The McDonald's of Home Services

The McDonald's of Home Services

Forget the plumber jokes. VenVest sees heating, air conditioning, plumbing and electrical services as a huge market ready for standardization and consolidation.

By Sean Roth

Real Estate Editor

Jim Abrams knows the public hates dealing with home-service people. There are the stereotypical plumber jokes and the heavy-handed, arm-bending sales pitches. On the more extreme end, the industry brings thieves, drug addicts and murderers into people's homes.

For Abrams, all stereotypes aside, the industry's reputation is an opportunity.

Abrams and his partner, John Young, are trying to "McDonaldize" the home-services industry. They want to create a conglomerate of home-service companies that use the same business model, from training to software to branding, and offer the same level of courtesy and professionalism.

From two small suites in One Sarasota Tower, Abrams runs a growing multimillion-dollar venture capital and business incubator called VenVest Inc. VenVest is a holding company for several companies, which fall into four main groups: service stores, Internet retailing, employee training and consulting/membership services.

VenVest operates two consulting operations: AirTime500 (for the heating, ventilation and air conditioning industry) and Plumbers' Success International. VenVest will debut a fourth consulting group for the electrical services industry, called Electricians' Success International, in May.

For a set weekly membership fee, typically about $200, these consulting/management companies provide access to management tools, such as proprietary software, business plans, payroll techniques, marketing and training for management. Individual technicians are trained through VenVest's New Millennium Academy.

BuyMax is VenVest's Internet retailer, which sells HVAC products to contractors. Businesses that use VenVest's consulting/management receive additional incentives to use the Web site in the form of rebates and reduced prices. The Internet portal also sells some of VenVest's branded and patented products, such as the talking thermometer geared toward the sight-impaired.

The fourth group of companies owned by VenVest is a branded retail operation that can be company-owned or franchised. Both One Hour Air Conditioning and Benjamin Franklin Plumbing focus on timeliness and 100% guaranteed service. The Mutual Fund Store is a group of branded stores based around the work of VenVest's partner in the franchise - Adam Bold. The Mutual Fund Store franchises place investors in no-load or fee-waived mutual funds based on an investor's risk tolerance. In five years the store has amassed more than $500 million in investor funds under management.

With the exception of The Mutual Fund Store, all of VenVest's companies focus on the home-services industry. "This is our market," Abrams says. "We started shifting over to home services two years ago. While The Mutual Fund Store is a profitable side of our business ... it is likely that we will sell it in the near future. (Home Services) is what we know."

The partners' long-term goal is to grow VenVest for an equity offering on the New York Stock Exchange. With enough additional investment VenVest could start acquiring homes-services companies nationwide.

The company's business plan shares more than a passing resemblance to Service Experts, the nation's largest public HVAC company. That's not surprising given that Young and Abrams founded that company and took it through its IPO in 1996.

Abrams and Young first met in the late 1970s at Trane Co., a LaCrosse, Wis.-based manufacturer of HVAC equipment. Both were on the fast track, and by the early 1980s, Abrams was manager of retail operations in the consumer products division, and Young was manager of product planning. In 1981, Abrams left Trane and founded Air Experts Inc., an HVAC service and replacement business in St. Louis. By 1991, the company had grown to more than $12 million in sales and had acquired several of its competitors.

In St. Louis, Abrams says, "I would go to fancy parties, and people would ask me, 'What do you do?' When I said I was in HVAC, they would say, 'Thank you, goodbye.' Now I get to tell them I'm a venture capitalist."

At the same time Abrams was developing his company in St. Louis, Young started one of the first franchise companies in the HVAC industry, Fort Myers-based Service America. When Young left in 1986, Service America had grown to more than 100 franchisees. Later that year, Young started the HVAC consulting company John Young & Associates in Fort Myers, which was one of the first users of direct mail.

The future partners kept in touch after leaving Trane. In 1998 Young suggested Abrams buy a failing franchisee of Service America in Sarasota. He did and the partners started meeting more frequently.

In 1990 Abrams and Young decided to combine their efforts and start an HVAC consulting company called Contractors Success Group.

"John's education is as a nuclear engineer," Abrams says. "Mine is more on the business side (a bachelor's degree in business administration). The match just comes together. There is a philosophy that says, 'If you study just one subject for 15 minutes every day, you can be one of world's experts.' If you visit John's house in Kansas City, on the right side of his house you would see thousands of books on marketing. He has read every one. He is a guru of direct marketing and studying things like using the mail and the Yellow Pages. My experience is all on the operational side. He makes the branding decisions, and the day-to-day business falls to me."

