Jake Johnson talks about Keys to a Successful Funeral Operation
September 29, 2008
Recently Jake Johnson, together with Scott Meierhoffer of St. Joseph, MO, was on a conference call with Robin Heppell.
The three of them were talking about how to be successful in the changing and this somewhat difficult time for funeral service. We have two excerpts from the interview. Robin asks Jake to elaborate on the keys of a successful funeral operation and then asks Jake to sum up his thoughts of the conversation.
Jake’s Keys to a Successful Funeral Home Operation
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Jake’s Parting Thoughts
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For more information about our Management Services, see the article: Funeral Home Management Services
Stay tuned for more excerpts from the interview - we will let you know as soon as we have them uploaded.
Return to the September2008 Management Insights Newsletter
Current Economy and its effect on Funeral Service - Tom Johnson
September 29, 2008
We are often asked by our clients, what it is the best strategy to employ in an economic downturn and how has this downturn affected my funeral home’s value? These are tough questions to answer but funeral directors can take some comfort in the fact that funeral service in general is one of the more “recession proof” businesses in the United States. There are many of our constituents in other fields that don’t have it so good right now. Home builders, commercial construction, real estate, trucking, automobile dealerships and restaurants to name a few are in particular feeling the hard times.
Funeral service marches on as families continue to need our services. The best way to handle the downturn is to work harder and smarter than you have in the past. Go the extra mile with families. While your competitor may be crying the blues it can separate you from the pack. Especially from an image standpoint and will pay dividends in years to come.
It is also amazing to me that many funeral homes really do not have an accounting system. They tend to just gather information and send it to their accountant so they can get year end taxes completed. There is no more important time to get your financials affairs in order than now. No matter who you use, get a professional accountant to assist you in not only handling your accounting but also doing some financial planning and budgeting. It is one of the hallmarks of our company now as our accounting division has grown rapidly during the past year.
There may be some families that opt for cremation because of the economy but I do not believe that is wide spread. If this happens it is probably the families that were sitting on the fence with this decision and economics push them over the edge. You may also have some families that do not select as much as they might have in good times, but in my 30 years of funeral service and having gone through this a few times, that really wasn’t much of a factor in the funeral homes I owned. Some funeral directors say that they extend terms on their contracts during these times but I really do not think it is a good idea unless absolutely necessary and then secured.
The funeral homes it affects the most are the ones that were struggling before the economy turned. It’s probably pretty tough for them right now. They may make it or may not. Time will tell. However, for the majority of funeral homes in the United States, it’s a good time to look at all of your expenses and maybe get rid of some of the “fat” in your organization that you have been putting off. As we do our “Performance Evaluations” around the country, we often can assist funeral directors in this effort. In nine times out of ten, the savings or enhancements that are created more than cover our costs. My caution is that the savings should not be in areas that are service connected as I firmly believe it’s time to give the best service you can.
There is a scene in the movie the Godfather that I think back to during situations like this. It was when the gang families were about to go to war to take over each others turf. Michael Corleone asked Clemenza (one of his father’s soldiers) “What happens during a time like this.” Clemenza retorted by saying “These things happen from time to time, don’t worry about it. Things will eventually get back to normal.” It’s true with our business. Things will get back to normal. The question is when?
With regard to the economy’s effect on the value of funeral homes, let me say this; The major way the economy has the affected the value of funeral homes is that the tightening of credit has had a limiting effect on the number of buyers. In our profession, where prices are primarily market driven, this will have an effect on value. The more “willing and able buyers” there are, normally the higher the price. However, this negative is mostly felt by smaller to mid size operators. Premium firms will always command a good price as long as it fits the demographics of the major buyers.
Finally, the best way to maintain or build the value of your funeral home is to continue to offer great service in your community while maintaining your property and grounds in excellent condition. Make sure you are following up with your families. If your call volume and revenues are maintaining or increasing you will be maintaining the value of your firm in the long run.
Hopefully, those who read this article noticed the number of times I referred to the word “service.” It is not an accident. As I have owned or operated over 300 funeral home or cemeteries in the past, the level of service given to the community is the hallmark of any successful firm I have had the pleasure of being associated with. With our many clients it is the same. Some give great “lip service” to the word, but really are just going through the usual motions. It is the funeral directors who are always looking towards “continuous improvement” in their service level that eventually lead the way.
