Common Funeral Home Sales Myths
Education is often our first line of defense against many things in life and it’s no different when selling a business. Appraisers, brokers and consultants will use a variety of methods to entice sellers into paying for expensive business valuations, signing exclusive listing agreements or expert consulting agreements. You may even be told that all fees are “buyer paid” so there will be no cost to you.
Everyone in business needs to make money, but normal profits should not be excessive nor have an adverse effect on the selling price.
Selling a funeral home can be difficult and time-consuming. It’s important to be aware of these common funeral home sales myths. It may save you time, money and frustration and give you a better understanding of the selling process.
Myth 1: You Need a Formal Business Appraisal
Business appraisals or “valuations” are used to establish the current market value of a business. Valuations are commonly used for selling, buying, refinancing, estate planning, developing buy-sell agreements and settling divorces. When selling, a valuation is used to determine the asking price. The problem is, most buyers need a loan to make the purchase and lenders typically order their own valuations. Lenders do this because they need to ensure valuations are done by independent third parties with no interest in the transaction. So the lesson is, don’t waste your money on a valuation lenders can’t use. If you do decide to get a valuation, make sure you use a national based valuation company and check with the buyer’s lender to confirm the valuation can be used. Also, be sure not to overpay for a valuation. Lenders typically pay between $1,500 and $2,500 for basic business valuations.
Myth 2: You Need to Sign an Exclusive Listing Agreement
Exclusive listing agreements are designed to lock in the seller and give the broker time to find a qualified buyer. Exclusive listing agreements are typically 12 to 24 months in length and come with a standard industry commission between 5% and 10% of the sale price. Often, the commission continues to apply to any buyer referred by the broker or any buyer finding out about the sale through the efforts of the broker. The listing period is “Exclusive” and normally means you pay the commission if you sell during the listing period – even if you find the buyer. The commission may also apply if you withdraw from a sale, fail to complete a sale or terminate the listing agreement prior to the end of the listing period. The reality is that you may already know the best buyer for your business and even if you don’t, it shouldn’t take a broker very long to find a qualified buyer you approve of.
Myth 3: Your Broker’s Fees are Paid by the Buyer so the Sale Costs You Nothing
Standard industry commissions are typically paid by the seller. But some brokers advertise their commissions are paid by the buyer and there is no cost to the seller. Be wary of this “buyer paid” approach because total transaction costs affect the selling price. While it may be true the commission is assessed and paid by the buyer, the true cost of that commission will affect the selling price. A buyer can only borrow so much money to buy your business, regardless of whether that money goes to you or to a broker’s commission. The lesson here is to be weary of the “buyer paid” approach and focus more on total commissions paid.
Myth 4: You Need to Sign an Expert Consulting Agreement to Improve Your Operations Before Selling
Expert consulting agreements are designed to lock in the seller, generate fee income, and allow the consultant to handle the sell when sold. The reality is that “improving operations” mostly involves maximizing cash flows, which is something your own CPA can do easily. An expert consultant with good industry experience may have suggestions to improve your pricing and personnel, but unless these changes are significant, they won’t increase your selling price.
Myth 5: You Need to Sign an Expert Consulting Agreement to Operate Your Business Before Selling
If you’ve been married to your business for 30 years you may want to relax for a few years before selling. The thought of relaxing and having someone else operate your business for a few years prior to selling is nice. But the reality of ownership is that while you still own your business, you’re still responsible for its performance. And, you’ll still go to sleep at night with the same level of stress and worry because of this responsibility. No consulting agreement to operate your business can change this stress level. Successful owners are heavily involved in day-to-day operations providing guidance and support to staff and customers. The lesson here is simple. As a successful owner, you’ve spent years developing relationships and trust with staff and customers. No outside consultant can duplicate these relationships and trust, or alleviate the stress and worry of ownership.
Myth 6: You Don’t Need to be Concerned With Financing Because It’s the Buyer’s Responsibility
Since few buyers can write a check for the purchase price, financing is critical to most sale transactions in today’s market. As a seller, you want to make sure the buyer is getting competitive financing to ensure you get the best selling price. The following example will illustrate this point.
Let’s assume you are selling your business to a buyer for $1.5 million and your building and real estate are worth an estimated $1 million. Due to the increase in real estate values over the past 10 years, this example is common in today’s market. Actual rates and terms will vary depending on a buyer’s credit history, experience and overall transaction risk.
A competitive loan would allow for a longer amortization period (25 years) and a lower interest rate (7.0%) on the real estate portion of the loan. While the business portion of the loan would result in a shorter amortization period (10 years) and a higher interest rate (9.0%). This competitive loan would result in annual payments on the real estate ($84,814) and business ($76,005) of roughly $160,819.
Contrast this with a non-competitive loan for the business and real estate of $1.5 million amortized over 15 years at 11.75%. This non-competitive loan would result in annual payments of roughly $213,144. The higher annual payments associated with the non-competitive loan would directly affect the buyer’s cash flow available for debt service by $52,325. Depending on the cash flow multiple, the higher payments associated with the non-competitive loan ($52,325) could result in a decrease in purchase price of $175,000 to $275,000. This example clearly illustrates the importance of competitive buyer financing and how non-competitive financing can significantly reduce the selling price.
These selling myths are not meant to be all-inclusive. Selling is difficult and the appropriate use of consultants, brokers or experts can help you get the results you need. These experts and consultants should be paid for their services, but their profits should not be excessive nor have an adverse effect on selling price.
Educate Yourself About Funeral Home Sales Process
It’s important to educate yourself on the selling process and to know what’s in the marketplace. Total transaction costs can and do affect selling prices. And, keeping these transaction costs at a normal level will allow you to maximize your sales price.