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Are you looking at owning a funeral home?

Are You Ready to Own a Funeral Home?

Many funeral directors talk about owning their own funeral home, but what traits are shared by those that become funeral home owners?
First, they realize they have the aptitude, dedication and desire to be an owner. They’re willing to sacrifice long hours and time away from family to achieve ownership. They’re willing to be the last one each night responsible for anything left undone during the workday. They know that if they are making these types of sacrifices already, they may as well be doing it for their own retirement.
Second, they have an entrepreneurial nature. They focus on daily priorities, not the hours of nine-to-five. They have a deep feeling of obligation to serve each family and to protect the reputation of the business. Their personal interactions with families, employees and people in the community drive their daily activities.
Answering the following questions honestly will help you determine if you are cut out for ownership. It will also help you prepare for the questions of a seller or a lender should you decide to go forward.

Do I have the experience?

It takes more than being a licensed funeral director and embalmer to be a funeral home owner. Management experience is critical because owners are responsible for the entire business. Owners manage the flow of first calls, embalming, cremations, arrangements, visitations, funerals, clergy, inventory, supplies, staffing, filings and the other administrative paperwork. Owners also manage relationships with the community, employees, suppliers and clergy. Owners track cash flow while keeping expenses low and successfully collecting receivables. Having solid management experience is often the first requirement for achieving ownership.
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Am I entrepreneurial?

Funeral directors are an entrepreneurial group. They focus on daily priorities. They will put administrative duties on hold in order to respond to a death call or a family in need. Funeral directors learn quickly that it is not just another job; they learn that their work requires a high level of personal interaction. These personal interactions drive everything they do and they quickly feel an obligation to serve families in their community.

Do I have the credit and financial resources?

Funeral home purchases are financed with debt. Lenders will look at the funeral home you buy and its ability to service the debt you borrow. They will also see if you have a consistent history of making payments on time: credit cards, utilities, house payments. They will want to see that you have money saved for a down payment.

Not all funeral directors with an entrepreneurial dream are cut out for business ownership. Those who are destined for the path of ownership have a detectable enthusiasm, a sparkle. They are not going to dwell on challenges and problems, their focus is on solutions. They can be quiet but confident, they have a firm determination.
At this point you may have realized you’re not ready yet. If this is the case, and you still think ownership is in your future, continue to prepare yourself and invest in getting the right experience.
Or perhaps you are ready to move forward now. If so, take the next step of looking for an intermediary to work with and begin the process.
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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.

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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:
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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.
Additional Resources
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Success Factors When Buying a Funeral Home

Success Factors When Buying a Funeral Home

After working with funeral home transactions for a long time — on both the buy side and the sell side — some characteristics of successful purchases stand out. If you pay attention to these critical factors, you’ll improve the probability of a successful purchase.

Fire in the Belly

Not all potential buyers are cut out for business ownership. Buyers who eventually succeed have a detectable enthusiasm, a sparkle. They don’t dwell on challenges and problems. They have a quiet confidence, the right attention to detail, the determination. Only you can answer the question: “Do I have what it takes?”

Package Yourself and Your Financing for Maximum Effect

You will want to buy the biggest business you can afford for a simple reason. It will give you a bigger base to grow from. Finding a loan with a lower interest rate and a longer term means that with the same payment you can buy a bigger business.

Assume There are Skeletons in the Closet

Look past the seller’s story; they are putting their best foot forward. Dig underneath into the financials and the operation. Fully investigate the business.

It's OK to Pay a Fair Price for a Good Business

This is no time to gloss over defects and look for bargains. You are going to live with the business for a long time, so buy one that is healthy and thriving. It’s like the proverb says: “If you buy quality, you only cry once.”

Find the Right Ally to Get Your Financing

The market for funeral home business loans is thin. Banks that are inexperienced with funeral home business loans may not understand your business and structure debt that the business can’t support. Banks or non-bank lenders may take advantage of your inexperience and burden you with above-market rates or terms. In either case, this is a time to have someone sophisticated in lending practices on your side.

You are Buying a Stream of Earnings

Financially, a funeral home is an asset that can generate a stream of earnings and cash. The earnings that the funeral home produces determine the size of your loan and to a great extent the price of the business you will buy.

Manage Your Attorney's Involvement

Your commercial law attorney has an important role in advising and preparing the legal structure of the business purchase and sale transaction. But problems arise if the attorneys see themselves as business negotiators whose goal is to get the “best deal” for their clients. They may forget that the “best deal” is one that both the buyer and the seller can live with, a deal that will enable the business to survive and thrive after the transaction. In their enthusiasm they may not remember that deals are forged in compromise. Keep in mind, if a deal becomes too lopsided, it will likely result in no deal at all.