After six years in the consulting business, Abrams and Young started Service Experts Inc., a Nashville-based HVAC business consolidator. Shortly after its founding, the HVAC company went public. After an IPO on the Nasdaq at $13 a share, the company rose to $22 a share and a listing on the New York Stock Exchange. By the end of 1997, it was trading at $32 a share. At that price, according to company proxy statements, Abrams' 803,144 shares would have been worth $25.7 million. Young's 837,855 shares would have been worth $26.8 million.

In 1997, personal reasons forced the two partners to hire one of their clients, Alan Sielbeck, as chief executive officer. It was a decision they later would regret. "He abandoned the business plan," says Abrams. "He started buying unlike companies. He wanted to put his own mark on the company. The weight of management took the company down."

In September 1997, Abrams resigned and retired to Siesta Key. Young stayed with Service Experts another year.

"I spent a year and a half walking the entire three-and-a-half miles," Abrams says. "I just kept asking myself what did I do wrong. I couldn't let go of the concept." At the same time, Abrams started refining his HVAC business model and operational manual.

In October of 1998, Abrams officially gave up retirement and with Young and a few other partners started and capitalized St. Louis-based VenVest Inc., a venture capital firm.

And then they went after their old company. In late 1999, Abrams, Young and a number of investment groups attempted a buyout of Service Experts, acquiring some of the company's public stock. In the end, they lost out to Lennox International Inc., which, Abrams says, bought the company for a fraction on each share. "We lost probably $1 million," Abrams says.

The two partners knew the goal of VenVest ultimately had to be to acquire and operate a chain of home services companies. The biggest obstacle to that was the need for capital. From their experience with Service Experts, they knew their new company would eventually need to go public.

Unfortunately, Abrams and Young knew that conditions had changed, and their new company would need to produce a minimum of $100 million in annual sales revenue for a shot at the NYSE. They also learned from their experience at Service Experts that their success would hinge to a large extent on retaining control of the company while at the same time having enough competent managers in place to handle the growth they wanted.

Abrams and Young then decided to emphasize the consulting and franchising side of the business to build it up quickly. The consulting and franchising business has the added benefit of helping the company find potential businesses to acquire in the future and makes acquisitions easier. VenVest encourages members to use identical business methods, software and personnel hiring. So any acquisition would be relatively seamless.

Abrams and Young decided to base the franchise brands on the timing promise that catapulted Federal Express and Domino's Pizza.

"When Domino's Pizza was doing its '30 minutes or it's free' promotion, no other chain could beat it," Abrams says. "Just like Fed Ex. I know if it's 10:30, a Fed Ex person is going to show up in my office. In the home-services industry, people want service the minute they need it. Operationally, that is impossible. We would need exorbitantly large staffs."

The alternative, the partners chose, was emphasizing punctuality and professionalism. If a One Hour Air Conditioning technician misses a one-hour window, then the repair service is free; Benjamin Franklin Plumbing offers a $100 bill for missing its arranged service time.

In addition, the partners decided the new company would use business plans that emphasize greater safety and courtesy to the customer in its consulting and branded properties. This includes technicians using citrus-scented booties, free service if a technician uses vulgarity and placing orange cones behind the work vehicle so a technician will check for small children before backing up. Beyond extensive background checks and drug testing, VenVest business plans emphasize paying technicians an hourly rate (something unheard of in certain areas of the country), offering 401k plans and family benefits and finished business offices.

"We want there to be no incentive to take advantage of customers," Abrams says. "It is very standard in places like Southern California to pay plumbers based on a percentage of revenue generated. They will also typically send a plumber on one call a day. It's not that these are malicious people, but if you have a wife and kids, you have got to make a living off that one call."

While Young and Abrams knew the HVAC business; they knew little about the plumbing and electrical services industries. So they tracked down some of the leaders in their fields. In 1999, Young and Abrams partnered with Mike Diamond, owner of Mike Diamond Plumbing, Heating & Air service centers in Los Angeles and Orange counties, as CEO of Plumbers' Success International. At the time, Diamond's company was grossing more than $16 million a year, and the Los Angeles Business Journal referred to him as "L.A.'s most famous plumber." Just this week, VenVest officials announced they were partnering with Patrick Kennedy of Mr. Sparky in Atlanta to head the company's new Electricians' Success International. In 2002, Mr. Sparky was selected by Inc. magazine as one of the fastest growing small businesses in the United States.

