Once you find a business you would like to purchase, how much can you offer? Since there are exceptions to every rule, this article will attempt to provide the business buyer with some general guidelines on the most common situations encountered in the funeral industry. In that context, this article makes several assumptions including the following: the buyer will obtain bank financing to make the purchase; the buyer has excellent credit, strong industry experience and the ability to make a modest down payment; any seller financing will be at similar rates and terms as the bank financing; the buyer will own and operate the business for profit as a stand-alone facility; the value of the individual assets of the business, including real estate, are not greater than the overall value of the business.

An important point to remember when buying any business is that most good businesses sell in the price range of three to six times Seller’s Discretionary Earnings or total cash flow available to the owner. Seller’s Discretionary Earnings or SDE is calculated by adding together several components including: business profit or (loss), owner’s salary, discretionary expenses, non-recurring expenses and non-cash expenses (i.e.: interest, depreciation and amortization).

Where your offer falls in this price range depends on the industry and the individual characteristics of the business. In industries where inventory and equipment are of significant value, those items are added to the purchase price, with the purchase price often being expressed in terms of sales revenue, plus inventory and equipment. In the funeral industry, most businesses sell in a price range between four to six times SDE. This price range typically includes all operating assets of the business.

Since most buyers are in business to make money, it makes sense to determine how much cash will be available to pay debt service after the purchase. This is also the method used by banks to determine how much they can loan on a purchase. SDE or cash flow available to the owner is often expressed in terms like: adjusted cash flow, seller’s discretionary earnings and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). All of these terms are used to describe SDE. Please note that SDE is a higher number and is not the same as cash flow available to service debt.

Cash flow available to service debt is always a lower number than SDE and it is calculated by subtracting a normal salary for the borrower from SDE. Most lenders require a borrower budget the minimum salary needed to take care of his or her personal liabilities and living expenses. They also require a small margin of safety over and above the actual debt service requirement which we will discuss shortly.

The minimum salary required by the borrower will vary depending on their personal debt level. A good rule of thumb to budget and estimate a borrower’s personal salary requirement is to multiply their annual personal liabilities by two. For example, a borrower with annual personal liabilities of $15,000 will require a minimum personal salary of $30,000, which is then subtracted from SDE to arrive at cash flow available for debt service. Cash flow available for debt service or CDS is then used to determine how much the borrower can actually borrower for the purchase, which then allows the borrower to estimate how much they can offer the seller.

In addition to subtracting a salary requirement, most banks will also build in a margin of safety when calculating the actual debt payments they are comfortable with. This margin of safety is referred to as debt coverage and is usually expressed in a ratio called the debt coverage ratio. Some banks require a minimum debt coverage ratio of at least 1.25 and some up to 1.50. For example, if a bank required a minimum debt coverage ratio of 1.25 and the CDS was $125,000, the bank would only be comfortable with annual debt payments up to $100,000. This total would then be used with the amortization term and interest rate to determine how much the borrower could actually borrow for the purchase.

The following example will help illustrate both the minimum salary requirement and the debt coverage margin. Let us say over the past three years a business has achieved average SDE of $350,000. The borrower’s personal salary requirement is estimated to be at least $50,000, which is then subtracted from SDE to arrive at CDS of $300,000. Let us say the lender is conservative and requires debt coverage of at least 1.5 on loans of this size. Dividing CDS of $300,000 by the minimum debt coverage ratio of 1.5 leaves $200,000 for total annual debt payments. In this example, $200,000 in annual debt payments over 15 years at 8.00% would allow the buyer to borrower approximately $1.7 million to make the purchase. If the buyer planned to put down $300,000 in cash, the buyer could offer the seller approximately $2.0 million for the business.

Whenever a buyer is getting financing for a purchase, some form of the process above is used to determine how much the buyer can borrower. Since banks like their loans to be paid back, the minimum personal salary requirement and debt coverage margin are both used to establish a realistic budget of how much annual debt service the business can actually afford. 

Matt Manske is the Managing Member of BSF, Business Services & Funding, LLC. He can be contacted at 888.665.4273, or by .

