Selling a Funeral Home

Guide to Selling a Funeral Home

You’ve been running your funeral home business for a long time. Perhaps you’ve thought about selling the business—to retire, to move on to another phase of your life, or to diversify your assets.

Whatever the reason, it’s a big decision selling a funeral home and an event to navigate knowledgeably and confidently.

The question is not whether you can sell your funeral business. There will always be buyers for well-run funeral homes for sale. The question is how you get there and what result you produce. Will you will be able to control the process? Will you get the best price and terms from the asset you’ve worked so hard to create?

Like any complex situation that you enter for the first time, many traps and pitfalls await the inexperienced traveler selling a funeral home.

Are You Considering a Sale of Your Funeral Home?

A lead time of at least two years is often needed for tax planning because appraising your funeral home may identify certain areas that need adjusted to increase profitability. Remember, all else being equal, higher profits translate into higher business values.

If adjustments to revenues or expenses are necessary to increase profitability, it will take some time for those adjustments to be realized on your financial statements and tax returns. Potential buyers need to see proof of your historical profitability via your financials and tax returns. Buyers and their lenders will use this historical data to determine the amount debt service the buyer can afford in the future. Thus, more profitability results in more cash flow available to pay debt service, which results in a higher sales price for you.

Estimating the value of a funeral home can be difficult because values can vary greatly from one business to the next – even in the same industry. Every business is operated and managed differently, and that can affect the value.

Review Market Conditions

If you are considering a funeral home sale, you need to know what’s happening in the market. You need to know who is buying; which buyers will be interested in buying your business; how desirable your business is; what prices buyers can afford to pay, what financing options are available to buyers, and if any seller financing will be required of you. Knowing the current market and addressing these factors will help determine the right selling strategy for you.

Large corporations rarely buy small- and medium-size funeral homes. Normally they are looking for 250-plus calls per year or more. After the feeding frenzy of the 1990s, corporations learned the importance of an owner’s personal touch and the importance of not overpaying for acquisitions.
This means the days of a corporation offering an owner three times revenue are gone and not coming back. Right now, individuals and small regional firms are offering the best prices to sellers in the market.
Most individuals are looking to buy a funeral home doing 75 to 150 calls per year. (A more experienced individual may go for a larger volume.) Small regional firms are looking to buy funeral homes doing 100 plus calls per year if they are within a reasonable distance from their other firms.

What kind of prices are individuals and small regional firms are offering for a funeral home? Current selling prices range from four to six times adjusted cash flow or up to 2.25 times net revenue. The final price is not dependent or correlated with net revenue, but is sometimes expressed that way. The final price is directly correlated with the adjusted cash flow because that is what shows lenders how much debt service the business can afford. In simple terms, the adjusted cash flow is the amount of money the new owner will have available to pay debt service after the sale. This is where competitive financing comes into play because lower interest rates translate into the ability to finance more debt.

Cheerful people holding speech bubble icon
Sellers in today’s market will often seek the advice of an expert, and they are often told their business is worth more than it really is. Be cautious of anyone telling you they can sell your business for over 2.25 times revenue, anyone trying to sell you an expensive business appraisal, anyone trying to sell you an outside management contract, anyone trying to sell you accounting services without the direct services of a Certified Public Accountant or anyone trying to get you to sign an exclusive listing agreement.

No ‘Secret Formula' for Selling a Funeral Home

There is no “secret formula” that will allow you to glide through a funeral home sale with little or no effort. From start to finish, the process of selling a business is detailed and time-consuming. But there are several things you can do to help navigate your way through the process.

Be Prepared to Answer a lot of Questions

Why are you selling? Are you ready to retire? Assuming you are ready to retire, are you ready to let go of the income, control and relationships you have worked hard to maintain? How will your employees handle the transition? Will a new owner keep your employees? Will the new owner be a good fit with your customers? Will the new owner maintain your reputation in the community? What is the accurate value of your business? Who should you get to value your business? Can you get enough from the sale to meet your needs? Who can you trust to negotiate with potential buyers? How many potential buyers will have to visit your business for you to find the right one? How much is selling your business going to cost you? How long will the selling process take? Have you prepared for the sale? Are your records maintained and organized properly? Can confidentiality be maintained during the process? These are the common questions.

Be Ready for Review of Your Records

The “Due Diligence” checklist of a buyer can be very long and detailed. As a seller, you will be required to provide the buyer with full access to your records, financials and tax returns. During the buyer’s review, the buyer will want to review your revenues and expenses by examining the supporting documents for the numbers listed on your financials and tax returns. You will need to provide copies of documents such as tax returns, financials, receivables, liabilities, signed contracts with customers, suppliers, employees, inventory listings, asset listings, tax bills, appraisals, surveys, operating licenses, insurance policies, benefit plans, advertising programs, price lists, payment policies, and vehicle titles just to name a few.

Find Out How Much Debt Your Business Can Pay For

Have your CPA prepare an analysis of your cash flow to determine how much cash is available to pay debt service on an annual basis. Once you know how much cash is available to pay debt service, you can then estimate how much debt the buyer will be able to service. Most lenders calculate a minimum debt coverage ratio. This ratio is basically the cushion required by the lender for a given transaction. For example, your CPA says your business annually produces approximately $125,000 of cash flow that would be available to service debt. Now let us say the buyer’s lender requires a minimum debt coverage ratio of 1.25. In this example, the buyer’s lender would only finance debt with annual payments up to $100,000. Any debt payments above this level would not meet the lenders minimum debt coverage requirement.

Hand agent with home in palm and key on finger.

Find Out How Much Your Business is Worth

Since valuing your business too high or too low can be a costly mistake, using a rule of thumb or multiple to guess at your funeral home valuation is not a good plan. Many business owners decide to have a formal business appraisal or “valuation” done to help determine their asking price. But what happens if the appraisal is not accurate? This often happens and the business owner is stuck with an expensive appraisal that cannot be used.

Business owners, beware. There are a lot of companies out there selling expensive business appraisals that may not produce an accurate estimate of value. In addition, most lenders that require a business appraisal will not accept appraisals or valuations ordered by another party – the lender has to engage the appraisal or valuation company.
A safer bet than ordering an expensive appraisal is to estimate the amount of debt the buyer can afford to pay for. Using the cash flow available for debt service along with a reasonable term, interest rate and down payment, you should be able to reasonably estimate the amount of debt the buyer can afford. This debt amount plus a reasonable down payment should be close to the estimated value of your business.
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