If You Plan on Selling a Funeral home, What is the Business Worth?

If You Plan on Selling a Funeral home, What is the Business Worth?

Do you know what your funeral home is worth? Most business owners think they have a good idea. Some will guess at their value and others might apply a multiple to revenue they’ve heard is an accurate measurement of value. Guessing and applying multiples to revenue typically do not produce accurate estimates of value.
Estimating the value of your funeral home can be difficult because values can vary greatly from one business to the next – even in the same industry. Why is this so?
The first reason is that every business is operated and managed differently. Some businesses are managed with discipline and achieve higher profit margins. Others are managed off the cuff and achieve lower profit margins. All else being equal, higher profit margins equate to higher business values per dollar of revenue. Thus, the way a business is operated can greatly influence its value.

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.

homeworth

Market Factors Affect the Funeral Industry

Others market factors affecting the funeral 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.
Experts will tell you that the market is the final arbiter of the worth of your company. This is true, but not helpful. Isn’t there some method of estimating the value of your business that is a good predictor of the price a buyer will be willing to pay?
BSF will show you some simple methods that are good predictors of the price a buyer will be willing to pay, so don’t run out and pay for an expensive valuation if you’re planning on selling a funeral home. It’s a waste of your time and money. Your potential buyer is going to do a valuation anyway.
Who is buying funeral homes 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 value of a funeral home is to compare the size of your business to others in your industry and the valuation of those businesses.
Although corporations in the past have paid three times revenue for large funeral homes, those days are over. Today, the strongest market is for individuals who are buying smaller funeral homes doing 75 to 100 calls per year. These buyers will pay up to 2.25 times net revenue.
Here is an example of a funeral home that is doing about 90 calls a year and producing $630,000 in revenue, which translates into an estimate of $1.2 million.

Multiples of cash flow or seller’s discretionary earnings

From a financial point of view, a business is a set of assets that are organized to produce a stream of earnings or cash flow.
The right to this stream of earnings has a value. The way to think about this method of valuation is to ask yourself: “If an investor would be willing to purchase an asset that produced a given stream of cash flow, how much would that investor be willing to pay?”
Note: For this method you may need to ask your CPA to do an analysis of your cash flow.
In the funeral industry, most businesses sell in a price range between four to six times Seller’s Discretionary Earnings (SDE). This price range typically includes all operating assets of the business. SDE or cash flow available to the owner is also expressed in terms such as adjusted cash flow and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).
Here’s an example:
earnings

How Much Can the Buyer Afford to Pay?

Another way to look at valuation is to ask how much the buyer can afford to pay. Individuals buying a funeral home are limited by how much they can borrow. Their ability to borrow is directly a function of the cash flow that the funeral home produces. This is the cash that will be used to service the debt.
Following are the easiest ways to find out how much debt your business can pay for
  • 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.
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