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Should I Buy the Business From Dad or Should We Sell to a Consolidator?

Question: 

Alan, my father and I have agreed your valuation opinion is a fair price and I think we are ready to move forward on his buyout and retirement.  But I still have one concern:  Given our recent spike in cremation and all the changes in consumer preferences in funeral service, what kind of future will I have in this business?  Specifically, will I be able to handle the debt if the business declines and will it be worth as much when I am ready to retire?

Warren K. (name changed)

Answer:

Warren, for the benefit of our readers let me fill in what you already know.  You are 38 and your father is 65.  Your firm is located in a rural community with two funeral homes serving a stable county population of roughly 75,000.  The economy is heavily agricultural dependent but farmers in your area are not as wealthy as they may be in the Midwest.  You have seen a spike in cremation primarily because of an inability or unwillingness to pay for burial.  Cremation has jumped from the mid 20% to the high 30% in the last 3 years and continues upward.  This has resulted in an unfortunate decrease in average sale.  You and your competitor split the market 50/50.  We surmise he is experiencing the same economic impact as you.  We also know that one of the partners in that firm is roughly your age.  A merger is possible but unlikely given the history of antipathy that has existed for at least two generations.

Given that background let’s talk first about options.  Rural locations are no longer on consolidator’s radar screens.  The reason you and your competitor split the business so evenly is that about 20-25% of your residents like you both.  They often trade business, using you for one funeral and your competitor for the next.  If an outside firm were to buy you that relationship (even if you stayed on) would be broken.  Your firm would lose upwards of 15% or more volume.  So a sale to a large consolidator is not an option.

Your best bet is your competitor or a regional firm.  But the regional firm, if they are smart (and not all are) knows this problem and will rank you high risk and that will lower your value.  I took that into consideration with my opinion so it is already “baked in”.  As far as your competitor is concerned, given the current status of funeral service it is in both your interests ECONOMICALLY to merge.  The community would like it because all but a few like you both.  You would profit because of economies of scale.  But if you can’t get along then one or both of you will be miserable.  So, without counsel in the beginning that option could be problematic.

IF YOU PURSUE THE MERGER OPTION:  You must determine up front who is in charge.  DO NOT try and fool yourself into thinking you will make decisions equally.  That will only work in highly mature instances.

OK, those are your sale options.  Now to the heart of your question.  What will your future be like?

I continue to believe that DeathCare is standing at the Threshold of The Single Greatest Opportunity In Its History.  But that opportunity will not go to the lazy or fearful.  In fact, it probably won’t go to those who merely adapt and try to dress up what we already sell to try and please a customer who is obviously moving past us.

As you and I have discussed, I am about to introduce some solutions in the next few months but for now here is what it will take “character-wise”:

  • Intestinal fortitude to
    • Challenge your customer by provoking them with new insights
    • Walk away from ideas that distract resources from serving families
    • Separate the “baby” from the “bathwater” and dispose of the bathwater
    • Be assertive in staff leadership and community relations
  • Willingness to learn and apply new perspectives and abandon old paradigms
    • Reexamine the sacred cows
    • Think in new ways
  • Willingness to learn new skills (some of which you think you already have)
    • Listening
    • Curiosity
    • Creativity

The funeral directors that are willing to transform and accept that they no longer make their money in the selection room will find a very receptive consumer audience.  I know that it sounds too good to be true but today’s customer is looking for you to be an expert and professional.  They will respect you for that and will not respect you for being an “order taker”.

Most of the profession will not make this transition.  If you will, you will begin to move past this 50/50 standoff with your competitor and you will also see your average sale go up because of a greater yield on cremation sales.  As a result you will see the value of your firm go up.

So, the answer to your question is another question:

Do you think you have what it takes to make the commitment over the next 5 years to become more than you are right now?  Do you think you can learn to think in new ways and to be more assertive with families and staff alike?  Can you be a leader instead of a follower and stop drinking the industry koolaid?

If the answer is yes (and Warren, knowing you, I think it is) then you have a great future.  If it is no, then it is time for both you and your dad to explore exit strategies because ending your career in futility is a bad way to go.

Respectfully submitted,

Alan Creedy, CPA

Alan Creedy is a widely respected business advisor specializing in DeathCare and its affiliated industries.  He has more than 30 years experience ranging from funeral home and cemetery management and preneed to advanced financial analysis.  He is a frequent author of trade articles and sought after convention speaker.   He publishes two weekly blogs intended to provide insight for thinking practitioners and help them adapt to Our New Normal:  The Creedy Commentary and The Creedy Roundup

 


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Alan Creedy

In addition to the weekly Creedy Commentary, I frequently contribute to industry trade journals and speak at trade conventions.Among my affiliations outside the DeathCare industry are The Center For Creative Leadership, The Performance Institute and Human Synergistics.
I believe in giving back and so was recently honored to serve as Chairman of the Funeral Service Foundation.

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  • BT Hathaway

    “Warren”, I think Alan has done a good job of outlining what might need to happen a few years down the road *after* you buy out your father.

    In the mean time I think you have asked an important question. You have to figure that through no fault of your own, your cremation rate will grow from the current 30% to something in excess of 50% over the next 20 years.

    Given that cremations (even relatively full service cremations–fewer rented vehicles, reduced facility use etc.) produce less revenue and less profit than burials, it would make sense to adjust your financial projections to allow for the diminished revenues over time. This means you will either pay your father less, so that you can maintain a lifestyle similar to his, OR, you will pay the going rate and have to settle for a lesser lifestyle.

    The only thing which would offset the diminshed revenues would be a major rise in the population you serve, but from Alan’s description you live in a stable region and cannot project a growth in volume.

    I will say that consolidators seem to be paying top dollar at the moment. That may not be an option in your region as Alan says, but that may be a way to provide your father with a more comfortable retirement without you having to take on so much risk.

    There is another strategy you could pursue, but that one would be tricky to pull off. If you’d like a summary of those thoughts, contact me directly at bt @ hathawayfunerals dot com.

    Good luck.

  • Paul Seyler

    “Warren”, I agree with BT on 2 fronts. First, Alan’s scenario is well presented and has all the fundamentals right on target. Second, any business sale scenario had got to base its financial projections on a minumum of 50-60% cremation and a higher share of event business going outside the funeral home. If you don’t use assumptions like those, the business is going to be overvalued. To put it simply, the business the seller THINKS he is running is worth more than what you’re actually buying. It’s a touchy subject when you’re buying from family, but you can use more conservative assumptions for the sale and then build in some upside for the seller if the results are better than you assumed. Consider completely buying out that competitor with the bad attitude instead of “merging” with him. SBA interest rates are at historically low levels, and you don’t need all those headaches from the management rivalry. The resulting economies of scale should help offset some of those painfully conservative cremation assumptions.

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