According to Homesteaders’ 2016 customer satisfaction survey, roughly a third of funeral home owners are age 60+, a metric that has increased 7 points since our 2014 survey. Funeral professionals are getting older, and many of them are reaching (or passing) retirement age without a clear plan to transition their business to the next generation of funeral professionals. Knowing how to put together an effective succession plan is an essential part of safeguarding what is often a funeral director’s life’s work and single most valuable asset, ensuring the business can carry on even after an owner transitions into retirement.
Before joining Homesteaders, I spent more than a decade working with funeral homes as they developed and implemented succession plans. As head of corporate development at public funeral home company, my job was to partner with funeral home owners to outline a strategy that would allow for a smooth transition to new ownership. In my experience, there are several steps that are essential to developing an effective succession plan.
The best time to sell is often when you don’t need to sell. A desperate seller is likely to settle for an offer that is lower than what they might accept if they had time to find a more attractive buyer. Too often, funeral home owners wait until age 65 to consider selling the business. At that point, there’s not a lot of time to negotiate a deal, and often the pressure to find a buyer – any buyer – leads owners to accept a deal that doesn’t position them well for retirement.
Starting before you think you need to – in your late 50s or early 60s – can give you an upper hand in negotiations because you have time to field additional proposals if the first offer is not attractive.
Complete a Business Valuation.
It’s a good idea to begin with some sense of what your business might be worth. The first thing you need to identify is your business’s EBITDA – earnings before interest, taxes, depreciation and amortization. (This is just accounting jargon for operating cash flow.) For most businesses, the market valuation will be between five and seven times the EBITDA. So, a funeral home with $500,000 in earnings would likely be worth between $2,500,000 and $3,500,000.
Other collateral can influence the true value of the business. Some of these factors are subjective, like real estate holdings (if you own your facilities) and inventory. Objective factors also impact the valuation, including the amount of preneed on the books, the age and quality of your vehicle fleet, your reputation in the community and even the quality of your employees (assuming they will remain on staff when you sell the business). Both subjective and objective factors can impact your valuation. A financial planner can help identify the extent to which these factors will increase your business’s value.
Identify Possible Buyers.
Once you have a good sense of what your business might be worth, the next step is to research and identify potential buyers. There are a number of options when it comes to selling a funeral home – you can choose to sell to an employee, a family member, a competitor, a colleague or even a corporation. A professional funeral home broker can help you identify potential buyers, create a listing and market your business. He or she will likely be equipped to help you prepare your financial documents and complete a full business valuation as well. It will also prove beneficial to have a good accountant and a good attorney who are experienced in business transactions.
To find the best fit for your funeral home, you need to ask yourself what your ideal role is post-sale. Would you want to continue to work there and support everyday operations? Would you prefer to partner with the new owner as a consultant? Or would you want a clean break? Knowing your best-case scenario will help you narrow down your pool of buyers.
Interview Potential Buyers.
Once you’ve identified potential buyers, it’s time to figure out which choice is best for you, your funeral home business and your staff. You need to be comfortable with whoever buys the business, and the way to do that is to ask a lot of questions about his or her plans:
- What are your expectations of me (the owner) after the sale?
- What are your plans for the staff currently in place?
- Are you planning any significant changes to our General Price List?
- What are your plans for preneed? How do you plan to honor the agreements currently in place?
- How will you maintain/grow the business?
These are all important questions, and they get to the heart of a buyer’s plans for the next phase of your funeral home business. Remember that your buyer doesn't have to do things the same way that you have always done them, but you should be comfortable with his or her overall approach to the business and to your client families.
Make a Deal.
When you find a buyer you are comfortable with, the last step is to reach a fair agreement regarding the price. Every deal is structured differently, but it’s important to remember that whatever the agreement, you can expect to lose a portion to taxes. If you’re relying on the profits from the sale for a comfortable retirement, you will want to ensure the purchase price is sufficient to meet those needs – even after taxes.
As you complete your succession plan, remember that your business is only worth what the highest bidder is willing to pay for it. If you have difficulty finding a buyer who wants to buy the business at your desired price point, there are a few things you can do to generate more interest. The first is to ensure your business has a good reputation in your community. A strong brand – supported by exceptional funeral home customer service and staff – will be attractive to any buyer. The second is to adopt a robust preneed program. A backlog of prefunded funerals mitigates the risk buyers assume when they purchase a business. They know they have guaranteed call volume for many years down the road, in a community that is already educated about the value of preneed.
Will Bischoff is the VP-Strategic Markets for Homesteaders Life Company. He is widely recognized as a respected professional in the funeral service realm, having served in various financial, sales and management capacities throughout his career.