Reclaiming the family remodeling business

Five years after he sold Airoom, Michael Klein is back to take the helm again

March 31, 2009
Sidebars:
Executive Summary
The New Marketing Reality


Five years after he sold Airoom, Michael Klein is back at the helm of the Chicago-area remodeling firm.  
Photo by Marc Berlow/Getty Images

Once a remodeler decides to sell a company he and his family have spent decades building, it's typically the end of the story.

For Michael Klein, it turned out to just be a short hiatus. Nearly five years after he sold Airoom to a private equity group, Klein is back in charge as the sole owner of the firm his father founded in 1958.

The company has struggled in the years since Klein sold, with revenues dropping from nearly $100 million before the 2004 sale to only $40 million last year. That left the equity group looking for an exit and presented Klein with an opportunity to get back into the business and restore it.

"It wasn't going the direction that I wanted it to go, and they weren't getting to the places that I had envisioned," Klein says. "Their focus was not the focus that this type of company needed to ultimately grow and become what it could potentially become."

While he won't discuss exact figures, Klein admits it was a great opportunity, as he was able to buy the company back for less than he sold it for in 2004, leaving the Lincolnwood, Ill., company debt-free and with the financial resources to make it through the current downturn.

Unplanned Exit

Five years ago, Klein certainly didn't expect things to end up this way. Initially, the partnership with the private equity group was about injecting capital into Airoom so the company could make acquisitions and expand outside the Chicago area.

At the same time, Klein was looking to take a step back after years of 90-hour weeks. Under the initial agreement in May 2004, Klein retained 18 percent ownership in Airoom and stayed on as the CEO. It quickly became apparent that the new and former owners weren't going to be able to work together.

"We had a difference of opinion on how the company was going to move forward," Klein says. "They had their opinion, probably formulated before they bought the company [about] what they were going to do and how they were going to do it."

The equity group decided it wanted to bring its own CEO aboard, and Klein officially left the company in January 2006, although he was "mentally out" by June 2005, he says.

"That's pretty much the standard M.O. for equity groups. You take the old CEO/entrepreneur out," Klein says. "I wasn't excited about it, but that's what they did."

When the opportunity came around to buy the company back, Klein decided he'd had enough time off and was ready to get back in the game.

"If the company was going to be transitioned, I felt like the best transition would be back to me, especially because it's kind of been floundering," Klein says. "It couldn't afford to have a false start again."

While the remodeling market is certainly not what it was a few years ago, Airoom suffered a steeper decline in revenues than it needed to, Klein says. The biggest reason, he says, is a difference in the entrepreneurial mindset he brought to the firm versus the bottom-line focus of an equity firm.

"I believe in investing more today for tomorrow," Klein says. "They're looking for returns every month, every year, so that's not their M.O. That's the first thing that goes in the private equity mindset."

Klein also believes the company was too quick to make cuts when revenues dropped rather than addressing the problem. That led to the departure of several good employees, hindering the company further. At the same time, the company never had a clear leader after Klein was ousted, with the first CEO leaving after just 13 months and Airoom having to scramble to find a new chief executive.

"There were some bad decisions that caused more retraction than was necessary," Klein says. "Arguably we should be 20 or 30 percent down, not 50 percent down."

Growth Delayed, Not Stopped

In a way, Klein intends to continue where he left off with Airoom in 2004. He projects an increase in revenues to $45 million this year, even in the current market, with the goal of getting the company north of $80 million in the next few years.

Klein plans to get there through acquisitions and expansions into other markets — much the same strategy that drove the initial partnership with the private equity group. This time, though, Airoom has the resources to do it on its own.

One of the company's biggest strengths going forward will be its mortgage business, which Klein intends to beef up to make sure Airoom's clients can continue to get financing.

"The companies that are able to control the funding through good times and bad times are ultimately the companies that can sustain success and navigate through muddy waters," Klein says.

That financing arm is one part Klein would like to take national this year because he believes there are a lot of remodelers and clients that have gotten tied up in the lending freeze despite being able to pay for a project.

At the same time, the Airoom team is looking for possible acquisitions, especially companies that provide services that would supplement the company's core remodeling services, such as closet systems or home automation. Klein doesn't plan to expand the company's remodeling services outside Illinois this year, but says that is definitely in the plan for 2010.

"I think we have a real opportunity to build some of these 'micro-businesses' inside of our business," Klein says.

Even as Airoom plans for future growth, the company has to deal with the very real challenge of a recession. Leads are down, and the average job ticket is 10 to 15 percent less than it was a year ago.

At the same time, Airoom is balancing the need to keep the best employees with the reduced overhead necessitated by lower revenues.

"Is it OK not to run a profit this year?" Klein says. "How much is that talent that you've invested in for years worth?"

In the end, a lot of those decisions have to come down to gut calls.

"You can look at the math, but the math doesn't tell you what tomorrow is; it just tells you where you are today," Klein says. "None of us have crystal balls."

While the recession is a challenge, it also presents an opportunity for an established business like Airoom to pick up market share as inferior competition leaves the marketplace.

"The good news is that as money becomes more important, clients are more concerned about who they're investing with," Klein says. "We're going to take advantage of our debt-free empire, so to speak, and our good name and brand and our longevity."

That's a message the company is emphasizing through its advertising and other marketing efforts: that it's a good time to remodel, and Airoom's history makes it the right company to choose.

"We have to bring people back to the mindset that it's OK to spend," Klein says. "It's not necessarily that they can't do it the way they did 2½, 3 years ago, but they feel like they shouldn't."

The phone is ringing less these days, but those clients who are calling today are more serious and better qualified than those a few years ago.

"Those people were calling you on a whim," Klein says. "The people that are calling today know what's going on around us."

 

Executive Summary

Airoom, Lincolnwood, Ill.
Chairman: Michael Klein
Specialty: Design/build
2008 projects: 300
2008 volume: $40 million
Projected 2009 volume: $45 million
Employees: 70
Founded: 1958
Biggest challenge: Driving leads and qualifying them at a reasonable cost
Web site: www.airoom.com 


The New Marketing Reality

One of the biggest changes in the short time Michael Klein was away from Airoom is in the arena of marketing.

"How to generate a lead and how to talk to the consumer has totally changed," he says. "It's a little bit weird. Newspapers are dead for all practical purposes, and died so quickly."

Year after year, the cost of getting and qualifying a lead increases as remodelers have to go to many different sources to reach the potential customer, as opposed to the past when Airoom could buy its real-estate in the newspaper and expect to see results.

"Nobody really has a good understanding of how to drive leads the way it used to be," Klein says.

For Airoom, the answer so far is a combination of the global and the hyper-local. While investing heavily in electronic marketing, the company is also getting more involved in neighborhood events to drive local attention. At the same time, the company can't abandon print advertising because that is still the best way to reach some segments of the market. However, where newspapers and direct mail once made up 90 percent of the company's marketing budget, it's now closer to 15 percent.

"It's not changed a little, it's changed a lot," Klein says. "We were trained by the generation before us that there's only one thing — print — and we have to get over that."

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