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.
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.
No ‘Secret Formula' for Selling a Funeral Home
Be Prepared to Answer a lot of Questions
Be Ready for Review of Your Records
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.
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.