The growth of a strong HVAC contracting company depends on many factors, such as the entrepreneurial smarts of the individual business owner or the collective strength of a network of contractors backing each individual owner. The HVAC trade has seen a good deal of both, beginning with the growth of the mom and pop businesses, to franchising opportunities, and the most recent trend, consolidation. Mixed in with this growth have been a number of different growth patterns, such as “tuck-ins” or “bolt-ons” where established businesses have bought like businesses in the same geographic region, or possibly in a similar market from a different region. Growth has also come from buyouts from local utility companies, with the ultimate goal of adding service to energy delivery.
Where will a new wave of growth come from?
There has been a noticeable uptick in HVAC franchising, with the emergence of One Hour Air Conditioning & Heating and the growing base of Aire Serv locations. A new franchisor, Daflure, has also entered the market. On the consolidation side, new owners of American Residential Services (ARS) are hinting at expanding their existing base of contractors while upstart Buckeye Ventures (see sidebar below) has started to buy up contractors on the West and East Coasts. The only original consolidator that has remained in its same form, Comfort Systems USA, is still doing well and looking to expand when it finds the right opportunities.
Market conditions, including demographics and the economy, can ultimately be the deciding factor in purchasing an existing business or establishing a new one. “A lot depends on the market and whether you want to invest as a business owner,” said David Slott, president and chief operating officer of ARS. “It’s a matter of how you want to deploy your capital resources and what sort of capital structure you want.”
ARS, one of the original HVAC consolidators, is once again looking to grow its base of service contractors organically and by selective acquisitions.
“It is a good time to be in the business because there is a lot of fragmentation and a lot of opportunities for growth,” said Doyle James, president of national HVAC franchisor Aire Serv. His company has experienced accelerated growth in the past year.
GROWTH BY FRANCHISINGThe HVAC franchise landscape has changed dramatically in the past few years. The arrival of One Hour Air Conditioning & Heating, a Clockwork Home Services company, has spurred rapid growth in franchises in key markets across the United State and Canada. Not only has One Hour been able to break into traditional HVAC markets through locally-owned franchises, it has also had its own company-owned businesses in larger competitive markets, such as Las Vegas. As of Jan. 1, 2007, there were 176 One Hour Air Conditioning & Heating territories held by 137 franchisees and company-owned operations.
Tab Hunter, president of franchise operations for Clockwork, said his operations manage more than $2 million a week in HVAC sales.
Aire Serv, one of the companies under the Dwyer Group umbrella, has been in existence for 15 years but only recently has taken a more aggressive approach to franchising. The company has 132 HVAC franchisees in the United States, Canada, and Great Britain. James spoke about a franchisee who has experienced solid growth after buying out a competitor.
“One franchisee bought a business from a major consolidator that was doing well but struggling to make a profit,” he said. “At the time, his own business was doing around $500,000.”
The reasons for purchasing a franchise can be many, from the desire to become a business entrepreneur, to owning a high-profile moneymaking business, or as a natural progression to working in a business that is already familiar to the purchaser.
“A high percentage of contractors have been used to working with their hands,” said Hunter. “While they are good with their hands, the business element of their businesses has been missing.”
Hunter said many contractors look for help, although they won’t admit to needing it. That’s why purchasing a franchise that brings the backing of an organization that has established successful business operational procedures is such an appeal. “Independent business owners know they can plug in and play our program,” he said.
Having a standard for all companies to follow can have a big advantage in a fragmented industry. That standard includes the brand name and the marketing-advertising that goes with it.
“Everybody, regardless of their size, has a local brand recognition,” said James. “But that can only take you so far.” He said that Aire Serv respects the local brand name and believes that the transition to a national brand name should be careful and calculated. “You don’t want to hurt the established customer base, who may wonder where the company went.”
Hunter noted that having standard operating procedures isn’t the only reason why franchisees enter the market. “Franchisees buy the brand, the value proposition, and the exit strategy,” he said. “At One Hour we can offer an exit strategy.”
He added that Clockwork will buy back a franchise if all of the factors are right and it is a good fit for the company. “We will not necessarily buy it back if it isn’t right.”
James, who discussed some of Aire Serv’s examples, outlined some of the other benefits of joining an established franchisor. He said his company’s franchisees contribute to an advertising fund, which helps to develop a national brand image.
