The Process of Buying a Funeral Home

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The Process of Buying a Funeral Home

Buying a funeral home business is a two-pronged process. On the one hand, you are looking for an asset you can afford to buy and grow over time. On the other hand, you are selling yourself to the business owner and lender—your credit worthiness, your capacity as a borrower and your ability to operate the business.

Prepare by Using Expert Resources

Align yourself with the expert resources you will need. A buyer is always in a stronger position with solid legal, financial and tax advice. Funeral home buyers who go it alone often pay the price in terms of poorly designed legal agreements with inadequate seller reps and warranties, poorly designed transaction structures with heavy tax consequences and overly burdensome financing structures with unfavorable terms.

Be honest with yourself about your ability to buy a funeral home business. You not only need to be prepared to operate your own funeral home, you will most likely need financing to make the purchase. Do you have a positive credit history? Have you saved enough for a down payment?

Search for a seller and a lender

Good funeral home businesses for sale are not easy to find. Most sellers do not advertise they are for sale and prefer to go through the transaction confidentially without the staff or community knowing the business is being sold. Sellers also know that most prospective buyers may not be prepared financially to get a loan to make the purchase. Given this, many sellers will be skeptical of a buyer until the buyer can demonstrate his or her financial ability to make the purchase.

Developing a personal network is one of the best ways to find out which owners may be considering a sale. Remember the importance of confidentiality and be discrete in your communications. Most sales representatives call on several funeral homes and are often a great source of potential leads. BSF cautions you about discussing your lead follow-up openly because the funeral industry tends to be a small community and you don’t want to derail your own opportunity. Remember that if a salesperson is telling you about a potential lead, chances are someone else may also know about it.

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When evaluating the business, don’t be afraid to ask why the seller is considering a sale. Make sure the business is priced at a level that will allow you to operate successfully. Make sure the business, customers and community are a good fit for you and your family. This fit will be the key to effectively transferring the current owner’s customer relationships.

Develop a Strategy Before Negotiation

Before entering negotiations to buy a funeral home, define your goals and develop a strategy for achieving those goals. Make sure you can support what you are negotiating for. If you want pay a million dollars for the business and real estate, make sure you can show the seller why that price is what you can afford to pay. Make sure you can show how your financing will be structured and how much cash flow there will be available to service your debt. The general rule is that if you ask for something, you need to be able to back up what you are asking for with valid supporting information.

Negotiations are a process of give and take. You and the seller will approach the table from different positions on price and terms. You are more likely to secure a deal if you keep your eyes on the goals, understand the seller’s needs and look for a win-win solution.

Do Your Due Diligence

Your negotiations will conclude with a letter of intent to purchase the funeral home business and real estate. The letter of intent is commonly called the LOI and it is your purchase offer based on the information you’ve received from the seller.
Unlike buying a house or a car, buying a business is a process of determining the true value of the business while uncovering any issues that may enhance or detract from the future operation of the business. The process of analyzing the business prior to the purchase is referred to as “due diligence” and the time period for performing these actions is referred to as the “due diligence period.” The due diligence process begins when a buyer identifies a target business to buy. The length of the due diligence period is determined by the complexity of the acquisition.
In reviewing the financial operations, the buyer will examine the financial records and accounting methods to determine the company’s historical cash flows, receivables will be analyzed to determine collectability, payables and debt will be reviewed to determine the quality of vendor and lender relationships and product pricing and service mix will be reviewed to determine consistency with industry norms.
The personnel of the target business will be reviewed to determine the necessity and pay level of each employee. In small business acquisitions, most employees are rehired at the same pay rate if their services are necessary.
Property and equipment owned by the target business will be reviewed to determine the useful life and appropriate fair value of each. Appraisals are conducted and the values will be used in the allocation of the purchase price to establish the depreciable values of the assets and equipment. Leases, rental agreements and property deeds are also reviewed.

The funeral home’s operations are reviewed to assess the location, inventory, vendors, management, customer relations, insurance policies and any other items specific to the industry of the target business. The main point is to question each item to see where improvements can be made. Is the business located in the right market area, is inventory adequate, are vendors providing quality goods at reasonable prices, has management run operations effectively, are customers satisfied with the services provided and are insurance policies adequately protecting the company from liabilities.

A female hand operating a calculator in front of a Villa house model
Marketing practices, advertising campaigns and public relations programs are reviewed to determine their effectiveness. Is the company using an appropriate marketing and sales strategy? How does the competition market their business and products? Could any of these practices be enhanced or changed to produce a better return on investment.
When commercial real estate is involved in a purchase, environmental due diligence refers to site assessments performed to uncover any potential liabilities associated with the property. These assessments are called Phase One and Phase Two Environmental Reports. A Phase One is almost always ordered by the lender for commercial real estate transactions. A Phase Two is not normally required unless a potential liability issue is uncovered by the Phase One.

Formalize the Purchase Agreement

Once you’ve completed due diligence, it’s time to formalize the purchase agreement. This agreement covers the price, terms and structure of the deal. Unlike the letter of intent, the purchase agreement is legally binding. The purchase agreement is often drafted by the buyer. This is for your protection and gives you opportunity to make sure the appropriate seller reps and warranties are included in the language.
The purchase agreements may take several rounds of review by you and the seller before the final draft is ready for execution. This is normal and you need to be patient during this process as the final agreements need to be drafted with care since they are the only binding source of commitment between buyer and seller.

The closing

The closing is the actual event where the transaction is concluded. It usually occurs at the office of an escrow or title company but can also be held at an attorney’s office. All documents are executed, the title, deed, stock, etc. are exchanged, the mortgage is signed and funds are transferred.
At closing, the seller and lender will be there along with the attorneys for both sides. As the buyer, you are generally responsible for coordinating the documentation and the sequence of events. Be sure that all closing documents are negotiated, reviewed and approved prior to the close. The seller’s attorney will make sure the seller brings all the necessary records, including stock certificates, articles of incorporation, corporate minute book and tax records.

At the close, you are not only executing the documents, the seller is transferring the entire business to you. Your attorney will help you become familiar with all of the documents and obligations to complete the close successfully. Most acquisitions are cash transactions along with promissory notes to the seller. The funds from you and your lender will be wired electronically to the seller. In addition, all payments to intermediaries are made at this time. The closing document from the escrow company will specify all of these payments.

You will likely find this to be a very stressful day. It’s the culmination of a long and arduous process. But you are also likely to experience an exhilaration of finally reaching your goal to own a business. Congratulations!
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