I hope this has given you some insights and ideas that you can bring to your organization. As we know and sometimes say, “It’s not rocket science…” It’s doing the little things, paying attention to the details…and getting back to the basics.
Return to the September2008 Management Insights Newsletter
Making Better Decisions is a Matter of Having Better Information - Glenn Gould
July 17, 2008
Every four years American voters’ most intimate social and political thoughts are picked and studied as politicians develop platforms, positions and talking points. This is where the period of peak demand for research services, but also where theory and practical application meet. Politicians will pay whatever is necessary for new research techniques that will reveal data competitors will not have. The success of these ideas filter into commercial applications after they have been proven in the political arena.
Tightening profit margins in funeral service are causing funeral business of all sizes to develop strategic plans. Long term and short term plans that involve succession planning with younger generations acquiring family businesses, advertising budgets, acquisition and sale of businesses or properties. All important, perhaps life changing, decisions.
Management consultants meet with family business owners to assist in this process, and they ask important questions; what is your market share, why do people use your firm versus competitors, and vice versa? Is your location, facility, staff, prices, services, name awareness, image, and pre-need competitive in the market? Too often these questions are answered based upon perceptions, or misperceptions, family members have held for generations, starting with great, great grand daddy.
Too often these marketing plans simply reinforce existing assumptions. Owners and managers will assume that everyone believe like they do about services, competitors, prices and facilities. The reality is without some source of objective data, developing a long term strategy without market research is like getting a physical without a blood test.
How Market Research Contributes to Planning
The cost of marketing-by-assumption can be enormously high, particularly when an organized market profile study can easily prevent mistakes. When people know rather than assume they will make significantly better decisions. Market research will pin-point consumer groups who may not be aware of your funeral firm or could be attracted to patronize a particular funeral home if they were made aware of the special services provided, such as on-site crematories, reception and children’s rooms. Creating advertising that will impact decision making is far easier once the consumer’s hot buttons have been identified.
Another benefit of a market analysis for existing facilities is to determine the importance of certain criteria in the selection of a funeral home. In some regions, consumers are very familiar with their funeral home options and are likely to refer to their own experience when selecting a funeral home. But, in a highly mobile society where as much as 20% of residents relocate annually, there are many consumers with no local funeral home experience upon which to base a decision. In these cases, it is important to have an understanding of the role the clergy, yellow pages, internet, print and broadcast media advertising play in funeral home selection.
Using Market Research to Plan New Facilities and Acquisition
The tradition of funeral service is to take uncalculated risk when expanding or building a new funeral facility. Through pure tenacity on the part of owner/operators, many of the nation’s newer funeral homes have remained open when business volume did not merit the cost. Most of these unnecessary and expensive facilities could have been avoided by a moderate investment in consumer market research.
Many funeral homes have been built because an operator in a neighboring community felt the funeral homes in the area did not provide quality services, or their facilities were inadequate. These assumptions ignore a fundamental element of funeral service: that funeral business, like many other businesses, is more about personal relationships than any other single factor. Judging a funeral business by its building or service is the same as judging a book by its cover. Typically, the existing firms in an area meet the local clientele’s expectations. It can take years for a new facility to build volume simply because residents like the owners of a competitive firm, regardless of the building or prices.
A market research study during the planning stages of a new facility will reveal information about prospective consumers by focusing on they really want from a funeral home; what factors they consider when selecting a funeral home. Accurate and specific consumer attitudinal information about a prospective trade area can predict at-need volume and assist funeral home owners and managers in determining the demand for a particular facility. Fundamental questions like location, building design and size can be answered.
Over the past five years, only one of every two clients conducting a prospective trade area study has decided to move ahead with new facilities. This means that half of the time owners that were prepared to invest millions of dollars in new facilities were dissuaded from moving ahead based upon information they learned from market research, such as:
- What influences a family to choose one funeral home over another?
- What families see as assets and liabilities of one facility versus another?
- The proportion of consumers owning a pre-paid funeral.
- The proportion of families who are unsure as to which funeral facility they will patronize.
- Sources used to select a funeral home.
- Present and projected volume of deaths in an area.
- Demographics, i.e.: age, income, length of residence.