Part of what Aire Serv does is to have a professionally published, 32-page, consumer-oriented magazine about HVAC delivered to a customer’s home for less than $1 each. The magazine would have the name of the franchisee on it. Last year Aire Serv produced one million copies.
In addition, “The Aire Serv Website is very user and customer friendly,” James said. “We spent over $100,000 developing it.”
Pricing information for HVAC systems from all manufacturers is available, including the price of add-on equipment and customization. Pricing a system via the Website can be done in the customer’s home, then printed out for them.
FACING THE BIG BOXESAlthough One Hour and Aire Serv compete for business, the leaders agree that having the backing of a successful and professional organization can be more advantageous than being an independent contractor facing challenges from retailers.
“The big boxes are coming,” said Hunter. “They aren’t known right now for brand name repairs and replacements, but they plan to be. As an independent, it would scare me to compete with the big box.”
James said, “You know that the big guys like Home Depot are out there talking about this side of the HVAC business. They may eventually become a consolidator if they started buying up smaller companies, or a network of companies.”
James noted the differences between his company and the consolidators that penetrated the HVAC market back in the ’90s and early 2000s. “Consolidation, when it began, was all about ultimate control,” he said. “Consolidators eventually drove the owners away from the business and did not have a good system for developing managers.
“I think consolidation is going to come back, but it is going to be a little more calculated. I don’t see that much wild growth and acquisition as we saw in the past.”
GROWTH BY CONSOLIDATIONARS’ Slott and CEO Donald Karnes aren’t so sure they want to be called consolidators, not just yet. But they have a plan for the former publicly traded company, which they purchased from ServiceMaster for $100 million in late 2006, along with sister company Rescue Rooter. ARS has 55 locations across the United States.
Karnes said he believes that the first HVAC consolidation model didn’t work for a number of reasons. “Companies grew too fast, paid too much, and didn’t have an infrastructure in place,” he said. “One of the strategic mistakes was not having a branding plan.”
Slott said that the present ARS does not intend to make the same mistakes. “A lot of that heavy lifting has already been done,” he said. “There has to be a transition plan, rather than wholesale changes overnight.”
He noted that another problem faced by previous consolidation efforts was a lack of strong local management. “The branch managers are very important and we are there to support them,” he said. “We have 55 good locations and 55 good branch managers. We can guide and direct but for the most part, we get out of their way.”
ARS is prepared to grow again. “We are looking to bring in quality companies at reasonable multiples,” said Karnes. “We are going to take our base of business and our platform and expand it. We think we can double the company size inclusive of organic growth and acquisitions.”
“We have a five-year plan that we feel confident about,” Slott said. “If we are not double our size in five years, we would be very disappointed.”
Karnes said there is room in the residential service and replacement business for both franchisors and consolidators. “It’s not that one method is better or worse than the other,” he said; “they are just different. We choose to be company-owned because we want all of the upsides of the market and don’t want to share that with anyone else.”
COMMERCIAL MARKET?Will the consolidation or franchise model work in the commercial market? Bill Murdy, CEO of Comfort Systems USA, the last remaining consolidator still in its original form, is skeptical. “I’m not sure a franchisor adds much value in the commercial sector. Possibly training and software?
“Commercial is inherently more complex than industrial work and the value add from a franchisor is questionable.”
As far as consolidation goes, Murdy does not see the same harried pace that was once the trademark of consolidators that are now out of business, such as GroupMAC. He uses his own company as an example.
“We are growing organically,” he said. “However, if there are companies that fit with our decentralized but not franchised model, we will look at an acquisition on the right terms. We are looking into expansion but not at the frenzied roll-up pace of several years ago.
“Further, we work with affiliate companies to whom we can refer service work to if we don’t have a presence in an area.”
THE LANDSCAPE CHANGESBusiness owners can also piggyback companies in order to gain market share in more than one trade. Clockwork and the Dwyer Group have business operations in plumbing (Ben Franklin and Mr. Rooter, respectively). ARS shares the stage with Rescue Rooter. An entrepreneur who wants more than one avenue for growth has more options.
“Some of our most successful locations are combo-businesses sharing the same back office and facility costs, leveraging overhead costs that make sense,” said Karnes. “We are looking for solid companies to buy with a good reputation and management team to go with that. We are not opposed to leveraging off the goodwill of a business in a certain marketplace.”
