Value Added: The Heating And A/C Annuity
Here's Tom Heath's latest column on Washington's business community:
I always thought annuities were something paid to me. But sometimes it's the other way around.
Every spring we call Bethesda Shade & Awning (now in Gaithersburg) and ask them to put up the awnings at our Chevy Chase home. They put them on, take them down in the fall, and hold them in storage during the winter. We pay them $325 every year for all of that, and the price seems to go up about five bucks a year.
Same with air conditioning and heating. Every spring, Tucker's Air Conditioning and Heating (also in Gaithersburg), arrives for an annual AC inspection. Then they come back in the fall to make sure the furnace is working. We got tired of writing checks to Tucker, so now we pay an annual service retainer of around $200, which covers two basic visits.
I marvel at these little companies.
They are what Warren Buffett refers to as "tollbridge" businesses -- something you pay for with some regularity. Think cigarettes, razors, Starbucks and mouthwash.
Inevitably, with each service visit, there is always something wrong with the furnace or the AC, requiring more spending.
I am not complaining. When Tucker's technician advised me to clean my AC coils a couple of summers ago, I figured it was probably a waste but told them to go ahead anyway. My summer electric bill dropped like a stone.
I wanted to know more about these tollbridge businesses so I called Ken Tucker and asked him how much my heating and air conditioning service agreement -- and the 700 other customers who have them -- contributes to the bottom line at his company.
"The service contract is our bread and butter," said Tucker, who is 45 and a native of Silver Spring. The 700 contracts bring Tucker about $140,000 a year, or less than 10 percent of the $2 million in gross revenue the company collects. But it leads to a lot more money because it keeps the company in regular touch with its customers. And on many visits, technicians find something additional you need (remember my coils?).
"These are the people we take care of," said Tucker. "My mantra is repeat customers. They are customers who, if they ever need to have equipment, we are the first they look at."
The money helps his cash flow too. "We bill those service contracts out March 1 and Sept. 1, and it increases our cash flow before we stock supplies for the season. So when I have to buy my heating supplies to stock my trucks, I use the cash flow from the September service contracts."
He said his goal is to double the number of service contracts to 1,500 a year. That would bring him around $300,000 in reliable cash.
Tucker attended Catholic University and has a knack for numbers. His brother, Mike, knows heating and air conditioning, so they started Tucker's in 1995 in Mike's garage in North Potomac with $10,000 in savings and a $50,000 loan from their mother. They used the $50,000 to buy two Ford vans for house calls. They have around 11 vehicles now.
Their plan was to build a business on customer service and reliability. Sounds like a cliche, but have you ever had a contractor not show up to fix your house?
"If you look at a typical contractor, they are run by tradesman and not businessmen," Tucker said. "Tradesmen sometimes don't understand that you have to treat the customer well."
The vast majority of the business is residential, with a small portion of commercial customers. To build customer loyalty, first-year "core clients" were given 10 percent discounts for life. If someone thought they were overcharged, Tucker gave them their money back so they didn't feel ripped off. The company tried to respond to every emergency call within 24 hours, even if it meant losing money. If a customer recommended Tucker to a neighbor or friend, the customer got a $50 credit on the next job. (I know. I have the $50 credit to prove it.)
Tucker grossed $200,000 the first year in 1995, and the business was profitable by 1999. The brothers each took a $30,000 salary for the first few years, rolling everything back into the business for new trucks, top notch employees, equipment, rent, office furniture. They were helped along by a $67,000 small business loan in 2000.
Tucker and his brother now each draw a salary "in the low six figures." They still roll any net profit back into the company, which amounts to between $50,000 and $100,000 a year. It buys computer upgrades, new trucks, better employees. A Tucker technician earns between $45,000 and $70,000 a year. The company has 14 employees.
Ken Tucker network liked mad, passing out his card, attending various business and association meetings and industry shows. He and other small business owners known as the "Success Network" gather every Thursday morning at the Clopper Road Bowl America in Montgomery County to exchange ideas, leads and gossip.
Tucker prays for bad extreme weather, which wreaks havoc on heating and air conditioning systems.
"When it's cold and damp, I feel wonderful."
Business has been good, despite the downturn. He said one smart move was to hire some top service technicians last spring, when competitors were laying off because of the housing downturn. Tucker said he could have laid low, waiting for the busy summer season to hit before hiring the new employees, but he didn't want to lose the chance to grab their expertise. When the heat wave hit, the company grossed $385,000 one month, besting the previous record by more than $100,000. Tucker said the new hires helped him get to more jobs in faster time. The business grew 20 percent this year.
Tucker's next gig is another take on the tollbooth business. You know those rectangular filters you are supposed to put in the air vents that recirculate the air through the AC system? Tucker wants to deliver them to your house, one at a time. You order them over the Internet at furnacefilterstoyourdoor.com, and he will ship them at a cost starting at $16.99 each.
"Homeowners typically don't replace the filters as much as they need to," he said.
He has 200 customers so far, but is hoping to increase that to 10,000 locally and many times that nationally. The hard part is delivering the filters, one at a time, to customers at a price that is affordable for the customer while also providing a decent margin for Tucker. Tucker makes a "couple of bucks" profit on each filter. If he can get that to a million households nationwide -- well, you do the math.
"I'm thinking huge," he said, adding that he only has $25,000 invested in the new venture.
I ask him what he does with his money, and he says nearly all of it is reinvested in the business, which may be worth a few million dollars. He has about $100,000 saved. He said he pulled it out of the stock market and "put it in safe stuff."
"My risk is my business."
November 2, 2008; 8:00 PM ET
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