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.
The question is not whether you can sell your funeral business. There will always be buyers for a well-run funeral homes for sale. The question is about 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?
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.
Review Market Conditions
What kind of prices are individuals and small regional firms are offering? 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 to Prepare 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.