James gave an example of how one former executive used his business acumen, and partnership, to have the best of both worlds:
“He is totally unlike the average. He is very entrepreneurial and takes an executive approach to building the business. He is not a technician. A friend of his has owned the existing Mr. Rooter franchise and he shares the same space with him, doing lots of cross-marketing.”
Hunter said people are lining up to buy franchises and his company is actively working with buyers to understand what they want from a franchisor. “We have added nine people to our staff since last year to handle all of the inquiries about our franchises,” he said. “There are more people looking to become franchisees than there are franchises available.”
James noted that the HVAC landscape has definitely changed in favor of existing HVAC business owners. “There is a lot of private money available today to acquire an HVAC company,” he said. “There are a lot of buyers and not a lot of sellers. It is similar to the days of consolidation when there was a lot of money available, only this time local companies are buying up competitors and growing locally and regionally.”
Karnes said, “There is always going to be room for consolidation as well as franchising - both are viable. Dave [Slott] and I come from the franchising trade (ServiceMaster) and those models are out there and working very well.”
Does all of this growth mean that the smaller independent HVAC businesses will soon disappear from the landscape? Hunter believes there are two ways to answer that.
“There is room in the market for everyone,” he said. “But we know that independents are losing market share in certain areas.”
For more information, visit www.onehourair.com, www.aireserv.com, www.ars.com, or www.comfortsystemsusa.com.
Sidebar: New World for Franchisesby Roger Goertz
Without having a background in the plumbing franchise I purchased, I had concerns about acclimating myself to this new venture. Although I have had a detailed and extensive business background, I was concerned about not having the plumbing experience and how it would go over with the plumbers that I was inheriting with the business. My first objective was to convince the plumbers that my main focus was to improve their work experience.
I talked about new uniforms (theirs were not in very good condition). I would switch to embroidered names on their shirts with the company name/logo so they would not appear as temporary employees. I planned to update one truck at a time, getting the existing trucks completely maintained. Three of the six vans did not even have the a/c working and some did not have spare tires or jacks. I also wanted to order better cable machines and sewer cameras with locators - but only one at a time and only after the plumbers learned how to perform preventive maintenance on both the machines as well as the vans.
I wanted them to learn about other programs and practices such as flat-rate pricing guides, sales training, how to understand customer reactions to problems and solutions, etc. They seemed to be a little skeptical, but I asked for mutual agreements up front and the mutual part from them was to work with me and train me in the terminology of the industry, how the service problems were addressed by the plumber, the solutions, etc.
Basically, they were to teach me as we grew together. Amazingly it worked and now, after just a few years of ownership, my team of plumbers will now swear that I know a great deal about plumbing and they continue to come to me for solutions to problems they themselves cannot solve.
I had two big stumbling blocks when I started out. The first was my aggressive nature in wanting things to change today. I had to have patience as I taught the existing employees a different way of servicing the customer and stepping outside their comfort zone (doing things the old way). As the team saw how much easier their job became, how much more rewarding their efforts were, they kept absorbing what I was trying to get them to learn from me. However, this takes time and patience is what I had to practice.
My second possible stumbling block would have been trying to do too much too soon. With the patience mentioned above and the business background that I had, I realized that a plan was needed, such as which projects to focus on first. In most cases, I focused on what would be best return on investment (ROI) and focus on that. Planning was essential.
The greatest rewards of the job have been seeing my team members change from being “just a plumber” to becoming a “technician.” It was rewarding to witness the change in their attitudes about themselves and being able to understand and empathize with our customers and their problems.
The financial growth of their income has been important. It is satisfying seeing 60 percent of the team purchase a home for their family for the first time ever.
And one last thing: It’s been enjoyable getting to know them and keeping them on the team with minimal turnover - less than 30 percent in an industry that constantly struggles for techs/employees. Only the best can stay here and we have raised the bar of professionalism.
So far, so good. The business is kept quite simple. At Mr. Rooter we focus on the residential side of the plumbing service and repair business. We continue to grow over 30 percent per year. We started with a business that was running $400,000 in sales per year and just last year we almost reached $4 million.
We keep the cash flow up as we collect after each residential job completed. Without commercial (we currently have 94.5 percent residential and the balance in good/on-time paying commercial accounts), we are better able to focus on that type of work and pricing and cost strategies.
