If You Plan on Selling a Funeral home, What is the Business Worth?
The second reason business values can vary in the same industry is that every business operates in a different market environment. Market factors will vary by location and can significantly influence business value. One business may operate with no competition and another may have five competitors in the market. Obviously, the business with no competition would be less risky and on average have a higher value per dollar of revenue than the business with five competitors.
Market Factors Affect the Funeral Industry
Other market factors affecting the funeral home industry include the threat of new competition, general market trends such as decreases in revenue per call associated with cremation, increases in interest rates which decrease loan amounts for borrowers, population shifts or demographic changes affecting the customer base, the availability of dependable employees to operate the business and the amount of goodwill associated with the business.
Who is buying a funeral home today? It’s mostly individuals and small regional firms. Large corporations learned the hard way during the feeding frenzy of the 1990s not to overpay for acquisitions in the hopes of economies of scale and lower expenses to achieve better operating margins.
Comparing the Size of Your Funeral Home to Others
The simplest method of determining the funeral home valuation is to compare the size of your business to others in your industry and the valuation of those businesses.
Multiples of cash flow or seller’s discretionary earnings
How Much Can the Buyer Afford to Pay?
- Ask your CPA to prepare an analysis of your cash flow to determine how much cash is available to service debt on an annual basis.
- Most lenders calculate a minimum debt coverage ratio. It’s basically the cushion required by the lender for a given transaction. Let’s say that ratio is 1.25.
- If your business produces an annual cash flow of $125,000 and the buyer’s bank has a minimum debt coverage of 1.25, then the maximum debt payments that the buyer can afford to pay is $100,000, or $8,333/month.
- At an interest rate of 7% and a term of 16 years, the buyer could borrow $960,938 and cover the debt.
- If you assume 20% down payment, then the total price for the business based on debt coverage is $1,201,173.