For more than six decades crews at the Neil Kelly Co. have been beautifying homes across Portland, Ore. This month, company president Tom Kelly finalized a deal to acquire a new location in Seattle, expanding the brand’s well-known Pacific Northwest footprint. But it’s not just the design/build division that’s growing. Kelly says that both the company’s home performance and handyman divisions have been doing well.
Did Neil Kelly Co. somehow escape the recession during the last two years? No. But the remodeler didn’t let the economy slow it down either. Kelly shared details on the company’s latest acquisition and a wealth of business information that only a long career in the industry can build. Here’s what he told REMODELING.
REMODELING: Many small businesses have had to close their doors as a result of the recession and many larger companies have seen that as an opportunity to snap up those companies and expand. Was that your mindset with Neil Kelly Co.’s acquisition of Seattle Design Build this month?
Tom Kelly: I wouldn’t say that. This is the fourth time we’ve acquired a company, and they all have something in common. The first acquisition, in 1988, was a company owned by a woman who wanted to get out of the business, and it was a really positive experience. We ended up with a second location that eventually became our West Side Portland location in 2001. After that, one of our cabinet dealers in Eugene, 100 miles away, was ready to retire. He asked if we were interested in buying the business, and at the time we weren’t, but after some thought we saw it as a great opportunity. Three years ago we decided to open a showroom in Bend, Ore., 160 miles away, and I contacted another remodeler — also a cabinet dealer of ours — and told him, “before you hear it from someone else, I may open a showroom in Bend.” As luck would have it, he had just spoken to a business broker and was ready to sell. In all of the situations, the principals want to retire or play a different role, and that’s what’s happening here. One of Seattle Design Build’s founders, Carolyn Boardman, is staying on as general manager of the Seattle location.
RM: Why does Seattle make sense for you as a new market?
TK: The new location will be a great market for us and will solidify the company as the largest residential remodeler in the Pacific Northwest. The big reason why we looked to Seattle is that in the Northwest, it’s the obvious place for us to go. The whole Seattle/Puget region is substantially larger than the Portland region and has a higher level of household income. On the other hand, it’s also similar to the Portland market and the housing market we’re familiar with. We’ve also been marketing our cabinets in Seattle for a long time and because of the fluidity of people moving back and forth between the two cities, we have a high brand recognition.
RM: With four acquisitions under your belt, is there a reason you opt for that kind of expansion rather than opening a branch office and growing organically?
TK: Absolutely. The advantage is that these businesses all have 1) a set of employees experienced in working in that area and experience working with the trades, and that’s important. 2) They have a previous client list. It’s one thing to hang up your shingle and build a showroom, but relationships in business are so important. We’ve really focused on building relationships in the industry when we go into a new market, so, for instance, we’re active in the Central Oregon Builder’s Association. We really focus on being good citizens of the industry. Those relationships are very important to us. Existing relationships in our business are also important. I won’t expand into a new market without having people who have worked for me for a long time be part of that expansion. In this case, four years ago we hired a woman who had moved here from Seattle. She has a following, and she’s anxious to go back, so we’ll be adding her and a project manager in Portland to the mix, and we’ll be hiring new staff members as well.
RM: We always hear about the importance of due diligence when purchasing a business. What does due diligence include for Neil Kelly Co.?
TK: We take the same steps that a consumer would before hiring a company. We check on its reputation and its references. Also, one of the valuable assets for us is the customer list because if the company’s reputation is good, those previous clients will have relationships with the company that we’ll want to maintain. It’s also important to us that the company is financially stable, that it has paid its bills and has a good reputation in that respect, and you certainly want to make sure there’s no litigation going on. In some ways, the process has gotten quite simple for us. We’ve gotten it down to a standard contract that we use. We’ve also done a fair amount of due diligence on the market and the prospective volume one could achieve over time. That’s a really important aspect when buying a business. I think a market has to be at least a regional population of 100,000 to 150,000 before someone should think about having a branch office in a particular market. It’s also worthwhile checking out the general economic climate in the area. I’m a believer that opportunities are often found in times like this and it’s a better time to expand because there is more opportunity to hire really good people, as opposed to when times are really rolling and trade contractors aren’t interested in your business. Slower times are opportunities to build a business.