Prior to purchasing property for a new facility, research will indicate whether or not there is sufficient at-need volume to support a proposed facility or if one site would be more productive than another. By understanding the consumer’s priorities, marketing efforts are made more efficient and productive. A funeral firm can be assessed in terms of:
- How well known and liked is the staff by local consumers?
- How does the firm’s reputation compare to that of others in the area?
- Does the firm meet the consumers’ expectations as far as flexible costs and services?
- Is the firm associated with one religious group more than another?
- Do consumers see value in special services such as aftercare, pre-need or rental caskets?
Having conducted 600 market research studies and moderated hundreds of focus groups and test panels for funeral homes, cemeteries and death care industry vendors, the most amazing phenomena is to observe an intelligent business manager make a business decision with significant long term implications in direct contradiction to hard research data. It’s impossible to list all of the instances when this has occurred, but the following are typical:
- A mid-west funeral home owner commissioned a research study to determine the prospects for a new funeral home in a relatively large city. The research data demonstrated that the client already pulled most of the business from this area and because the population was so young and transient, the number of deaths from the area would not increase for many years. The client chose to proceed with the new facility under the rationale that he had two sons and wanted each to have their own business. The client was apprised that what he was actually doing was digging an expensive hole from which his son would spend the rest of his career trying to emerge, but the facility was built. Fifteen years later it has yet to conduct a sufficient number of calls annually to meet the overhead cost.
- A major industry vendor was considering a personalization product to replace a more generic standard product that all funeral homes use. The proposed product had merit as it was more attractive, but the nature of the product made it very cumbersome for funeral homes as it would require them to carry extensive inventory. The client observed two focus groups of funeral directors, each of which made it very clear they would not purchase the product because of the need for a large inventory and because the product is so specific as to limited the opportunities for use. None the less, the client ignored the research finding and pursued the product. The product failed miserably and contributed to the president’s termination.
- A funeral home client in a mid-western city had not initiated a pre-need marketing effort even as competitors experienced good success with their individual efforts. The client conducted a research study which clearly demonstrated that the competition was gaining market share among younger adults (age 55+) primarily through their pre-need sales efforts. The research also demonstrated that consumers did not believe the client offered pre-need and had reluctantly shifted their preference to other firms that did offer pre-need. As the age 55+ consumers aged into the age 65+ generation, the client funeral home has steadily lost market share among families preferring traditional burial and now has a far higher cremation rate than the competition. The very high cremation rate has resulted in lower profit margins, and the owners have lost tremendous equity as the acquisition value of the firm has declined.
- Funeral home owners often consider building a new funeral home too near a major competitor under the assumption that being located near a major competitor is a good strategy for pulling business from the competitor. Research and experience has demonstrated just the opposite. Consumers need a good reason to change their funeral home preference from one firm to another, and simply locating near their preferred funeral home is not good enough. A market research study was suggested to a client that had intentions to do exactly the above. The research was conducted and the results demonstrated that a new facility in another area of town would be far more successful. None the less the client built the new facility on property near the competitor. Today that facility is law offices.
- A funeral business has two facilities that operate with similar, but different names. One of the facilities has never performed as well as the other. The owner commissioned a research study to determine why one building was so much more successful then the other. The results demonstrated that consumers did not know the two buildings were owned by the same company and held negative images perceptions of the less successful facility. The solution was obvious; change the name of the less successful facility to reflect the common ownership and promote the two facilities under one name. Management was reticent to drop the heritage names associated with the underperforming facility, and to date, the facility continues to underperform.
- A large manufacturing company commissioned test panels to create a merchandising system that would sell more profitable product. The research results dramatically indicated that the product line was to broad and that sales would improve by deleting lower end products, implementing a “good, better, best” merchandising strategy, and using a presentation book or computer based presentation as opposed to the current selection room merchandising strategy. Although investing in excess of $100,000 in the study, the results were never implemented; product mix continues to be the company’s primary challenge.
Perhaps the same mentality explains why so many funeral homes and cemeteries pursue courses that run contrary not only to research findings, but empirical data as well.
- Funeral businesses nationally have installed reception rooms with outstanding success when funeral arrangers are trained to present their catering services, yet the great majority of funeral homes fail to take advantage of this obvious opportunity.