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Closing the Deal is Hard

It should be easy, but it’s not. After all, the hard work is done — valuations, investigations, and negotiations are complete. Now it’s just a matter of getting it all written down in a form that everyone can live with. Closing is the shortest part of the process. But someone will get cold feet when it’s time close. Be ready! Anticipate and be prepared with your attorney and consultant to work through the issues in a logical and reasonable way.

Resist the Urge to Change the Business Right Away

This company has been working successfully, or you wouldn’t have purchased it. Get to know the company and how it works before you start making changes.
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Selling a Funeral Home

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 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 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?

A lead time of at least two years is often needed for tax planning and 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 your 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 the sale of your funeral home, 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.
Large corporations rarely buy small- and medium-size funeral homes. Normally they are looking for 250-plus calls per year or more. After the feeding frenzy of the 1990s, corporations learned the importance of an owner’s personal touch and the importance of not overpaying for acquisitions.
This means the days of a corporation offering an owner three times revenue are gone and not coming back. Right now, individuals and small regional firms are offering the best prices to sellers in the market.
Most individuals are looking to buy a funeral home doing 75 to 150 calls per year. (A more experienced individual may go for a larger volume.) Small regional firms are looking to buy funeral homes doing 100 plus calls per year if they are within a reasonable distance from their other firms.

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.

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Sellers in today’s market will often seek the advice of an expert, and they are often told their business is worth more than it really is. Be cautious of anyone telling you they can sell your business for over 2.25 times revenue, anyone trying to sell you an expensive business appraisal, anyone trying to sell you an outside management contract, anyone trying to sell you accounting services without the direct services of a Certified Public Accountant or anyone trying to get you to sign an exclusive listing agreement.

No ‘Secret Formula” for Selling a Funeral Home

There is no “secret formula” that will allow you to glide through a funeral home sale with little or no effort. From start to finish, the process of selling a business is detailed and time-consuming. But there are several things you can do to help navigate your way through the process.

Be Prepared to Answer a lot of Questions

Why are you selling? Are you ready to retire? Assuming you are ready to retire, are you ready to let go of the income, control and relationships you have worked hard to maintain? How will your employees handle the transition? Will a new owner keep your employees? Will the new owner be a good fit with your customers? Will the new owner maintain your reputation in the community? What is the accurate value of your business? Who should you get to value your business? Can you get enough from the sale to meet your needs? Who can you trust to negotiate with potential buyers? How many potential buyers will have to visit your business for you to find the right one? How much is selling your business going to cost you? How long will the selling process take? Have you prepared for the sale? Are your records maintained and organized properly? Can confidentiality be maintained during the process? These are the common questions.

Be Ready to Prepare Your Records.

The “Due Diligence” checklist of a buyer can be very long and detailed. As a seller, you will be required to provide the buyer with full access to your records, financials and tax returns. During the buyer’s review, the buyer will want to review your revenues and expenses by examining the supporting documents for the numbers listed on your financials and tax returns. You will need to provide copies of documents such as tax returns, financials, receivables, liabilities, signed contracts with customers, suppliers, employees, inventory listings, asset listings, tax bills, appraisals, surveys, operating licenses, insurance policies, benefit plans, advertising programs, price lists, payment policies, and vehicle titles just to name a few.

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.

Hand agent with home in palm and key on finger.

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 business value 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.
Business owners, beware. There are a lot of companies out there selling expensive business appraisals that may not produce an accurate estimate of value. In addition, most lenders that require a business appraisal will not accept appraisals or valuations ordered by another party – the lender has to engage the appraisal or valuation company.
A safer bet than ordering an expensive appraisal is to estimate the amount of debt the buyer can afford to pay for. Using the cash flow available for debt service along with a reasonable term, interest rate and down payment, you should be able to reasonably estimate the amount of debt the buyer can afford. This debt amount plus a reasonable down payment should be close to the estimated value of your business.
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Selecting a Financing Intermediary

Selecting a Financing Intermediary

Whether financing a funeral home purchase or refinancing current debt, borrowers are determined to finance with terms their business can support. Although many borrowers go it on their own to arrange financing, they soon encounter challenges they hadn’t anticipated.
For banks, lending to funeral homes is a niche business. Many banks are unfamiliar with the funeral home industry. Non-bank lenders have arisen to fill this gap in the lending market, but not all of them are reliable. Some non-bank lenders have good business practices, some do not. Some have a clear fee structure; others are less forthcoming about what they will charge you.
Under these conditions, lenders tend to have the upper hand in the negotiation. Borrowers often find themselves conceding to high interest rates and onerous terms.
In this market it’s valuable to have someone on your side. A competent intermediary will be familiar with lending to funeral homes, will steer you to reliable lenders and negotiate a package that your business can cover.

