The NFDA estimates that 86% of the 19,000 funeral homes in the United States are privately owned by families or individuals. The average funeral home will care for 113 decedents this year while supporting four full-time and three part-time employees, and, in many rural areas, these funeral homes will be the sole provider of funeral services in their community. A number of people depend on these privately-owned businesses, yet many funeral home owners don’t have a plan in place to ensure the funeral home will continue to operate when it’s time to retire.
Funeral professionals know better than anyone that life can be unpredictable. You may plan to work for another 30 years, but that doesn’t necessarily mean that you will – or that illness or disability won’t impair your ability to continue running your business. A succession plan is a critical component of a long-term business strategy, and there are a number of things you can do today to ensure that, when the time comes, your business is ready to transition into new ownership.
Set Aside Time
You should be thinking about these things on a regular basis, but at a minimum you need to set aside time each quarter to focus solely on your succession plan. You need not – and should not – do this alone. Talk with your accountant to make sure you understand the tax ramifications of transitioning your business. Meet with a financial planner (or your banker) to review your business’s cash flow. Spend time with a qualified lawyer who can advise you how best to structure a purchase agreement and provide the necessary documentation. An hour every few months with these experts can help position you and your business for a successful transition.
Separate Yourself from the Business
You’ve probably run a number of expenses through your funeral business that reduce reported income like compensation paid to family members, travel expenses, automobile leases, cell phone bills, etc. Keeping expenses like those on the books may be beneficial for tax purposes, but doing so in the long run can make your business look less profitable – and less attractive – to a potential buyer.
When the time comes to sell your business, a reputable buyer will want to see at least three years of audited financials, so it’s a good idea to start transitioning some of these loosely related expenses out of the business at least five years before you plan to retire.
Pay Yourself a Salary
Too often, funeral home owners pour everything they earn back into their businesses. This may be a good, strategic move in the short term, but it can distort the profitability of the business in the long run. If you are not currently paying yourself a salary, you should start. Set aside an amount equal to what a new buyer would have to pay if they were to hire someone to replace you. This will make your financials more accurate and credible and also allow you to diversify some investments away from the funeral home.
One of the best ways to set aside something outside of the business is in a self-employed person (SEP) IRA. A diversified mutual fund is an inexpensive and good choice. As a self-employed businessperson, you can contribute up to 25% of your pre-tax earnings to an SEP IRA annually (for a maximum of $56,000). An additional $6,000 can be placed in a Roth IRA (taxes are paid upfront, but growth accrues tax free) for a total of $62,000 set aside for your retirement. Do this on an annual basis, and take time at the beginning of each calendar year to review the IRS’s contribution limits to ensure you are not exceeding the amount you can legally set aside.
Create a Policies and Procedures Manual
You likely have a particular way of running your business which fuels the high quality of service your community has come to expect. A new owner will not necessarily know the nuts and bolts of your day-to-day operations – how you process paperwork, where you keep your preneed files, what vendor agreements are in place, how you update your website, what software you’re using to create funeral folders, etc.
Start documenting these things now in a comprehensive policies and procedures manual. Having such a manual on hand can help overcome some of the operational hurdles a new owner is likely to encounter. As an added perk, this document can double as a training manual for new and existing staff.
Increase Your Curb Appeal
An attractive business is likely to attract buyers. So, a few years before you plan to retire, take a quick inventory of your facilities, from the back end to the customer-facing areas. Is your prep room up-to-date? Are you making the best use of your selection room? How comfortable are your meeting rooms? Do you have a place for families to enjoy refreshments? Does your building look professional and inviting from the street? The sidewalk? The parking lot?
You should also spruce up your business operations, starting with your digital presence. Is your website mobile friendly, ADA compliant and easy to use? Are you leveraging social media to build your brand? Would your business benefit from a mobile app? You may also want to look at the software and hardware you’re using to complete everyday tasks, the vendors you’ve partnered with and the merchandise and technology you offer to client families.
Small improvements can make a big difference to potential buyers – it’s like buying a move-in ready home instead of a fixer upper – and many of these adjustments can increase your profitability over the next few years, which will position you well when it’s time to transition the business.
Above all, make sure you are planning ahead for the future of your business. Taking time for that today will ensure that your funeral home is around to serve your community well into the future.
Disclaimer: Nothing contained herein should be construed as tax, financial or legal advice. Consult a professional as appropriate; This article originally appeared in July 2018 issue of American Funeral Director magazine.