Shot From a Cannon, Consolidation: Working Without a Net?

Jan. 1, 2004
by Richard Almini The year was 1997. A circus-like atmosphere of HVACR consolidation rolled through the air. The excitement, the promise, the attraction

by Richard Almini

The year was 1997. A circus-like atmosphere of HVACR consolidation rolled through the air. The excitement, the promise, the attraction -- it was a great time to be an independent contractor.

However, this was the time when Linford Service Company experienced the roller coaster ride of being part of a consolidated HVAC company.

We were up, down, and then out.

Now, we're back in business with a start-up company. The experience of consolidation taught some hard lessons that I brought into the new venture. These lessons include:

  • HVAC is best delivered regionally
  • Organic growth is better than acquisition growth
  • At all costs, don't alienate customers or employees
  • Build the new company on the collateral of the old
  • Target the "best and brightest" people.

HVAC is Best Delivered Regionally

If there are successes in consolidation, it's likely when independent operations are allowed. Some consolidators attempted to do that -- but most did not. Trying to homogenize various operations to meet central headquarters' demands doesn't work.

Another issue was the consolidators' attempts to change entrepreneurs into managers. Once an owner has developed and grown a business with his or her own unique approach, it's hard to manage someone else's system.

When we decided to go with a consolidator, the decision was based on the following promises: national purchasing agreements, better training, growth through acquisition, the ability to leverage our size, and sharing best practices of member companies.

The national purchasing agreements never really materialized. Case in point: We had purchased Ford service vehicles for years at good prices and received good service from local dealerships. We had to change to a new brand of truck, in order to gain reduced prices. That made sense. However, we never saw the savings. In fact, we paid slightly more for the trucks and any savings stayed at the corporate level, and thereby did nothing to improve our local competitiveness.

Equipment agreements with the major manufacturers were supposed to provide lower prices. We ended up paying slightly more at the local level and the corporate office received the rebates.

The State of Consolidation: Where Are They Now?

  • Encompass (fomerly GroupMAC) filed Chapter 11 bankruptcy November 2002.
  • EMCOR seemed to be taking a low-key conservative approach to consolidation. Indications had been that the mega-giant was making the process work where others failed. However, EMCOR appears to have recently changed its branding philosophy. Trucks are now required to be repainted; the EMCOR name is in big letters and the contractor name is taking a backseat. HVAC locations in 1999: 20+; Current HVAC locations: 58
  • Conversely, Comfort Systems USA has backed off its initial branding strategy, and is now allowing the contractor brand to take the lead. HVAC locations in 1999: 125 ; Current HVAC locations: 58
  • BlueDot (formerly ServiCenter USA) was on a selling spree in 2003. HVAC locations in 1999: 80+ ;
    Current HVAC locations: 22
  • American Residential Services was purchased by ServiceMaster in 1999. HVAC locations in 1999: 85+ ; Current HVAC/Plumbing locations: 95, plus 14 as part of American Mechancial Services
  • Service Experts was purchased by Lennox International in 1999. HVAC locations in 1999: 118; Current HVAC locations: 200, including previously-owned contracting businesses

Organic Growth is Better than Acquisition Growth

Prior to selling the business, the Linford Company received three different offers and finally accepted GroupMAC's in late 1997. Prior to the consolidation era, HVAC firms typically sold for multiples between two and four times earnings. It can be fairly said that consolidators often paid more for companies than they were really worth.

Immediately following our buyout offer ensued a joyous period of exceptionally good business. Our agreement provided for lucrative incentive payment called an "earn-out," if the company remained profitable during the 12 months immediately following the transition. In 1998, we had an absolutely great year!

The result equated to a buyout that was 13 times earnings. Did I say it was a joyous time? Our "deal" was mainly cash, rather than company stock. In hindsight, that was certainly a good move on our part. We could have been left high and dry when the bad times hit.