The right loan can be the difference between success and failure in the funeral home business. Once a funeral home owner came to us who had arranged his own financing in the past. He had owned his funeral home for about five years and had gotten his financing from a specialty financing company. The debt load was threatening to put him out of business. We were able to help this owner refinance and get a very good deal compared to what he had before.

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What a Lending Intermediary Does

  • Determines the size and term of loan you need based on the amount of cash flow your business has available to service debt.
  • Evaluates your background, credit history, and available collateral. Works with you and your CPA to prepare your financial projections. Helps you assemble your loan documents.
  • Finds and contacts potential lenders, introduces your package to them.
  • Negotiates interest rate, length of loan and other terms.
  • Works with all parties to prepare and close the loan.

How an Intermediary is Paid

The standard industry fee charged by an intermediary for brokering a loan is 1 percent of the loan amount paid at closing. This is a success-based fee and if your loan doesn’t close then you should not owe anything to the intermediary. In some cases, the borrower pays the fee and in other cases the lender pays the intermediary in the form of a referral fee.

It’s possible that the lender won’t disclose to you that they are paying a referral fee. In this situation, the intermediary may try to charge a fee both to you and the lender. Beware this “double dipping.” Direct lenders don’t like it and neither will you since it could put you in a short cash position after closing. Ask enough questions when you interview an intermediary to fully understand how the fees will be paid.

Reasons to Use an Intermediary

You may be questioning the need for an intermediary. “Can’t I do this myself?” “Is it necessary to pay a percentage of the loan to a consultant or broker?”
Competent intermediaries will more than make up for the fee you pay by getting you a better loan with a lower interest rate and favorable terms. Reasons to use an intermediary include:
  • Experience - Like you, competent intermediaries have invested years to become a specialist in their field. A professional intermediary brings an understanding of the lending process and the market for funeral home business loans. Your intermediary can help you package your application, work with you on the technical aspects of the loan, and resolve accounting, legal and tax issues.
  • Objectivity - You have a big emotional stake in the success of your business. It’s hard to separate issues from emotions when you are close to a situation. An intermediary can maintain this separation and stay focused on resolving the issues that arise in the course of applying for a loan.
  • Knowledge of lenders - Just as you are an expert in the needs of your local funeral home customers, an intermediary that specializes in funeral industry financing knows who the best lenders are and how to package your application for the best possible results.
  • Skill at negotiations - It’s often difficult to negotiate a deal for yourself when you are not used to negotiating. Intermediaries negotiate deals regularly and know what types of responses to expect and how to read them. It is in the best interest of borrowers to have someone negotiating on their behalf that is experienced at negotiating the best terms and rates. And because the intermediary can’t legally commit for you, you will have more flexibility because the intermediary has to check with you before agreeing to anything.

What to look for in an intermediary

While a professional, experienced intermediary can add tremendous value to the loan transaction, an ill-informed, inexperienced advisor can do more harm than good. 

Look for these qualities when seeking an intermediary: 

  • Professionalism - An intermediary’s reputation can have a profound impact on your ability to qualify for the best loan. Be certain that your intermediary has the required education and experience. The intermediary also must have a solid reputation within the funeral industry.
  • Experience - Your intermediary should have a track record of successful funeral home loan transactions.
  • Focused effort - This transaction is important to you. You want an intermediary that also takes it seriously.
  • Senior level attention – Avoid an intermediary who will hand off your work to a junior person on the staff. Find an intermediary who is anxious enough for your business to devote a senior person to the project.
  • Sensitivity to your objectives - A competent intermediary will bring a wealth of experience to the table. A good intermediary will also listen to the client’s specific goals. If the person is truly capable, this careful listening will translate into a customized approach that produces the right loan.

Additional Resources

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Securing a Funeral Home Loan

Securing a Funeral Home Loan

Banks are in the business of renting money by lending it to you at interest. Before they provide you a loan, they want to be confident that you’ll be able to pay it back. They use multiple ways to determine their confidence, some financial and some non-financial.
Meeting the bank’s financial requirements is not enough. The bank wants to see other signs that you are a good risk for their capital. Just keep asking yourself as you work with your consultant, put your package together and meet with bankers: “Will these actions increase the bank’s confidence in me?”

A solid financial history, a reasonable purchase price, and projections that are doable are the beginning of the story. But just as important to your banker is a positive attitude and determination.

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Good Character is Necessary

Your character is a necessary condition. Lenders look for a clean credit report and a consistent record of paying your bills on time. They also want to see if you have the education, experience and emotional resilience to run a business. A positive personal attitude and a constructive business plan is a surefire way to impress all financial lenders and investors.

