Brothers rescue failing mechanical services firm

American Combustion Industries was performing poorly before its acquisition from Washington Gas

It took them three months to begin putting the business back into the black, said John Kirlin, of Chevy Chase. And within one year, the brothers increased revenues by 18 percent, from $24.4 million to $28.7 million.

ACI had operated as an unregulated subsidiary of Washington Gas since 1998, said Tim Kirlin, a Bethesda resident. The gas company was trying to get a piece of the mechanical services industry after deregulation in the late 1990s, but it did not know how to run ACI properly and wanted to leave the business, he said.

‘‘They were losing money at an astonishing pace,” John Kirlin said. ‘‘Our due diligence in preparation to buy the company indicated the accounting was in disarray and the management was unsure of the cost of a man-day on the job.”

‘‘They were trying to chase revenue and grow, and they went after the wrong kind of work,” Tim Kirlin said.

There was also excess overhead, including a full-time housekeeper and a Sarbanes-Oxley compliance officer, the brothers said. Instead of relying on its accounting or financing department, the company was paying for a business analyst.

The brothers continued to wonder, ‘‘How dysfunctional is this company?” Tim Kirlin said.

ACI specializes in constructing and servicing mechanical and electrical systems in industrial and other commercial buildings. Its ideal customer is not the low-bid, low-margin, non-building owner or facility end user, but one who will pay for the company’s high quality and expertise, John Kirlin said. The building owner or user is going to value that high quality, rather than someone whose only motivation is to get the work done cheaply, he said.

The first thing the Kirlins did was cut overhead by 40 percent, and shift the business model, they said.

‘‘We managed every line item,” Tim Kirlin said, which meant getting better prices on trucks, other equipment and office supplies.

Most of ACI’s nearly 145 employees at the time kept their jobs; the company now has close to 155 employees.

ACI has always had ‘‘great” service capabilities, Tim Kirlin said, so they went back to what the company did well and doubled its service contract base. It focused more on selling directly to the customer, instead of working though general contractors, and not stretching into big new construction jobs, he said.

They share credit for the turnaround with ACI’s longtime employees. ‘‘We all worked very hard ... there was very little resistance to change,” John Kirlin said.

Plans now include ‘‘more of the same,” he said. ‘‘More improvement, more business growth, more profit, more opportunity for our personnel.”

The two most obvious first steps toward a turnaround include increasing revenues and-or cutting expenses, said Jerry Silberman, CEO and founder of Corporate Turnaround of Paramus, N.J., which specializes in helping small businesses deal with their liabilities.

Some business owners may fear cutting staff in an area such as sales because of its impact on revenues, said Silberman, also author of ‘‘Small Business Survival Book.”

A business should also look at what it pays for products and services, and re-evaluate what it charges, he said.

‘‘A lot of people are afraid they’ll lose their customers if they raise prices [but] you’ve still got to maintain a profit at the end of the day,” Silberman said. ‘‘You can’t just say I don’t want to raise my fees because I think I’ll lose customers.”

Troubled situation canmean better return

Tim Kirlin got a tip in August 2006 from an industry associate that Washington Gas wanted to sell ACI, he said. The sale closed in a month. The Kirlins declined to disclose the price.

‘‘It was extremely fast-paced,” he said. ‘‘When an opportunity to buy such a great company like ACI came along, we jumped at it.”

They assessed the risk of purchasing the company and thought it would be best to have a partner, which they found in Blackstreet Capital in Bethesda. The investment company specializes in corporate orphans and turnarounds, ‘‘and ACI fit perfectly within their investment parameters,” John Kirlin said.

Buyout investors tend to look for a troubled situation because there is a much greater potential for significant return, said Robert N. Rubin, managing director of National Capital Cos., an investment bank in Bethesda. ‘‘For a company that’s doing great, you have to pay a big premium,” he said.

Investors may invest capital, ‘‘but a lot of times what they’re investing is time and effort, and opportunity costs from doing something else,” Rubin said. Sharing that expertise and fixing the problems can have a major impact on the business, he said.

Sometimes management isn’t sophisticated enough and may need some guidance from ‘‘people who have been there, done that,” he said. Maybe they are not charging enough, are paying people too much or not controlling expenses, or there may be multiple partners and some are not pulling their weight, he said.

The Kirlins grew up learning about mechanical services after their father planted roots in the industry more than 50 years ago. Kirlin senior started mechanical contracting company John J. Kirlin LLC in Rockville in 1960, and purchased Combustioneer Corp., a mechanical services business, in 1975.

John and Tim Kirlin worked together at Combustioneer in Rockville, and sold the company in 1999. Tim Kirlin said he continued working there for a few more years, while his brother took some time and ‘‘had fun.”

Both have undergraduate degrees in business administration and finance. Tim Kirlin then got a master’s in business administration while his brother sought a law degree. ‘‘I got tired of paying attorneys to collect our bills,” he said.

His education has paid off ‘‘almost to the point of annoyance,” John Kirlin said. ‘‘Every time a contract comes through, it lands on my desk.”