After being in middle to upper management most of my career, I decided to make this move for myself. I just wish I would’ve done this 10-15 years ago. I would have been long retired by now.
Roger Goertz is the co-owner of Mr. Rooter and Rainbow International, of the greater Houston area. Mr. Rooter is a plumbing and drain cleaning business; Rainbow International is a fire, smoke, water, and mold remediation company. He is the former president of national HVAC franchisor, Aire Serv.
Sidebar: Emcor ExpandsASTORIA, N.Y. - EMCOR Services Trimech of Pompton Plains, N.J., and EMCOR Services Gotham Air Conditioning, Astoria, N.Y., have combined operations.
The combined companies, which represent over 60 years of experience in servicing and managing facilities for clients, will be known as EMCOR Services NY/NJ and will be headquartered in Astoria.
The company is a subsidiary EMCOR Group, Inc., a Fortune 500® company specializing in mechanical and electrical construction, energy infrastructure, and facilities services for a diverse range of businesses globally.
Frank Cooney, previously president and CEO of EMCOR Services Gotham Air Conditioning has been appointed president and CEO of the combined companies.
According to Cooney, the overriding goal of the new structure is to enable EMCOR Services NY/NJ to provide clients with exceptional performance.
“Combining our technical workforce and mobile services operations enables the two EMCOR companies to provide significantly enhanced customer service,” he said.
“The new structure will benefit clients like Grubb and Ellis, the real estate giant for which Gotham has been servicing over a million square feet in New Jersey, as well as clients such as Adams & Company, Steinberg & Pokoik and NYU Medical, which will benefit in the design/build aspect of our business due to the increased engineering capabilities that combining the operations of Trimech and Gotham provides.
“Trimech clients such as Bergman Real Estate and Cendant will also benefit from the new operating structure through access to enhanced technical capabilities and broader coverage by service personnel.”
While the service departments as well as the back offices of Gotham and Trimech have been combined into the New York location, EMCOR Services NY/NJ continues to maintain separate project operations in each state.
A primary focus of the Pompton Plains, N.J., group remains on process piping, engineering and construction for large pharmaceutical companies; a key focus in Astoria continues to be design-build of air conditioning systems and interior fit-outs for Class A building tenants.
In his new position, Cooney is responsible for establishing the firm’s strategic direction as well as the realization of its tactical implementation plans. He brings over 20 years of experience in mechanical contracting and facilities management to the new business entity.
Sidebar: Buckeye Acquires BarnetSAN DIEGO, Calif. - Buckeye Ventures Inc., announced that it has acquired Barnett Heating and Air Conditioning Services Inc., based in Modesto, Calif. Founded in 1961, Barnett specializes in complete energy-savings solutions for homeowners in the residential market.
The new acquisition will increase Buckeye’s revenue stream, contributing an expected $3.5 million boost to annual revenue. It also increases Buckeye’s scope of operations regionally, augmenting Buckeye’s existing Energy King operations based in Sacramento.
The Modesto location brings a number of synergies with Buckeye’s other locations. The proximity of the Energy King and Barnett operations will allow the enterprise to consolidate overhead in accounting, operations and administration as well as benefit from the experience of Energy King’s proven management professionals.
According to a Buckeye Ventures’ press release, “Varin Larson and Alan Hardwick, the senior management team at the Energy King location, have earned a national reputation for the assistance they’ve provided a number of air conditioning, heating and plumbing companies - assistance that has resulted in significantly improved business operations, increased revenues and enhanced profits. They have more than tripled Energy King’s customer base and revenue stream over the past four years and will oversee the Barnett integration, working to streamline Barnett’s operating system and expand Barnett’s footprint in Central California.”
The Barnett acquisition is the latest step in Buckeye Ventures’ national acquisition strategy, and the company plans to implement the same tactics in Modesto that it has used in its Boston and Sacramento operations.
“This acquisition was particularly attractive for several reasons,” said Alan Mintz, president and chief executive officer of Buckeye.
“First, it takes advantage of our great management team in the area, providing significant insight into the industry and performance-enhancing capabilities. Second, its location represents an attractive opportunity for significant regional growth as Buckeye Ventures Inc. continues its progress in building its national group.”