During the initial negotiation, something called "deal heat" was at an all-time high. Consolidators were showing up at every industry function. They were knocking on everyone's door. As contractors, we loved the attention and the story they were selling. Everyone -- on both sides of the street -- had the best intentions and expectations of success to come. Yet, at the same time, the not-so-subtle message delivered by the consolidators was, "If you don't get on the wagon, you'll eventually go out of business as we take control of the market." As we now know, the opposite happened.

We were told that nothing would change, unless it was for the better. Perhaps it was the thrill of the deal, but we certainly were naive. Many of the promises weren't necessarily unrealistic. However, our expectations were usually not met.

Most of the consolidated companies in our group generated a lot of cash, yet there was no way to cover the huge debt load of the corporation. GroupMAC paid out a lot of money in acquisitions. The growth by acquisition strategy stalled the corporate machine when not enough growth and cash flow developed to manage the debt.

At All Costs, Don't Alienate Customers or Employees

The branding strategy was the first indication that consolidation would fail. The early efforts of the consolidators were to court all the high profile, venerable companies. The established brands of all the great contracting companies -- many with 50 to 100 years of local name recognition -- went out the window as the new corporate names were given top billing.

Linford Service became GroupMac, then GroupMac became Encompass. Somewhere in the fray was a merger with Building One. It was really confusing to our customers and our employees. Something very important was being lost, but the consolidators couldn't see it.

Perhaps the worst outcome of consolidation was that we had so little time to spend with our customers. Linford had always been successful because of our attentiveness to customers and employees. After consolidation began I spent a lot of time with new reporting activities, unecessary meetings, and endless phone conferences. Keeping Wall Street happy had become a preoccupying concern.

I tried my best over three years to make the new company function as smoothly as in the past. The consolidators really didn't want to hear our ideas. We were told, "You're the contractor, we're the professionals." Granted, they may have successfully consolidated other industries, and we had bought into the program, so we expected it to work, just as they did. It didn't.

Build New on Collateral of the Old

Linford Service company grew from a dream during the 1950s, to become a player in the Bay Area. It faded with the bankruptcy of Encompass. Now, after a brief hiatus, a group of dedicated people and I have opened a new business, Legacy Mechanical & Energy Services.

Linford started with a plan to always be a good Design/Build firm grounded in service. It worked well. So well, that we came under the flattering spotlight of consolidators. We were approached several times during the heyday. Consolidators really wanted to acquire a premier company. Linford's reputation in the Bay Area made us that type of company.

Customers called when they heard rumors that we were coming back. Past employees called because they wanted to be part of the new team. We even heard from a number of vendors who had encouraging words for us.

Legacy Mechanical rose from the ashes; we're proud to be where we are and believe we're going to be a formidable competitor in the Bay Area. I don't believe that we'll be the 800 pound gorilla, nor do we really want to be. We've taken a back-to-basics approach. Service and Design/Build are what built the old Linford Services. That's how Legacy will go forward.

Target the Best and Brightest

The partners of Legacy targeted the "best and brightest" people in the area whom we wanted to work with, and for the future, we are creating a way for them to share in ownership. Essentially, we want premier employees who would likely never be in an ownership position without a business strategy like this. Today, we have 33 employees, and attribute our rapid growth to them.

We started Legacy Mechanical in three bedrooms of my house. I'm proud of that, and it strikes me now that size doesn't have much appeal. We sold a $24 million company to become part of a $4.3 billion company, and now we're part of an 18-month old, $5 million company. I'm much happier with my new challenge than I ever was before.

Richard Almini has more than 25 years experience in the commercial HVAC and controls industry. He is a founding partner and the president of Legacy Mechanical & Energy Services, Inc. in San Ramon, CA. He served as president of Linford Service Company for 16 years until it was acquired by Group Mac/Encompass in 1997. The Linford Company received the prestigious Commercial Contractor of the Year Award from Contracting Business magazine in 1993. Almini was a speaker at the Design/Build Seminar held recently in Orlando, FL, December 3-5, 2003.