Capacity to Produce Cash

Determine the capacity of the funeral home you are buying to produce cash. Lenders only use historical tax returns and financial statements to determine your ability to repay the loan and still have adequate funds to run your business.

Investing Your Own Capital

How much of your own capital are you willing to invest? Lenders will not lend you the entire purchase price of the funeral home. They expect you to provide some of the capital, typically a down payment of 20%. The down payment reduces the bank’s risk and it shows the bank that you are confident enough in the business to invest your own capital.

Seller Lowers Bank’s Risk

The seller is part of the equation. Lenders often want to see the seller provide some of the capital in the form of a loan to you. This is another way for the bank to lower its risk. Their thinking is, if the seller is willing to finance some of the purchase, then the seller must be confident that the new owner will be able to run the business profitably.

Real Estate Provides the Collateral

Your purchase includes two components: the real estate and the business. The business provides the cash flow. The real estate provides the collateral. The bank looks at your cash flow to determine how much you can borrow. It secures the loan with the real estate that comes with the funeral home.

Term of the Loan

The mix of the value of the business and the real estate determine the term of the loan. If it was all real estate, the term could be as long as 25 years. If there was no real estate, the maximum business loans are about 10 years. If the mix of the value of the business and the real estate are 50:50 (which is typical), then the term of the loan will be around 16 years.

Principal

Decide how much you need to borrow. The amount you can borrow is directly linked to the amount of cash flow the business produces each year. Contact us and we’ll walk you through how to calculate the amount you can borrow based on the cash flow of the company you are planning to buy.

Tell the Truth

Be truthful to your banker and your business consultant. You may have a flawed credit record. No one is perfect. Better to lay all your cards out on the table with your financial intermediary so that the two of you can figure out the right strategy for approaching the lender.

Packaging Your Proposal

Prepare the documents you need to support your proposal. Your loan officer or business consultant will know what you need to prepare and how to package it.

Shopping Your Loan

Prepare the documents you need to support your proposal. Your loan officer or business consultant will know what you need to prepare and how to package it.

Additional Resource

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The Process of Selling a Funeral Home

The Process of Selling a Funeral Home

Selling your funeral home is like any other sale: You must understand your product, find buyers who are interested and qualified to buy, show the product to buyers in the best possible light, and pursue sales opportunities actively and diligently.
There are no shortcuts. Preparation, diligence and attention to the needs of the buyer are the criteria to succeed at selling a funeral home business.
Some owners take a more casual approach. Serious buyers quickly see that they are unprepared and uncommitted, and these buyers move on to better opportunities. If you aren’t ready to sell, if you can’t commit to the time and energy required, then it is best to wait.
Once you are ready, the steps in the process are straightforward. Establish your goals, prepare the business, find qualified buyers, and actively promote the quality and value of your business to these buyers.

Preparing for the Sale

Selling your funeral home can be the single most important event of a funeral director’s career. Regardless of what is prompting the sale, it should be handled correctly as it will have far-reaching financial and emotional consequences.
In the best scenario, the business owner begins to prepare for the sale at least one year in advance. The owner should start by working with his or her accountant to create clear-cut financial statements that illustrate the company’s revenues, expenses and growth potential.

Owners typically try to minimize taxes during their careers. When it’s time to sell, owners need to “lean-up” their operations to ensure they can show the best possible cash flow to prospective buyers. Their records should clearly document all transactions so that potential buyers can easily evaluate the company. This will also give the new owner the ability to take over with minimal training.

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Following are some additional recommendations for making your company more attractive to potential buyers:
  • Eliminate any potentially difficult situations when possible. The new owner will not want to face customers expecting special treatment or, worse yet, be the one that cancels a long-standing verbal agreement with the company’s oldest customer.
  • Examine all supplier and customer contracts. Make sure terms and conditions will not expire or require re-negotiation just as a new owner steps in. Terminate contracts that might be trouble for a potential buyer, or that drain the company financially and serve little purpose.
  • Start recording company policies and procedures that exist as unwritten rules. If necessary, create a procedure manual that documents exactly how to best run the business, and be sure to include your unspoken, undocumented techniques. Your payroll service may be able to prepare a comprehensive procedure manual for you at very little cost to you.
  • Review real estate leases, especially if your business is tied to its location. Make sure the lease does not expire or require re-negotiation at the same time you plan to sell the company. If the company’s location will discourage buyers, consider moving the location before you place the business up for sale.
  • Analyze equipment leases and other material contracts from the buyer’s perspective. Evaluate and catalog your company assets, from property to inventory to employees. If you delayed investing in computer upgrades to help with operations, now may be the time to modernize.
  • Address any employee issues. The loss of key employees during a sale can kill a transaction. Key employees may be crucial to the new owner’s success, so it’s important to determine which employees are prepared to stay with the company during and after the transition. It is also important that employees don’t hear about the pending sale of the company from a third party.
  • Once you begin the process with a potential buyer, be sure to make a complete disclosure of all aspects of your business. Open up your books for inspection. Show all of your leases and other relevant contracts. Let the buyer see everything, good and bad. Business sales most often go awry if the buyer feels the seller is failing to disclose an important aspect of the operation – an act that may constitute fraud. By making a full disclosure, you ensure that no one can accuse you of anything down the road.
  • Discuss tax consequences of the pending sale with your accountant as soon as you can. After you sell your business, the amount of tax you owe will depend on the internal structure of your company and how you structure the sale. If you plan wisely, you can minimize your tax liability. (Your tax advisor or accountant will determine what’s best for your company.)