Do you know what your funeral home is worth? Most business owners think they have a good idea. Some will guess their value, and others might apply a multiple to revenue as a measurement of value. Guessing and applying multiples to revenue typically do not produce accurate estimates of value.

It’s been said that first-generation business owners tend to underestimate their business value because they remember the lean years and believe their business may not survive without them. There is some truth to this because many businesses do not survive the transition to the second generation. This can happen for a variety of reasons which we will cover in a future article. Second-generation owners tend to overestimate value because they did not experience the lean years, and they may think the prosperity they’ve seen will easily continue for a new owner.

Estimating the value of your funeral home can be difficult because values can vary greatly from one business to the next—even in the same industry. Why is this so? The first reason is that every business is operated and managed differently. From an operations standpoint, some businesses are managed with discipline and achieve higher profit margins. Others are managed “off the cuff” and achieve lower profit margins. All else being equal, higher profit margins equate to higher business values per dollar of revenue. Thus, the way a business is operated can greatly influence its value. An easy example of this in the funeral industry is a 150-call firm operating with two full-time funeral directors at $50,000 per year each versus a similar firm operating with three full-time funeral directors at the same pay rate. One firm is paying an additional $50,000 in payroll for no additional revenue.

The second reason business values can vary in the same industry is that every business operates in a different market environment. Market factors will vary by location and can significantly influence business value. One business may operate with no competition and another may have five competitors in the market. Obviously, the business with no competition would be less risky and, on average, have a higher value-per-dollar of revenue than the business with five competitors.

Existing competition is just one of several market factors. Others market factors affecting the funeral industry include: the threat of new competition; general market trends—such as decreases in revenue-per-call associated with cremation; increases in interest rates which decrease loan amounts for borrowers; population shifts or demographic changes affecting the customer base; the availability of dependable employees to operate the business, and the amount of goodwill associated with the business. A common adverse market factor seen in the funeral industry is a declining market. Population shifts are often impossible to overcome no matter how the owner changes his or her marketing strategy.

As you can see, there are many factors that must be considered when arriving at an accurate value for your funeral home. It’s not just a matter of multiplying revenue by two and putting the word out that you want to sell. Guessing is not a good option either—as it can be very costly. If you guess too low, you may sell yourself short and leave money on the table. If you guess too high, you may spend the next three years wondering why buyers keep low-balling you. And, by the time you’ve recovered from your depression, and are ready to sell for the true value, your buyer pool may be depleted, and you may have to sell for even less! You only get once chance to sell your funeral home. So, it’s critical that you obtain an accurate estimate of the value of your business before you plan to sell—preferably at least two years before you plan to sell.

Why do you need to know your value two years before you sell? Appraising your funeral home may identify certain areas that need to be adjusted to increase profitability. Remember, all else being equal, higher profits translate into a higher business values. If adjustments to revenue or expenses are necessary to increase profitability, it will take some time for those adjustments to be realized on your financial statements and tax returns. Potential buyers need to see proof of your historical profitability via your financials and tax returns. Buyers and their lenders will use this historical data to determine the amount debt service the buyer can afford in the future. Thus, more profitability results in more cash flow available to pay debt service, which results in a higher sales price for you.

If you are considering the sale of your business, you need to know up front that there is no easy way to do it. There is no “secret formula” that will allow you to glide through a sale with little or no effort. From start to finish, the process of selling a business is detailed and time consuming. But, there are several things you can do to help navigate your way through the process.

First, be prepared to answer a lot of questions.

Why are you selling? Are you ready to retire? Assuming that you are ready to retire, are you ready to let go of the income, control and relationships you have worked hard to maintain? How will your employees handle the transition? Will a new owner keep your employees? Will the new owner be a good fit with your customers? Will the new owner maintain your reputation in the community?

What is the accurate value of your business?
Who should you get to value your business?
Can you get enough from the sale to meet your needs? Who can you trust to negotiate with potential buyers? How many potential buyers will have to visit your business for you to find the right one?

How much is selling your business actually going to cost you? How long will the selling process take? Have you prepared for the sale? Are your records maintained and organized properly? Can confidentiality be maintained during the process?

These questions are common examples. Since every business is unique, count on answering many more questions specific to your business.