"We try to find the best experts in their field," Abrams says.

If there is one thing the partners and even some of the franchisees will admit: They aren't the cheapest companies on the block, and that will cost them customers.

"The studies show that almost 37% will never go with us," Abrams says. "That's OK, we have to be able to motivate the right people to work for us. One of the questions we ask general managers is, 'Can you hang the key to your house in your office and send any service technician on your payroll to fix a problem? If not, you've got a problem."

With the business plan in place, the partners started and staffed the nine business ventures and were looking at acquisitions when everything stopped. Abram's son, who lives in Sarasota, became ill, so in 2001, Abrams returned to Sarasota to take care of him. After his son recovered toward the end of the year, Abrams decided to move VenVest's business operations to Sarasota.

"It was a good management transition," Abrams says. "It allowed me to pass some of my responsibilities to others. That left me free to focus on acquisitions."

The company made its largest acquisition to date last May, acquiring the heating and air-conditioning businesses of Canadian-based Union Energy. The deal also included the 192 employees of the four companies. VenVest is operating the four units under the name AirTime Canada ULC. While the terms of the sale were not released, in 2002, the four business produced more than $20 million in sales. Abrams expects a 50% improvement in profits at the four companies over the next 18 months.

Later this month, the company is under contract to purchase a $10 million One Hour Air Conditioning franchise in Las Vegas. "This is one of the largest retailers in Las Vegas," Abrams says. "We are very high on Las Vegas in general. We expect to raise that to a $20 million base by next year."

Already the business plan has created some attention for franchise and consulting companies. In the January issue of Air Conditioning, Heating and Refrigeration News, four of the VenVest's franchise or consulting companies won recognition as one of the best contractors to work for, including A-Temp Heating and Cooling Inc. of Clackamas, Ore.; Heating Co. Inc. of Lincoln, R.I.; Tiger's One Hour Air Conditioning & Heating of Largo; and All Seasons 500 Heating & Air of Huntsville, Ala.

In the long-term, Abrams says he expects to see even returns in all three areas of the home services industry, but the company is looking into less seasonally affected industries such as locksmiths, roofers and painters

"Industries that have fewer peaks and valleys," he says. "Right now, HVAC represents a disproportionate portion of our business. We expect that to even out."

In terms of its Sarasota office, VenVest purchased the ninth floor of the Plaza and Five Points under construction on Central Avenue between First and Main streets. Plans currently call for VenVest to relocate the remaining St. Louis office (44 people), the existing Sarasota staff (23) and 50 new staff members into the new facility by mid-2005. It's also possible the company could relocate the 14-person staff of BuyMax currently based in a warehouse in Nashville.

"We plan to employ 300 people by 2010," Abrams says. "I have always liked Florida; it is certainly a more tax favorable state. It is certainly makes it easier to recruit."

Next on the recruiting list: a chief financial officer with experience taking companies public.

VENVEST'S GROWTH TRACK

Revenue% Chg.

2000$7.39 million

2001$12.2 million+65%

2002$14.6 million+20%

2003$38.2 million+161%

2004$79 million*+106%

* Estimated

VENVEST'S FAMILY TREE

Here are the companies that comprise VenVest's portfolio.

HNBC

The Mutual Fund Store

Franchises that place investors in no-load or fee-waived mutual funds based on an investors risk tolerance. Projected revenue 2004: $1.4 million.

Infinity Groups

Consulting groups for HVAC contractors, plumbers and electricians

× AirTime500: a consulting group for residential HVAC contractors that receive proprietary tools, management expertise and marketing systems. Projected revenue 2004: $6.5 million

× Plumbers' Success International, a consulting group for the residential plumbing service industry. Projected revenue 2004: $5.5 million

× Electricians' Success International, a consulting group for the residential electrical-services industry (starting in May). Projected revenue 2004: $1 million

× New Millennium Academy, training for technicians of businesses that are using the three other Infinity group companies. Projected revenue 2004: $2.1 million

BuyMax

An Internet buying Web site - www.4buymax.com - with branded and patented products. Projected revenue 2004: $16 million

Retail Operations

These are the company-owned or franchise stores

× One Hour Air Conditioning. Projected revenue 2004: $4.2 million (franchise fees). Projected revenue 2004: $39 million (from company-owned stores)

× Benjamin Franklin Plumbing. Projected revenue 2004: $3.4 million (franchise fees)