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.