- Funeral home profits are declining precipitously from cremation, but so few firms are implementing arrangement room strategies such as packaging, and presentations systems that have proven to increase sales and customer satisfaction.
- Response to lead generating advertising has consistently declined over fifteen years as cemeteries try to sell traditional graves and mausoleum. Research indicates 80% of consumers that want burial already own cemetery space. Direct response advertising, particularly advertising that offers price discounts succeeds only when there is a pent up demand for the product. 61% of adults age 45+ are either unaware of cremation memorials at cemeteries are simply do not want memorials, as such the advertising fails simply because there is no audience. The objective of cemetery advertising should be to create a demand for cemetery memorilization instead of further deteriorating the perceived value of cemetery memorials as opposed misleading “free veteran space” advertising.
- There are too many funeral homes in the US; as a result weaker firms are becoming financially desperate. Because desperate people take desperate risks, pre-need and other financial scandals are rampant in the death care industry. There is an obvious need for legislation to protect the consumer from unscrupulous funeral home and cemetery operators, but the state and national associations have failed to take a proactive position by recommending regulation that could preclude the actions of a few from undermining the public’s confidence in all death care businesses while also protecting the public.
- Local ownership has been the most successful advertising strategy ever implemented in the funeral home industry at shifting business from one funeral home to another. In fact, local ownership advertising is one of the main reasons the corporations are selling off isolated facilities where they are at a competitive disadvantage with locally owned firms in deference to markets where corporate operated funeral homes dominate. Yet, independent funeral homes have convinced themselves consumers no longer care about ownership because they don’t hear them talk about it anymore. It is so apparent that consumers considered ownership important when advertising informed them of the local versus corporate issue. Consumers learn the issues they should consider through advertising so your advertising must raise the issues you want consumers to consider important; not the other way around.
Making Market Research Work
There are many methods for collecting consumer data, and each was developed to meet a specific need. Focus groups are becoming increasingly common in funeral service as management teams need qualitative data that can not be ascertained through telephone interviews. Focus groups bring residents of your community together to discuss issues important to you; such as special services, the consumer’s understanding of cremation, memorialization with cremation, columbarium niches, cremation scattering options in cemeteries, and other options.
Most funeral home research needs are quantitative in nature, meaning a large number of respondents must be surveyed. Quantitative research answers fundamental questions such as why one firm is preferred over another, why is volume down, what do consumers like about one firm, versus another, and what are the opportunities for market share gains.
It’s very easy to commission a research study that produces 200 pages of charts and graphs but no practical information, no recommendations or direction upon which to base a decision. One funeral home owner was convinced to conduct a mail out survey study. The questionnaire was sent to adult residents of his community; of which only 12 were returned, six of which were clergy members. A thick report was produced, which obviously had no value what so ever at reporting what the community thought about the local funeral homes.
Market research should be used to investigate specific rather than general issues. For example, the most common question business people will ask is “Why do consumers do what they do?” Determining “why” is deceptively difficult. When people are asked direct questions about what they do, they are inclined to answer with rationalizations rather than reasons because people want other people to believe they are reasonable. So, they search for ways to rationalize their behavior and make their actions acceptable to others. Answering “why” is not a realistic research objective; but knowing what consumers will do meets our needs as marketers. Market research should answer specific questions that contribute to specific decisions rather than a long list of generalizations:
“Is there a market for this new facility?”
“How much can we charge for our services?”
“How much opportunity is there in the market for volume growth?”
“What do I have to do to grow this business?”
“How is my pre-need program doing compared to others in this market?”
Involve all individuals with responsible positions within the firm to recommend issues that should be investigated by the research. Whether at-need, pre-need, or family follow-up, there will be important questions which, when answered, will allow this individual to better perform and may apprise the rest of the organization of special opportunities.
Make a commitment to accept the results of the research study even when they run contrary to held beliefs. The marketplace is full of misinformation. Consumers believe things to be true that you may know to be false. This does not mean the survey is wrong; rather, someone is misinformed. One of the greatest contributions of a market profile study is to reveal areas of misinformation so as to allow managers to make their promotion and advertising more effective and productive by realigning perceptions.
Conclusion
The dynamics of a sophisticated and diverse consumer market combined with high interest rates and construction costs and a fiercely competitive marketplace make a careful marketing plan for prospective or existing funeral facilities essential for success.
