Selling a Funeral Home Business

by T. Scott Gilligan

In last month's newsletter, the first of our three-part series on succession planning stressed the need to prepare well in advance for the sale or purchase of a funeral home. This advice is particularly critical to any funeral home owner who contemplates selling the funeral home business in the next five years. Whether selling to a major consolidator, an independent funeral home or an employee, the funeral director will want to implement strategies now to maximize the value of the funeral home when it is sold at a later date.

One mistake that some funeral directors will make is to treat the sale of the funeral home as a sale of real estate, instead of a sale of a business. They will spend thousands of dollars renovating their physical plant and updating rolling stock in hopes of increasing the overall value of the funeral home. However, buyers of funeral homes are purchasing a business, not a building. Their primary interest is EBIT (Earnings Before Interest and Taxes).

Unless a funeral home facility has major structural or environmental problems, there is little incentive to improving physical plant. The prospective seller would be much better off by concentrating time and resources on increasing EBIT. Of course, to do this, the prospective seller should focus on lowering costs and increasing income. More importantly, these efforts should be undertaken at least two to three years before selling so the results will be reflected in the funeral home's financial statements.

Of the two ways to increase EBIT, cutting costs will probably be more short-term and less effective than attempting to increase revenue. Many major expenses are fixed such as real estate taxes, utilities and labor costs. Other expenses, such as the cost of merchandise and supplies, are not as important to a consolidator because they will probably be able to achieve lower costs than an independent funeral home as a result of volume discounts. Acquisition companies may also have the ability to manage other expenses (advertising, automotive expenses, insurance costs) more effectively than smaller independent funeral homes.

What remains is to focus on increasing revenue. Paul Kuper of Kuper Consulting Group, Inc. headed up SCI's Great Lakes region and was directly responsible for much of the acquisition activity in the north central states from 1985 through 1996. Mr. Kuper, who now represents independent funeral homes as a succession planning consultant, explains that acquisition companies usually plan on increasing a funeral home's net sales 8% in the first year and 5% per year thereafter. They expect to accomplish this increase by raising prices, rearranging the GPL and enhancing merchandising and staff training. In most cases, they do not anticipate increasing market share after the acquisition and are usually satisfied if they can retain the same level of market share.

When the funeral home does make the decision to sell, a second professional who needs to be on board is an attorney with experience in funeral home acquisitions. One of the primary goals of the attorney representing the seller will be to limit the legal exposure of the seller after the sale. Buyers typically demand a series of representations and warranties regarding the condition of the funeral home's physical plant, business and liabilities. The attorney will attempt to limit the seller's future legal expo-sure by negotiating a restricted warranty survival period and/or dollar caps on the warranties.

The use of an attorney experienced in funeral home acquisitions is also vital in negotiating employment agreements, consulting agreements and covenants not to compete. The paramount goal of the attorney will be to protect the seller against the buyer (or any subsequent buyer), unilaterally terminating these agreements and the revenue streams they produce for the seller.

If the seller is taking back a note as part of the purchase price, the attorney must insure that the seller is fully protected by means of a mortgage, security interest on personal property and a stock pledge. Another important aspect of the attorney's role is to structure the transaction to limit adverse tax consequences.

A final aspect of any sale, and one that is often neglected, is addressing the life of the seller after the sale. Too many times when funeral home owners make the decision to sell, they focus only on the transaction itself without also addressing fundamental decisions such as lifestyle, employment opportunities, retirement, and estate planning after the sale. Before making any commitments to sell, these issues must be addressed and decided. This is why a funeral director seeking the assistance of a succession planning consultant should look for one that will take the time to explore with the funeral director his or her expectations and objectives after the sale.

The sale of a funeral home is typically one of the most important financial (and one of the most difficult emotional) decisions a funeral director will make. Prospective sellers are advised to take their time, do their homework, seek advice of peers and state associations and avoid rash decisions. It is never too early to implement a strategy so that when and if the time comes to sell, the funeral director will receive maximum value for his or her lifetime work.

Part III: Buying A Funeral Home Business

Second part of a three part article. Reprinted from the Summer 1999 Ohio Funeral Directors Association newsletter. T. Scott Gilligan is General Counsel for the National Funeral Directors Association.