Ask the Expert: Is Now the Time to Sell My Business?
Jeff Boutwell, President, Dwight Glover, Director – Advisory Services, and Tony Kumming, Senior Advisor, Midwest Region for NewBridge Group
This is an ongoing series provided by NewBridge Group Mergers & Acquisition Consultants. Have a question about business and finance? Email it to us at Carolyn (at) NewBridgeGroup (dot) com.
I’m thinking about selling my business, but I’m not in any hurry. Is now the right time? Or should I wait 5 or more years for a better selling environment?
The net values that funeral home owners can receive today for selling their businesses are higher than at any time in the last decade. Ironically, the factors contributing to this increase in business values—low capital gain tax, low interest rates and an influx of new buyers in the industry —are the same factors that will likely lead to a decrease in values in future years.
The capital gain tax rate is still at one of its lowest levels since the 1930s. Depending on how your sale is structured, the capital gain tax owed could be anywhere from 0% to 23.80%. So effective structuring plays a huge role in getting to retain the largest amount of net proceeds as possible. When the tax rate increases, and if history is any indication, there will be increases in taxes again soon, the tax you owe will be higher.
Interest rates are at an all-time low. Lower rates equate to smaller debt payments when business buyers borrow money—something they all do. So, the lower the interest rate, the higher the value of a business. The Federal Reserve dramatically reduced interest rates in the last few years in an attempt to help spur investment and help the struggling housing market. Their actions affect every type of investment—even funeral homes. The funeral industry hasn’t been significantly damaged by this country’s recession, and so this reduction in interest rates has actually contributed to increasing funeral home values well above the values that owners could have expected any time in the last decade.
Buyers are out and active. There are several factors that are causing funeral home owners to want to start buying again. Low interest rates, for the reasons mentioned above, are definitely a factor. New private equity money coming into the industry is a factor, as well. Will there be a feeding frenzy like in the 1990s that ended with several large buyers going bankrupt? Not likely. The buyers today are much more practical—NewBridge Group is seeing them walk away from potential purchases rather than overpay. That said, in the last year, NewBridge Group has helped clients realize as much as 25% more than valuations we projected as recent as a couple of years ago.
Cremation rates are increasing every year. NewBridge Group has monitored national and regional statistics from multiple sources that prove this trend. In 1980, according to the National Funeral Directors Association, the national cremation rate was approximately 10% of all funerals. The NFDA is projecting that it will reach 47% in 2014 and 70% by 2030.. Cremation revenues and profits, as you know are typically much smaller than that of traditional funerals. Lower profits almost always equates to a lower business valuation.
How long will this renewed activity last? It’s anyone’s guess. It could stop as soon as it started, with something as seemingly small as the gradual increase in interest rates. Or, a large lawsuit. Or, a general realization that the cremation trend is going to have a larger impact than anyone realized. As with all industries, there are cycles. The good news is that you are in an extremely positive part of the cycle right now.
You’ve heard the saying that you should cut hay while the sun is shining. Funeral home owners, the sun is shining. If you have any interest at all in selling your funeral home in the next five years, it’s worth it to take a look at your options today.
For more information on buying or selling a funeral home, visit NewBridgeGroup.com or call 404-249-9582. If you have a question you’d like answered here, email it to Carolyn (at) NewBridgeGroup (dot)com.