Every manager and owner in the funeral industry should be alert for ways to reduce the risks of a new facility and for ways to generate greater volume at existing facilities. As many funeral professionals have stated, “It costs too much today to make mistakes.” To avoid that end, market research can be a most helpful tool.
Remember, marketing-by-assumption leaves open the possibility that it may be you who is misinformed and not the consumer.
~ Glenn H. Gould, CEO, MKJ Marketing.
Glenn’s diverse management and consulting experience has contributed to MKJ Marketing becoming the leading marketing influence in the death care industry. His new book “Deathcare Marketing, 25 FAQ’s”; has recently gained NFDA endorsement, and is in use by mortuary schools. Glenn’s articles appear regularly in major death care industry publications, and he is a frequent presenter on death services marketing at seminars and conferences.
Glenn’s work experience includes executive positions with Bausch & Lomb, General Mills and the Batesville Casket Division of Hillenbrand Industries. In funeral service Glenn assists funeral homes and death care industry vendors in establishing marketing and advertising plans. He is recognized for his market research services having conducted over 500 positioning and prospective trade area studies for funeral homes throughout the US and Canada. In addition, Glenn has conducted quantitative research studies, moderated focus groups and/or consulted to:
- Wilbert, Inc.
- The Woodlawn Cemetery
- Funeral Service Foundation
- Capital Holding
- Open Dialogue
- Columbian Financial Group
- Keystone Group Holdings
- Aurora Casket Company
- Consolidated National Life
Glenn has testified in multiple civil suits between funeral homes as an expert witness, served on the Board of Directors of the Pittsburgh Institute of Mortuary Science and instructed the Small Business Class for the St. Petersburg College, School of Mortuary Sciences. His biography appears in Who’s Who in America; he holds BA and MS Degrees.
Return to the July 2008 Management Insights Newsletter
Knowledge Replaces Fear - Todd Van Beck
June 24, 2008
A wise mentor of mine once said that “knowledge replaces fear.” As the years of my career in funeral service has passed from 10 to 20 to 30 to now 40 years, I have witnessed the movement of funeral service going from a fairly simple day to day operation to the present day environment which is complicated and yes, at times, fearful and filled with uncertainty.
No one enjoys rapid constant change. In fact psychologists almost uniformly agree that the human being cannot handle rapid change over a sustainable period of time. Rapid change usually creates fear of the unknown. Everywhere I travel in my speaking and seminar sessions, I listen to funeral director after funeral director tell me of the concerns, fears, and worry that they have these days in the day to day operation of the funeral home.
Too bad there is not a “graduate” school in funeral home management. In fact the curriculum of the mortuary school system really does not spend an inordinate amount of time on such matters as business management, people management, community outreach, alternative services, etc. The curriculum of the mortuary schools is, basically upon graduation, to give the successful student more of a learner’s permit than an academic degree. Where does most of the learning in funeral operations happen – on the floor of the funeral home where hour by hour challenges are faced and coped with.
Not long ago, I spoke at a large state convention. The speaker before me was a representative of some state watchdog agency and the assignment was to speak on the state of funeral service’s relationship to government regulation. It was a merciless in assault on funeral service. This person went on and on and I could see that the attendees were moving quickly from tolerate respect, to fear and then to anger.
One funeral director stood up and took umbrage with the speaker who had basically indicted to the entire audience that they were not in compliance with much. There was an audible gasp in the room when the speaker expressed that sentiment. Now, it was this funeral directors opportunity to set the record straight. In a nut shell this is what he said: “On a day to day basis this is what I deal with: State Board of Funeral Directors and Embalmers, I pay the fees, I renew licenses, I participate in required continuing education and I open my door for an annual inspection. Then I deal with my cities ordinances which range from parking regulations to regulations concerning the placement of my sign. On top of that I work with the State Department of Taxation, the State Department of Motor Vehicles, and the State Department of Environmental Protection. Then I have to make sure the payroll is taken care of and taxes paid, the accounts payable and receivable are monitored and that I offer a good health and retirement plan. Now I am not finished. I deal with the Internal Revenue Service, the State Revenue Service, the Federal Trade Commission, Occupational Safety and Health Administration, the Social Security Administration, the Veterans Administration.” Finally he was out of breath, but he received a standing ovation.
