How Much Can You Borrow to Buy a Funeral Home?
- The buyer will obtain bank financing to make the purchase of the funeral home.
- 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.
Seller’s Discretionary Earnings
In the funeral industry, most businesses sell in a price range between four to six times Seller’s Discretionary Earnings (SDE). This price range typically includes all operating assets of the business. SDE or cash flow available to the owner is also expressed in terms like adjusted cash flow and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).
Cash flow for Debt Service (CDS)
The minimum salary required by the borrower will vary depending on their personal debt level. A good rule of thumb to budget and estimate a borrower’s personal salary requirement is to multiply their annual personal liabilities by two. For example, a borrower with annual personal liabilities of $15,000 will require a minimum personal salary of $30,000, which is then subtracted from SDE to arrive at cash flow available for debt service. Cash flow available for debt service or CDS is then used to determine how much the borrower can actually borrow for the purchase, which then allows the borrower to estimate how much they can offer the seller.