Establish your goals

You might be surprised to be told that it’s necessary to establish your goals. Isn’t the goal to sell the business? Yes, but within that broader goal lie many others. A prioritized list of all your goals will help you to form your selling strategy and will inform many of your decisions along the way.
Some of the questions to consider are:
  • What are your main reasons for considering a sale? What do you want personally from a sale? What do you want for your company?
  • What characteristics are you looking for in a buyer?
  • How quickly do you want to transition away from the company? How long are you willing to consult or be available after the sale?
  • What deal structure will enable you to achieve your financial goals? Are you willing to accept terms in exchange for a higher price? Are you willing to finance part of the sale?
  • Do you feel an financial or other obligations to your management team? Employees?
  • How important is confidentiality to you? How vital is it that your employees and customers not know that you are for sale?
Different funeral home owners have different priorities. Some want to maximize the price they get for their business, regardless of who the buyer is. Other funeral home owners place a high importance on finding the “right buyer” and will make concessions in price and terms for the buyer they believe is the best fit to continue to run their business.
The reality is that most sellers believe that multiple priorities are important: price, the buyer, the local community. By identifying and prioritizing your goals, you’ll have a better sense of what’s important to you and be able to approach your selling with a clearer strategy.
Once goals are set, you can create a strategy to achieve them. A haphazard approach rarely produces a successful transaction. A well-conceived plan will inform which types buyers you should approach, what kind of deal you want to structure, and the schedule for moving forward.
Set up a timetable at the beginning and track your progress against the schedule. Six months is a rule of thumb to sell a funeral home, though it can take as long as a year.

Prepare presentation materials

Buyers will look at multiple funeral home opportunities. They are only going to take seriously sellers who provide a complete and understandable description of the business. Your advisor can work with you to prepare a complete descriptive memorandum before you go to market. This memorandum will show your business in the best light and highlight the aspects of your company that are most likely to impress buyers.

Identify prospective buyers

You may have some prospective buyers already in mind. Perhaps an employee or a nearby funeral home owner would like to expand. More than likely, you will need to cast a wider net and look for buyers more broadly.
Although corporate funeral home businesses made many purchases in the 1990s, those days are over. They overpaid and found that the operational efficiencies they hoped to gain were not possible.
Who is buying today? Mainly individuals who are looking for funeral homes that are doing 75 to 100 calls per year.
It’s impossible for you to avoid looking like you want it too badly if you approach a potential buyer directly. It’s always better to have a third party, preferably a skilled professional, approach the buyer for you. This lets you discover the buyer’s interest in a purchase, it maintains your confidentiality until you know there is interest, and finally, it lets you continue to run your business while the third party makes the time-consuming efforts to approach potential buyers.

Selling

Once you have a potential buyer, the best action you can take is to get them excited about your business. The facts of the acquisition can only say so much. It’s your ability to personally influence the buyer that will increase the probability of a successful sale.
  • Learn about the buyer and the buyer’s criteria for purchase.
  • Structure your meeting with the buyer so that you cover all topics that the buyer needs to become confident about your offer.
  • Answer the buyer’s questions openly and honestly. The buyer doesn’t expect everything to be perfect, but the buyer will want to know the full story in order to make an informed decision.
If you can help the buyer become excited and can answer all questions about your business, you are on the way to receiving an offer. From that point, the process is straightforward: work with your intermediary to negotiate terms of sale, respond to all due diligence requests, and complete a contract.
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The Process of Buying a Funeral Home

The Process of Buying a Funeral Home

Buying a funeral home business is a two-pronged process. On the one hand, you are looking for an asset you can afford to buy and grow over time. On the other hand, you are selling yourself to the business owner and lender—your credit worthiness, your capacity as a borrower and your ability to operate the business.