RM: Speaking of financial stability, do you expect an acquired company to continue to pay for the staff members that stay on after the purchase or does Neil Kelly Co. have to have enough funds available to cover those salaries?
TK: Any time we buy a business, we develop a preliminary pro forma budget, so we have a good idea of what level of business we need to do to justify the additional overhead. In general, we’re going in with an idea that we’ll take all the good aspects of the company and incorporate them into our system. With that in place, we generally plan on an increased level of revenue from what those companies had been doing. When someone starts a new business in this kind of environment, the expectation of being profitable right out of the gate isn’t realistic — it’ll take some time. On the other hand, in our situation in Seattle, we bring our financial strength to the table, so we expect to be able to increase the revenue rather quickly. During the recession, Seattle Design Build just didn’t have the resources to market the way we’re able to, so we bring that to the table, and we can also capitalize on the experienced staff that will continue working in that office.
RM: What can you tell us about how your acquisitions have been financed?
TK: An acquisition isn’t something a business owner should rush into. We have a good deal of experience in these transactions and we believe it’s important to pay cash. If an acquisition is something you have to finance, you better think twice. Make sure you have the capital on hand to do it or your attempt to grow could be a formula for disaster.
RM: Switching gears, tell us about the success that your home performance division has seen in recent years. Were the energy tax credits in 2009 and 2010 important for that growth?
TK: We started the home performance division three years ago, and it was quite a small piece then. Once we really got behind it, we hired some people to really grow the business, and it doubled in size over the last year. This year, we’re planning a lot less growth but we’re optimistic that we’ll still see an increase. The home performance division has really become vital to our business. The tax credits that have been available were very positive for business in 2010. Probably just as important, or even more important, were the good state programs we have in Oregon. For instance, the Energy Trust of Oregon offers incentives in addition to federal ones, and a local program called Clean Energy Works Portland is now going statewide. Homeowners will be able to partner with banks to get loans for energy retrofits. The bank loans the money, but the homeowner pays for the improvements through their utility. This year, the $1,500 tax credit was reduced to $500, but we haven’t seen a big decrease in business because of the change. Even if a homeowner doesn’t take advantage of other programs, we find that our average home performance project is $12,000 and that consumer is going to get upwards of 30% savings in energy costs. Another thing that has helped us grow is that we’ve really assimilated home performance into how we do business with our remodeling division. When we sign a design retainer over $1,000, an energy audit is free to the client. It’s unique to our standard remodeling business and improves the service we provide. We want to take a holistic look at the whole house.
RM: Home performance is one area that some companies are looking into as a way to expand their service menus, and handyman work or small jobs are another. What changes have you recently made to your handyman division?
TK: Our small-jobs division was originally called Neil Kelly Handy Man Home Repair. Our perception was that the brand was living too much under the design/build umbrella and we wanted to separate it out and to also separate ourselves from the “handyman” moniker. We’re renaming the division Neil Kelly HomeForce and will roll that out over the next several months with some great new advertisements. We decided to make the change because our home repair division does more than just handyman jobs. We still do that kind of work, but there are a lot of handyman companies in our market, so we want to differentiate from the crowd. In our case, some of our home repair jobs are significant repairs, such as redoing a whole house to correct construction defects. We want the marketplace to understand that, rather than seeing us as just a small handyman company.
RM: With all this success, it seems like the company made it through the recession unscathed. What kind of impact did you feel the last couple of years?
TK: Our reduced market of our business from the recession is down overall 30%, but it’s starting to climb back. The handyman business was just over $2 million last year and home performance was $1.3 million out of nearly $17 million in total business. Compare that to 2008 when all of our business was almost $28 million. Home performance was just starting then, but handyman was over $4 million then. It’s been a big change for all of us to deal with, but we’re looking forward to the next positive steps forward.