What to Consider Before Selling Your Funeral Business
Many of you remember the acquisition crazed days in the late-1990s when there were dozens of buyers willing to make very aggressive offers to purchase funeral homes. Things escalated until several of the buyers filed bankruptcy due to overpaying for businesses. In 2000 the acquisition market screeched to a halt and for the next ten years it became very difficult to sell most funeral homes. Valuations fell with the reduction in viable buyers.
Over the last two or three years the funeral home acquisition market has rebounded in a big way. Current values of funeral homes are at the highest we have seen in the past 10-15 years. Large public companies built up cash reserves and are able access additional capital at historically low interest rates. In addition several new firms entered the market, supported by large equity funds. This trend accelerated again with the SCI acquisition of Stewart Enterprises, as several new firms entered the market in anticipation of acquiring some of the SCI divestitures.
In the past, we’ve told clients that they should sell when they’re psychologically ready to turn over ownership and either slow down and/or do something less stressful. But now, more than ever, owners need to consider whether their business will be worth more in the future than it is today. We believe there’s a window of opportunity at peak values over the next few years. Interest rates are expected to rise in late 2015 and current buyer cash-on-hand will be deployed on acquisitions over that time frame, so buyer access to cheap capital will be greatly diminished. In addition, cremations are expected to continue to grow and accelerate so revenues for funeral home owners are expected to decline. According to the NFDA the U.S. Cremation Rate was 43% in 2012—an approximate 65% increase above the cremation rate in the year 2000. If that trend continues, the U.S. will be at 71% cremation by 2024. Some of you may look at your businesses and feel like that rate is coming much sooner.
Another market trend that we have seen has been the emergence of low-cost providers who are starting to take significant market share. Consumer preferences are changing rapidly, almost all of which are leading to lower funeral revenues, and lower revenues will equate to lower business values.
If you do decide to sell, whether now or in the future, it is important to avoid some of the common mistakes owners have made that have greatly reduced their sale proceeds. For instance, we have seen many owners try to sell for prices that are either below or way above market, so it is extremely important to know the true market value of the business based on actual recent sale values. It is also critical to know how to properly structure the transaction for the lowest tax effect. Poor financial records can not only make it difficult to determine the true tax effect, but it can also cause buyers to have concerns about the quality of the business and reduce the value they would be willing to pay. So, it is important to have clear and professional financial information. We have also seen many owners try to sell to employees or other buyers who do not have access to financing and so they end up having to provide owner financing instead of being able to walk away from the business with most of the proceeds provided at closing. It is imperative to do a thorough screening of all potential buyers and to have access to experienced buyers who know how the process works.
Most funeral home owners get into the business because they love to serve families, and they don’t want to walk away from the families they have assisted for so long. Selling your business doesn’t necessarily mean that you can’t continue to serve your families. In fact, almost all buyers we talk to tell us that they would prefer for the former owner to stay and work for as long as they want. The business is more valuable if the former owner will stay on and continue to serve the families even if it is at a reduced capacity. In fact, selling is an opportunity to get rid of most of the back office activities like bookkeeping, filing insurance claims, payroll, accounts payable, technology, legal, etc. and focus strictly on serving your families. An added benefit is that you can do this while eliminating the risk of the value of the business going down in the future, and reducing or eliminating your weekend and middle of the night hours. If you have kids in the business, buyers also prefer for them to stay on and help continue your legacy for years to come. In fact, often times they will have opportunities for career growth beyond what you could currently offer.
It is an excellent time to explore selling a funeral home. We know that selling a family business is a very difficult and emotional decision, especially when the family has owned the business for many generations. NewBridge Group can help you separate the business side of the decision from the emotional side. For many years we have offered funeral home owners a free valuation to help you determine the current value. With the dramatic increase in the cremation rate, we realized the need to evaluate how that could impact the value of funeral businesses in the future. To address that need we have recently begun to offer a comprehensive analysis of the impact of cremations on revenues and value over the next 5 years using your actual financial and cremation numbers. This will help you base your succession planning and exit strategy on actual data while keeping the emotional aspects out. If you are considering a sale, NewBridge Group would be happy to assist you in your decision.
NewBridge Group represents funeral home owners interested in exploring a sale of their business. Call for a free consultation: 404-249-9582
President, NewBridge Group
Director – Advisory Services, NewBridge Group