Preparation

Align yourself with the expert resources you will need. A buyer is always in a stronger position with solid legal, financial and tax advice. Buyers who go it alone often pay the price in terms of poorly designed legal agreements with inadequate seller reps and warranties, poorly designed transaction structures with heavy tax consequences and overly burdensome financing structures with unfavorable terms.
Be honest with yourself about your ability to buy a funeral home business. You not only need to be prepared to operate your own funeral home, you will most likely need financing to make the purchase. Do you have a positive credit history? Have you saved enough for a down payment?

Search for a seller and a lender

Good funeral home businesses for sale are not easy to find. Most sellers do not advertise they are for sale and prefer to go through the transaction confidentially without the staff or community knowing the business is being sold. Sellers also know that most prospective buyers may not be prepared financially to get a loan to make the purchase. Given this, many sellers will be skeptical of a buyer until the buyer can demonstrate his or her financial ability to make the purchase.

Developing a personal network is one of the best ways to find out which owners may be considering a sale. Remember the importance of confidentiality and be discrete in your communications. Most sales representatives call on several funeral homes and are often a great source of potential leads. BSF cautions you about discussing your lead follow-up openly because the funeral industry tends to be a small community and you don’t want to derail your own opportunity. Remember that if a salesperson is telling you about a potential lead, chances are someone else may also know about it.

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When evaluating the business, don’t be afraid to ask why the seller is considering a sale. Make sure the business is priced at a level that will allow you to operate successfully. Make sure the business, customers and community are a good fit for you and your family. This fit will be the key to effectively transferring the current owner’s customer relationships.

Develop a Strategy Before Negotiation

Before entering negotiations to buy a funeral home, define your goals and develop a strategy for achieving those goals. Make sure you can support what you are negotiating for. If you want pay a million dollars for the business and real estate, make sure you can show the seller why that price is what you can afford to pay. Make sure you can show how your financing will be structured and how much cash flow there will be available to service your debt. The general rule is that if you ask for something, you need to be able to back up what you are asking for with valid supporting information.
Negotiations are a process of give and take. You and the seller will approach the table from different positions on price and terms. You are more likely to secure a deal if you keep your eyes on the goals, understand the seller’s needs and look for a win-win solution.

Do Your Due Diligence

Your negotiations will conclude with a letter of intent to purchase the funeral home business and real estate. The letter of intent is commonly called the LOI and it is your purchase offer based on the information you’ve received from the seller.
Unlike buying a house or a car, buying a business is a process of determining the true value of the business while uncovering any issues that may enhance or detract from the future operation of the business. The process of analyzing the business prior to the purchase is referred to as “due diligence” and the time period for performing these actions is referred to as the “due diligence period.” The due diligence process begins when a buyer identifies a target business to buy. The length of the due diligence period is determined by the complexity of the acquisition.
In reviewing the financial operations, the buyer will examine the financial records and accounting methods to determine the company’s historical cash flows, receivables will be analyzed to determine collectability, payables and debt will be reviewed to determine the quality of vendor and lender relationships and product pricing and service mix will be reviewed to determine consistency with industry norms.
The personnel of the target business will be reviewed to determine the necessity and pay level of each employee. In small business acquisitions, most employees are rehired at the same pay rate if their services are necessary.
Property and equipment owned by the target business will be reviewed to determine the useful life and appropriate fair value of each. Appraisals are conducted and the values will be used in the allocation of the purchase price to establish the depreciable values of the assets and equipment. Leases, rental agreements and property deeds are also reviewed.

Business operations are reviewed to assess the location, inventory, vendors, management, customer relations, insurance policies and any other items specific to the industry of the target business. The main point is to question each item to see where improvements can be made. Is the business located in the right market area, is inventory adequate, are vendors providing quality goods at reasonable prices, has management run operations effectively, are customers satisfied with the services provided and are insurance policies adequately protecting the company from liabilities.

A female hand operating a calculator in front of a Villa house model
Marketing practices, advertising campaigns and public relations programs are reviewed to determine their effectiveness. Is the company using an appropriate marketing and sales strategy? How does the competition market their business and products? Could any of these practices be enhanced or changed to produce a better return on investment.
When commercial real estate is involved in a purchase, environmental due diligence refers to site assessments performed to uncover any potential liabilities associated with the property. These assessments are called Phase One and Phase Two Environmental Reports. A Phase One is almost always ordered by the lender for commercial real estate transactions. A Phase Two is not normally required unless a potential liability issue is uncovered by the Phase One.

