The Brea-based provider of heating and air conditioning services to homeowners was approached by a private equity firm, CenterOak Partners of Dallas.
“They had never seen anyone like us,” Smith recalled. “We were growing every year and we were more profitable than anyone close to us.”
After CenterOak bought a majority stake in his company, Smith reinvested in it. At that time, Service Champions’ goal was to reach $200 million with $40 million EBITDA.
Through acquisitions and internal growth, the company far surpassed that amount by generating $280 million with $60 million EBITDA in 2020, he said.
“They thought it would take three years to do that,” Smith recalled. “It took us 18 months.”
Last December, Champions was purchased by another private equity firm, New York-based Odyssey Investment Partners, for an undisclosed amount.
While Service Champions isn’t on this week’s list of Orange County’s largest private companies, which includes those with at least $500 million in sales, it could be on next year’s list, and perhaps rank high on the list in the not-too-distant-future.
“Right now, we’re close to $400 million and will probably hit $500 million by the end of the year,” Smith said.
With plans for more acquisitions and internal growth, “there’s a good chance we could get close to the billion-dollar mark next year.”
An initial public offering is “a real good possibility,” he said.
Opportunity
Service Champions has around 1,200 employees, with 350 working out of Orange County. Of that amount, 850 are technicians who perform more than 275,000 service jobs annually. As the largest residential service provider of heating and air conditioning services in the Western U.S., Service Champions goes to market via several local trade names, including Moore Home Services, Bell Brothers, ASI, Adeedo and ProSkill Services.
It doesn’t compete with another PE-backed HVAC provider, Brea-based Coolsys—also approaching the $1 billion mark in sales via an aggressive roll-up strategy—which services the heating and air conditioning needs of commercial companies like Starbucks and Costco.
Odyssey has raised more than $8.2 billion to make majority controlled investments in industries with long-term positive outlooks and favorable secular trends. It targets middle-market companies with annual EBITDA of between $20 million and $100 million.
“Service Champions is a compelling opportunity to build on Odyssey’s successful history of investing in localized service businesses,” Dennis Moore, a managing principal at Odyssey, said in a statement announcing the acquisition. “We are excited to invest in a growing business with attractive opportunities to grow organically and through acquisitions.”
The Plumber Accountant
Smith, 66, comes from a family of plumbers in Kentucky, where he grew up and attended university. He arrived in Southern California at age 25 in the 1970s when his brother offered him a job. At that time, he was earning $10,800 a year as an accountant when he asked his uncle how much he would make as a plumber.
“My uncle said if you’re dumb, stupid and ignorant, you’d make at least $50,000 a year. I thought I’d make at least $25,000,” he quipped. “I was a sweet ol’ country boy from Kentucky who turned into a plumber.”
When Smith started his own plumbing company in 1979, he learned two critical lessons. After his plumbing work caused two minor fires at houses he was working on, he decided he “wasn't good at it.”
“So I came into the office,” he said. “I tell people I’m the least technical person in the building. I know the business side well because I’m an accountant.”
He built that initial plumbing company up to $5 million in annual sales before eventually selling it in 1997 to the American Residential Services plumbing company, where he worked for a couple of years.
Hiring the Best
After his non-compete clause ended in 2000, he decided to start Service Champions.
This time, he focused on HVAC and heating systems where training can be done within a few months, as opposed to plumbing, which requires a couple of years to learn the trade. He began with just one salesman and two installers.
His edge was to provide quality services in an industry known for poor treatment of customers.
“One of our core values is being on time. We’re really strict about it. If I’m a customer who has an 8-to-10 appointment window and you show up at 10, I’m ticked. I want you there at 8 o’clock.”
He hires technicians with pleasant personalities who smile, give eye contact and can make people comfortable.
“We do everything we can to get the best personalities. We can teach them the technical side, but you cannot teach personality,” he said. “Our techs are the friendliest guys out there. We’ve even trademarked ‘the World’s Friendliest Technicians.’”
He decided to attract the best employees by offering higher salaries, which came with a requirement that technicians don’t look scruffy with old clothes and unshaven beards.
The company even teaches technicians how to park their trucks.
The company has “a happy money promise,” wherein the customer doesn’t have to pay if unhappy with the service. His technicians will do “good deeds for free” such as paint the side of a house or install an Xbox.
“We want to wow the customer. We’re always trying to do a little bit more than heating and air conditioning.
“It’s all about customers more than anything. You got to have great employees who treat customers right. If you have that, the company will always win.”
HVAC Subscription
Service Champions also has a subscription service, where for $19.95 a month customers receive a tune-up twice a year in March and October for their systems. If their systems break on a hot or cold day, their systems will be fixed that very day.
Thus far, Service Champions has 60,000 enrollees.
“We’re creating relationships. So many companies want to hit you once and get out,” he said. “Anybody can do air conditioning. The difference is how you treat the people.”
Family members have worked at his firm, including his children, nephew, and niece Katey Stern, who is chief marketing officer and part of the four member executive team that includes Chief Operating Officer Frank DiMarco and Chief Financial Officer Daniel Hamm.
“The secret is titles don’t mean anything. I have a vote just like they do,” Smith said. “If I say no and these three say yes, it happens. I’m not a dictator by any means. I’m just a team member. We just want to win.”
In the past few years with its new PE owners, Service Champions has made about a dozen acquisitions; at the time of the interview with the Business Journal in late May, it was on the verge of a couple acquisitions that would help it expand into Ohio.
“If we see a company that’s making half the profit of us, we’ll try to figure out how to pay their employees more and increase the profit,” Smith said.
New owner Odyssey wants Service Champions to reach $1 billion in annual sales.
“It’s not a matter of if it will happen,” Smith said. “It’s going to happen.”
