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
Comparing the Size of Your Funeral Home to Others
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.