Guide to Buying a Funeral Home
Many funeral directors dream of buying a funeral home. They want to be rewarded for their long hours, hard work and time away from family. They want to be in control of their career and future retirement.
If you think you want to buy a funeral home is the right path for you, ask yourself a few key questions first. Am I an entrepreneur? Do I have the drive and attention to detail that it takes to be successful? Do I have the personality to interact successfully with customers and employees?
How Much Can You Offer?
Once you find a business you would like to purchase, how much can you offer? Following are some general guidelines on the most common situations encountered when buying a funeral home. Several assumptions are made, including: the buyer will obtain bank financing to make the purchase; the buyer has excellent credit, strong industry experience and the ability to make a modest down payment; any seller financing will be at similar rates and terms as the bank financing; the buyer will own and operate the business for profit as a stand-alone facility; the value of the individual assets of the business, including real estate, are not greater than the overall value of the business.
Are Funeral Homes Profitable?
Most potential buyers wonder if funeral homes are profitable. That’s why it makes sense to determine how much cash will be available to pay debt service after the purchase. This is also the method used by banks to determine how much they can loan on a purchase. SDE or cash flow available to the owner is often expressed in terms like adjusted cash flow, seller’s discretionary earnings and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). All of these terms are used to describe SDE. SDE is a higher number and is not the same as cash flow available to service debt.
How Much Does It Cost
to Own a Funeral Home?
In order to determine how much it will cost to own a funeral home, take a look at the minimum salary requirement and the debt coverage margin. Let us say over the past three years a business has achieved average SDE of $350,000. The borrower’s personal salary requirement is estimated to be at least $50,000, which is then subtracted from SDE to arrive at CDS of $300,000. Let us say the lender is conservative and requires debt coverage of at least 1.5 on loans of this size. Dividing CDS of $300,000 by the minimum debt coverage ratio of 1.5 leaves $200,000 for total annual debt payments. In this example, $200,000 in annual debt payments over 15 years at 8.00% would allow the buyer to borrower approximately $1.7 million to make the purchase. If the buyer planned to put down $300,000 in cash, the buyer could offer the seller approximately $2.0 million for the business.
Time-Consuming and Stressful Process
Buyers Shouldn’t Go Through the Process Alone
Buying a funeral home is complex. There are many details that need to be handled in the transaction process. There are legal, financial and tax issues that need to be addressed in every business purchase. A buyer should always seek the appropriate legal, financial and tax advice when going through a transaction. Buyers who go it alone often pay the price in terms of poorly designed legal agreements, overly burdensome transaction structures, heavy tax consequences and unfavorable financing terms. Steve Jobs, the founder of Apple Inc., once said: “Great things in business are never done by one person. They’re done by a team of people.”
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