How Do You Calculate the Value of a Funeral Home?

How Do You Calculate the Value of a Funeral Home?

How do you calculate the value of a funeral home? A funeral home is only worth as much as a buyer will pay for it. This means there are no ironclad rules that can be used to pin down the exact value of a funeral home before selling it, although there are plenty of well-established guidelines.

Becoming familiar with the most common valuation strategies and contributing factors will make funeral home valuation less mysterious. The market always has the ultimate say when it comes to determining the value of a funeral home, but there are some rules of thumb that can be used for estimating it.

Compare Other Funeral Homes in the Same Market

The easiest way to get a rough idea about the value of a funeral home will be to compare it to others in the same area that have recently changed hands at known prices. Since no two funeral homes are the same, factors including the following will then need to be accounted for to arrive at a valuation:

  • Size. Most often expressed in terms of calls handled per year, the size of a funeral home business will always be one of its most important characteristics. Smaller funeral homes that receive under 100 calls in the average year tend to be of greatest interest to funeral directors who plan to run them personally. Larger, busier funeral homes are more likely to appeal to corporations or business-minded buyers who wish to focus more on management than personal interaction and provision of funeral services. In addition to suggesting certain sorts of buyers, the size of a funeral home will also have a fundamental influence on its financials, of course.
  • Revenue per call. Funeral homes vary widely about how much revenue they average per call they receive. A home that has a history of catering to a relatively well-heeled client base might generate much more revenue per call than one that focuses on serving people who are less well off, even if only because of the average price of a funeral. Once again, the revenue a funeral home produces with each call will impact both the types of buyers who will be interested in it and the financial case it will make to each.
  • Gross annual revenue minus cash advances. Multiplying a funeral home's annual call volume by its average revenue per call will produce its gross revenue. Depending upon the reporting, though, it may be necessary to deduct advances clients have made to pay third-party vendors. A funeral's gross revenue net of cash advances is often used as a starting point by buyers interested in making offers. (1)

Ideally, the best way to these figures will be to find funeral homes in the area that have sold fairly recently and are relatively close matches. Looking at several such transactions will make it possible to get an idea regarding what sort of multiple of revenue buyers are currently offering for local funeral homes of the same general class.

Of course, it will often be necessary to cast the net more widely just to have enough candidates to assess. In many cases, though, locally dominant trends will become apparent. If smaller homes have been selling to buyers at multiples of well over twice gross revenues, and larger ones command significantly less, then a home that slots in between with regard to size would likely do the same on the market.

Taking Additional Factors into Account

Even having a general idea about what a funeral home will be worth on the market can be helpful. In practice, though, it will almost always be necessary to go beyond basics like call volume and gross revenue to arrive at a remotely reliable estimate.

Some of the other factors that will almost always help better define a funeral home’s price are:

  • Real estate. The piece of land that a funeral home sits on can impact its market value more than almost anything else. In some cases, a particularly desirable property can draw buyers who have no interest in the funeral services industry at all. More often, particularly valuable real estate will alter the transactional or operational implications of a contemplated purchase. Valuable real estate can make it easier for a buyer to obtain a loan, for instance, or affect related details like interest rate or term. On the other hand, a high assessed value for a piece of real estate can also inflate the cost of running a funeral home, thanks to increased property taxes, insurance costs, or maintenance requirements.
  • Cash flow or EBITDA. Although call volumes and gross revenues are often used as convenient starting points, many experts prefer to focus on cash flows when conducting funeral home valuations. Cash flow is more complicated to report and analyze, but it provides more insight into the day-to-day realities of running a funeral home as a business. It has also become more common to adjust observed, historical cash flows to account for income taxes paid by a funeral home's owner. As one funeral home valuation expert wrote in a note to clients "The value of a funeral home is based on its tax-effected cash flow. Period." (2) Measures like EBITDA can just as well be used to arrive at a more financially informed valuation of a funeral home's worth, with the same sorts of caveats. Either figure can be plugged into a funeral home valuation calculator to provide another perspective.
  • Intangibles. Funeral homes of apparently similar sizes and financial situations sometimes end up selling for wildly different sums. If one funeral home has kept its burial rate fairly steady while another has been increasingly losing revenue to cremation, that can affect selling prices significantly. A funeral home in a declining neighborhood might be worth a lot less than one on the other side of town, despite posting competitive figures at the moment. How intangibles impact the value of a funeral home can be difficult to pin down, but even simply identifying those that are most relevant should help.

As with the fundamentals discussed earlier, these factors can only ever be taken as suggestive of a funeral
home’s value, not determinative. Delving into details like these and learning as much as possible about the
local market, though, should make it possible to estimate a funeral home’s value fairly accurately.

Contact the experts at BSF today.

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