Formalize the Purchase Agreement

Once you’ve completed due diligence, it’s time to formalize the purchase agreement. This agreement covers the price, terms and structure of the deal. Unlike the letter of intent, the purchase agreement is legally binding. The purchase agreement is often drafted by the buyer. This is for your protection and gives you opportunity to make sure the appropriate seller reps and warranties are included in the language.
The purchase agreements may take several rounds of review by you and the seller before the final draft is ready for execution. This is normal and you need to be patient during this process as the final agreements need to be drafted with care since they are the only binding source of commitment between buyer and seller.

The closing

The closing is the actual event where the transaction is concluded. It usually occurs at the office of an escrow or title company but can also be held at an attorney’s office. All documents are executed, the title, deed, stock, etc. are exchanged, the mortgage is signed and funds are transferred.
At closing, the seller and lender will be there along with the attorneys for both sides. As the buyer, you are generally responsible for coordinating the documentation and the sequence of events. Be sure that all closing documents are negotiated, reviewed and approved prior to the close. The seller’s attorney will make sure the seller brings all the necessary records, including stock certificates, articles of incorporation, corporate minute book and tax records.

At the close, you are not only executing the documents, the seller is transferring the entire business to you. Your attorney will help you become familiar with all of the documents and obligations to complete the close successfully. Most acquisitions are cash transactions along with promissory notes to the seller. The funds from you and your lender will be wired electronically to the seller. In addition, all payments to intermediaries are made at this time. The closing document from the escrow company will specify all of these payments.

You will likely find this to be a very stressful day. It’s the culmination of a long and arduous process. But you are also likely to experience an exhilaration of finally reaching your goal to own a business. Congratulations!
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How Much Can You Borrow to Buy a Funeral Home?

How Much Can You Borrow to Buy a Funeral Home?

The price of a funeral home and the amount you can borrow are closely linked.
The payments for a business loan come out of the cash flow of the business. To make these payments, the business must produce enough revenue to pay its expenses, pay a salary to the owner, and have enough earnings left over to make the monthly loan payment.
This means the price you pay for a funeral home is a function of how much you can borrow. And how much you can borrow is a function of how much cash the business produces each month.
To explore the link between cash flow and the size of your loan, let’s make some assumptions about the buyer/borrower:
  • The buyer will obtain bank financing to make the purchase of the funeral home.
  • The buyer has excellent credit, strong industry experience and the ability to make a modest down payment.
  • Any seller financing will be at similar rates and terms as the bank financing.
  • The buyer will own and operate the business for profit as a stand-alone facility.
  • The value of the individual assets of the business, including real estate, are not greater than the overall value of the business.

Seller’s Discretionary Earnings

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 like adjusted cash flow and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).

Cash flow for Debt Service (CDS)

Since most buyers are in business to make money, it makes sense to determine how much cash will be available to pay debt service after the purchase. This is also the method used by banks to determine how much they can loan on a purchase.
Cash flow available to service debt is always a lower number than SDE. It is calculated by subtracting a normal salary for the borrower from SDE. Most lenders require a borrower to budget the minimum salary needed to take care of his or her personal liabilities and living expenses. They also require a small margin of safety over and above the actual debt service requirement which I will explain shortly.

The minimum salary required by the borrower will vary depending on their personal debt level. A good rule of thumb to budget and estimate a borrower’s personal salary requirement is to multiply their annual personal liabilities by two. For example, a borrower with annual personal liabilities of $15,000 will require a minimum personal salary of $30,000, which is then subtracted from SDE to arrive at cash flow available for debt service. Cash flow available for debt service or CDS is then used to determine how much the borrower can actually borrow for the purchase, which then allows the borrower to estimate how much they can offer the seller.

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The Bank’s Debt Coverage Ratio

In addition to subtracting a salary requirement, most banks will build in a margin of safety when calculating the actual debt payments they are comfortable with. This margin of safety is referred to as debt coverage and is usually expressed in a ratio called the debt coverage ratio.
Some banks require a minimum debt coverage ratio of at least 1.25 and some up to 1.50. For example, if a bank required a minimum debt coverage ratio of 1.25 and the CDS was $125,000, the bank would only be comfortable with annual debt payments up to $100,000. This total would then be used with the amortization term and interest rate to determine how much the borrower could actually borrow for the purchase.

