. The successful mechanical contractors in the Washington, D.C., area ended a lengthy search for a company to purchase when they bought American Combustion Industries (ACI) from local utility company Washington Gas. This acquisition may not have made any headlines but for the fact the Kirlin brothers were buying a company that was bleeding red ink to the tune of $2.5 million annually. As John said, “It was upwards of $4 million, depending on how you figured it.”

It seemed like a risky venture. Tim said it was hard to believe that a business with $24 million in revenues was losing so much money. “The whole accounting department was a complete disaster,” he said. “That surprised us. We assumed it would be in order because of the system of checks and balances.”

To understand why the brothers took on such a troubled company, it is best to learn a little about their own history first.

KNOWLEDGE A PLUS

The Kirlin name is well known in the Washington construction services community. The largest mechanical contracting company and three of the largest mechanical services companies in the area can trace their lineage to John J. Kirlin Sr., father of John and Tim. The senior Kirlin started his company, John J. Kirlin Inc., in 1960 and purchased Combustioneer in 1975.

At the time, ACI was considered a “competitor of sorts to Combustioneer,” according to Tim. ACI specialized in the boiler and burner market, while Combustioneer was more into chillers as its niche. “We did some boiler work but not the size and scale of ACI,” said Tim. “In fact, we actually referred some work to ACI which had a reputation for quality work.”

Local utility company Washington Gas purchased ACI in 1998, the year prior to John and Tim selling Combustioneer.

While John went out on his own and contemplated what his next purchase would be, Tim continued working for Combustioneer until he left to pursue an MBA degree. At about the same time, Tim was looking for a business to purchase and Washington Gas was looking to divest itself of ACI. Tim was interested but he needed to know more about ACI.

“I got access to the financial statements,” he said. “And they scared me. ACI was still doing quality work in the field but the business was deteriorating because of management and financial performance.”

Tim was concerned about how long it would take to turn the company around and if the process would break him financially. There was negative gross profit in the construction division and a backlog of work that was scaring other potential buyers away. But when he mentioned the possibility of acquiring ACI to John, John immediately said, “I’m in.” John knew ACI’s reputation for quality work and felt it was a risk worth taking.

“We figured it would be a good buy opportunity considering the fact that the company was losing money,” he said. “We had competitors who were interested, but the financials scared them off. One company just wanted to purchase the service side of the business.”

The sale wrapped up quickly at the end of September 2006. Then the fun began.

MAKING IMMEDIATE CHANGES

The Kirlin brothers began their new venture with two emotions: worry and confidence. “Confidence speaks volumes when you are sitting in the middle of a chaotic situation,” John said.

The first thing Tim did was to “weed out the deadwood” among the existing staff. He said it created a lot of fear but added the employees he kept were amazed that Tim was able to pick out the people who really needed to go.

“The remaining employees congratulated me on knowing who to keep and who to let go,” he said. “Some of these positions were actually fluff jobs anyway and weren’t necessary. We were straightforward with everyone and people knew who was staying and who was going. The ones who left could prepare themselves by knowing ahead of time. There was at least one person who we wanted to keep but who didn’t have a fit with our new structure.”

The fluff positions included an internal auditor, a business analyst who, according to Tim, “basically prepared spreadsheets for the president,” and a full-time housekeeper. The Kirlins outsourced the janitorial work and saved a lot of money. “The office is a lot cleaner now, too,” said John.

John and Tim felt it was important to cut out all of the fat and concentrate on what the company did best. ACI’s service and replacement operation should have been a strength, but Tim said it had “gone amok.” He added, “We redirected ourselves to the kind of work where we have a distinct advantage over our competition instead of playing into their strengths.”

The Kirlins also put a lot of effort into building up the company’s service contract business - and it worked. ACI has doubled its service contract customer base in one year.

John and Tim have also gone after a particular market: private customers who own or manage their own buildings. They prefer to steer away from general contractors who they believe do not always have the customer’s best interest in mind, but who only see the lowest cost for projects. “Our ideal customer is not price driven,” said Tim. “They are value driven. And we do not sleep well if our customers are not happy.

“If a company gets too backed up with government jobs or working with general contractors, they often can’t take care of their private customers who may need service right away. We don’t want to tie up our resources and not take care of our customers.”

Another item the Kirlin’s experience brought to ACI was their knowledge of job costing, something that the previous owners had trouble grasping. “When we did due diligence before the purchase, we found out that ACI didn’t know the cost of putting people on the job,” John said. “They weren’t costing their jobs right. We mandated a certain job cost and have based our price around that.”

One of the reasons they replaced everyone in the accounting department, except one person, was not necessarily because of poor performance - it was “because they really didn’t know how to cost a job or where to allocate the money for the job,” said John.

ONE YEAR LATER

Despite having a negative year in fiscal 2006, which ended in September of that year (the same month the Kirlins purchased ACI), John and Tim made the decision to pay bonuses to the staff. “Our partners thought we were insane,” said John. “We felt the people who were left had nothing to do with ACI’s poor performance in the past and everything to do with the future of the company. This move kept our employees loyal to us, too.

“We have been pleasantly surprised by the skill and talent level of the people we retained. Our field people, field supervisors, and sales management people can be given the credit for helping turn ACI around.”

One year later, ACI is solidly in the black, with sales up 18 percent, a doubling of service contracts, and 47 new service vehicles already added to the fleet or on order. All this growth has occurred with no net increase in employees, though ACI has been actively and successfully recruiting trained and experienced field personnel. In fact, the Kirlins slashed overhead in the early months of their leadership by more than 40 percent. It was just one step in the process to climb out of the red, but the climb was faster than anyone had expected.

“We figured our first year would be a loss and the second year would start to show some profitability,” said Tim. “But in our first year we were already reflecting year three of our five-year model.”

In the end, the Kirlins credit their amazing turnaround to the people they kept. “Our labor production numbers are out of sync with any in the company’s history,” said Tim. “That is a real testament to the people. They believe in us and therefore they pull their own weight.”

Publication date: 03/24/2008