I thought that funeral director showed manifest courage and laid out the complex environment that even the smallest funeral operation works under in these complicated and challenging times.
In the past several months, I have been involved with an organization called Johnson Consulting. I, the reader, look at the company’s information one can readily see that a team of exceptionally qualified people have been assembled to do one thing and one thing only – assist funeral homes in improving day to day operations.
Already Johnson Consulting has developed an impressive analysis system. Tom Johnson says it best. “Our approach is simple and straight forward: We fix what is wrong and keep in place what is working well.”
I attended 27 seminars in my life which were conducted by the legendary Dr. W. Edwards Deming (the American who taught the Japanese about quality service) and he was firmly convinced that in order to improve services to a community one had to be constantly on alert as to what was not working properly within the organization. Then after identifying the weaknesses the organization was in the highly advantageous position of fixing them. Identifying the weaknesses is the key. This is what Johnson Consulting does, from internal analysis of daily operations, to telephone mystery shopping analysis to business consulting issues. It’s a very thorough and comprehensive “Performance Analysis”.
Might I share a private sentiment with the reader? My entire career I have worked with individuals, good individuals, who get involved with funeral service – but they do not understand funeral service. They present the attitude “Well if I was able to sell a lot of Fig Newtons selling a funeral will be a snap.” Rarely have I seen these people move forward or the programs they present relative to the funeral profession.
For me, one of the great attractions of getting associated with Johnson Consulting was that everyone, and I mean everyone, possesses great knowledge and experience in day to day funeral work. This is a tremendous asset for any client of Johnson Consulting. We know the secret handshake! We have been there and done it all.
So for time such as these, with all the day to day complications in funeral work, Johnson Consulting is a resource well worth exploring. Johnson Consulting truly believes in and nay say loves the funeral service profession.
~ Todd Van Beck
Return to the June 2008 Management Insights Newsletter
Building Relationships Online
May 6, 2008
The marketing thought leaders of today - Seth Godin and David Meerman Scott - both preach that to connect to today’s consumer, we have to turn away from “interruption marketing” and focus on the building of relationships. Relationship marketing is nothing new to funeral directors and cemeterians. We have woven ourselves into the fabric of our communities for generations. Whether it was through our churches, service clubs, or sports teams, we were shoulder to shoulder with other members of our community - building those relationships.
Today the problem is that we don’t always have time to belong to all of these activities and even if we do make time, others in the community are just as busy and may not be there for us to build those relationships with. We do have some resources available to help us build relationships via the Internet. Although the Internet is not meant to replace our physical presence in our communities, it does allow us to connect with those who are online themselves - just like you!
This is actually what Tom and Jake are doing with their new website and newsletter. Although you will still see them at conventions and conferences, they have created - as Bill Bischoff named it - their virtual marketing platform. With the goal of creating this platform to provide the most relevant and current information to funeral and cemetery professionals, we harnessed the power of the WordPress weblog functionality and applied the best practices of online marketing and public relations.
Key features of this site above the usual website components:
- Audio clips welcoming visitors to specific sections of the site - the goal is to make visitors comfortable with members of the team, hence building relationships
- Testimonials are displayed throughout the site, some randomly in the right sidebar and others relating to specific service offerings
- Media Room lists all press releases with the most recent listed first - this page is dynamically created and new releases are uploaded with the same ease as sending an email with an attachment - no more web developer fees to add new information
To further build those relationships, they have developed a complimentary newsletter - what you are reading right now - that will go out to members of the death care community. It takes the latest articles posted to the website and turns them into the newsletter. This strategy recognizes that some people will prefer to go to the website on a regular basis for new information; others will prefer to get that information in their email inbox; and for the super techies - they can subscribe via RSS. Just like traditional marketing, a multi-pronged approach is a must to reach potential customers in the manner that they wish to receive the message - this is what Seth Godin calls Permission Marketing.
As outlined in his book, The New Rules of Marketing and PR, David Meerman Scott states that these tools can be applied to any business who wants to methodically build relationships with their community. These tools and strategies can even be applied to funeral homes and cemeteries who want to who want to take their online presence from just a website to a virtual marketing platform. If you would like more information on how to apply these strategies to your own online presence, please visit my WordPress powered website at: www.FuneralFuturist.com or feel free to contact me at 800-810-3595 or 250-744-3595.