An example

The following example will help illustrate both the minimum salary requirement and the debt coverage margin. Let us say over the past three years a business has achieved average SDE of $350,000. The borrower’s personal salary requirement is estimated to be at least $50,000, which is then subtracted from SDE to arrive at CDS of $300,000. Let us say the lender is conservative and requires debt coverage of at least 1.5 on loans of this size. Dividing CDS of $300,000 by the minimum debt coverage ratio of 1.5 leaves $200,000 for total annual debt payments. In this example, $200,000 in annual debt payments over 15 years at 8.00% would allow the buyer to borrower approximately $1.7 million to make the purchase. If the buyer planned to put down $300,000 in cash, the buyer could offer the seller approximately $2.0 million for the business.
This example shows clearly that the buyer is unlikely to offer the seller more than $2M for the funeral home because the business can’t service more than $200,000 in loan payments each year.
This example shows clearly that the buyer is unlikely to offer the seller more than $2M for the funeral home because the business can’t service more than $200,000 in loan payments each year.
Now that you know how to calculate the amount of the loan you are seeking, let’s look at the sources of financing and the  process for getting a loan.
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Sources of Funeral Home Financing

Sources of Funeral Home Financing

Funeral home lending is a specialty market. Fewer banks cover the funeral home industry than other small-business markets. This has been true for the funeral industry for many years.
In response to the limited financing available to the funeral industry, some very ambitious lenders have attempted to enter the market. These lenders offer aggressive terms that put stress on the cash flow of the business. Over time, the business owner has difficulty paying down the debt. Lenders that charge aggressive interest rates and fees know this. Their main goal is to charge heavy closing fees and collect as much interest as possible until you can refinance your debt with a traditional or direct lender.
The right loan can be the difference between success and failure in the funeral home business. The following will examine some of the borrowing options available to funeral home buyers and owners

Seller-based financing

Funeral home financing has traditionally been done via a seller-held note for the business and a local lender holding a note for the real estate. This structure can be good for the buyer but often requires the seller to hold a very large portion of the overall debt. Holding this debt means the seller still carries a lot of the risk of the success of the business. Consequently, the seller must continue to supervise the business until the seller note is paid off.

Direct lenders

Baby boomers are starting to retire and generally they want to cash out of their business without having to hold 40% to 60% of the borrower’s debt load. Specialty lenders have come to the table and offer financing that allows the seller to cash out and hold very little transaction debt.
This structure puts a large portion of the risk on the specialty lender. In turn, they demand higher fees and interest rates for taking on that risk.
Direct lenders include specialty lenders, traditional banks and non-bank lenders. Direct lenders originate and underwrite their own loans and either hold their loans in-house or sell off part of their loans to investors or other banks.

Direct lenders are the safest route to go when seeking financing for a funeral home acquisition or refinance. Direct lenders do not normally charge up-front fees for reviewing a transaction. Direct lenders do not require you to sign a financing agreement with them to pursue a loan. Direct lenders may charge an application fee for submitting your loan for approval and they may ask you for a good-faith deposit once the loan is approved to cover any out of pocket expenses for third party reports such as a business appraisal, commercial real estate appraisal and an environmental inspection of the commercial property. Typically, the monies you pay into a direct lender during the approval process will go directly toward your down payment when the loan closes. Please verify this fact when dealing with any lender.

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Dealing directly with the bank will save you time and money, but dealing with banks can be difficult if you don’t know the lending process and the information a bank needs to make a credit decision.
Banks need to prove that your business can service the debt you are requesting. To prove your debt service, the bank will need to see a current picture or snapshot of your business and personal income and expenses. This means the bank will need your historical federal tax returns and your current financial statements. They need to see a current picture of your existing business and personal debt.
The keyword here is “current.” Your tax returns and financials must be filed and current. If you are behind on filing your taxes, a bank will not have the information they need to make a credit decision.
Being prepared is key. It shows the bank that you have attention to detail and an understanding of the financial aspects of business. Your banker will be much more confident in your abilities if you are prepared financially.

Non-direct lenders

The limited availability of financing for the funeral industry has led to an increased number of non-direct lenders and intermediaries advertising on the internet. These non-direct lenders and intermediaries are not lenders and do not underwrite and fund their own loans. Their role is to originate loans that they then take to direct lenders for funding. Remember, if you need a loan and don’t know where or how to look for a direct lender, an intermediary may be able to locate a direct lender for you.
Whenever you are seeking financing on the internet be aware of the difference between a direct lender and a lender that may only be acting as an intermediary. Make sure you ask the question, “Are you a direct lender?” Not knowing the difference could cost you a significant amount of money in loan fees.
Be wary of any lender or intermediary asking you for up-front fees to begin working on your loan. Be wary of any lender or intermediary asking you to sign a financing agreement prior to beginning work on your loan. Direct lenders will not ask you for up-front fees or a financing agreement to review your loan and they can quickly gather the required information to assess their interest level in pursuing your loan.

In this confusing market it’s easy to see why borrowers want to be well-educated about obtaining a loan and often seek the services of a  reputable intermediary.