Robin Heppell, CFSP
Return to the May 2008 Newsletter
Value Drivers for Today’s (and Tomorrow’s) Market
May 5, 2008
We believe the merger and acquisitions market for funeral homes and cemeteries is characterized by good fundamentals at the time of this writing (January 2008), but with an uncertain future. Some currently favorable fundamentals are a wide range of buyers (first-time buyers, established independents, regional and national consolidators), good financing choices (conventional banks, SBA, industry lenders), low borrowing rates, and favorable tax rates for sellers. Several of these fundamentals, however, could change dramatically before the end of 2008.
It is unclear what effect the unraveling credit markets will have on borrowing by business buyers. Housing market problems may begin to leak over to commercial real estate markets, and have in some areas. Equally unclear is the future for historically low capital gains tax rates in this election year. Finally, the looming effect of cremation rates and timing of expected demographic changes add to an uncertain future for transfers of funeral homes and cemeteries.
For an owner considering whether this is the time to sell, or how to protect or enhance his value for a future sale, what can be done while waiting to see how the fundamentals unfold? The answer is Value Drivers.
When offering a business for sale, Value Drivers are matters within the owner’s control that have the greatest impact on achieving premium value. To be sure, in addition to the above fundamentals, there are many other factors that influence value, including reputation, area demographics, competition, facilities, etc. These factors are partly in the owner’s control, but also subject to factors that the owner cannot control. Value Drivers are those matters that the owner can address at any time he chooses, good market or bad, that will always have a positive impact on business value. What are some Value Drivers in today’s M & A market for funeral homes and cemeteries?
Effective Financial Controls. Financial controls are documented in financial statements and reports. To be an effective Value Driver, these documented financial controls need to be accurate, timely and detailed. Properly done, these controls are a critical management tool. More importantly, effectively documented financial controls help verify for a buyer (and their lender) the financial condition of the seller’s company.
Consider the seller who is currently having an above average year, while marketing his company for sale. Try telling a buyer that even though it has been 8 months since the tax return, calls are up and dollars should be too. Is it any surprise the buyer’s response is
“prove it?” Much better is the seller who can show not only monthly statements of income and expense right up to the current date, but even document particular areas where volume and averages are up.
Not only does this seller make an effective case for higher proforma cash flow, but the attention to detail and controls creates a favorable impression of the entire business that often translates into a premium price.
Management Team. Having a solid management team in place is another Value Driver for an owner planning a transfer. Though this may seem obvious, an owner needs to have some understanding of his likely buyer to know what is appropriate. A fairly paid, effective manager is essential if the buyer already owns one or more other businesses and needs someone in place. For a buyer who plans to move in and operate the business himself, however, that manager and his salary may become an unnecessary expense. Releasing the manager may be an unwelcome prospect for both buyer and seller, especially if there is not a noncompete agreement in place.
An unsettled management team almost always results in lower offers, fewer prospective buyers or both. Advance consideration of the market for a particular firm is important to establish an appropriate management team as a Value Driver.
Management Systems. Suppose you feel that you have a great team in place, ready to hit the ground running and help a new owner be as profitable as expected. How do you know, and how do you prove it to the buyer? Detailed, timely management reports that accurately measure performance and allow rapid responses are a tremendous Value Driver. Beyond the financial controls mentioned above, these reports might include:
- sales average reports for revenue categories by company, location and arranger;
- business mix reports tracking percentage of cremation, burial, forwarding, receiving and preneed fulfillments;
- customer satisfaction surveys and reports; and
- accounts receivable aging reports.
As with financial controls, not only does this seller make an effective case for higher proforma cash flow, but the attention to detail and controls creates a favorable impression of the entire business that often translates into a premium price.
Begin with the End. The legal, tax and ownership structure of a business can be another Value Driver. A structure that allows for an asset sale, with or without real estate, and free of any issues with dissenting partners or shareholders is worth a lot to a prospective buyer. Unfortunately, many decisions are made by owners at the establishment of a business and later without any consideration of the impact at the time of sale. Consider a few actual situations we have recently encountered:
- Owner owns cemetery and funeral home in the same subchapter - C corporation.
- The C-corporation means that on a sale of assets, the owner may be taxed twice on the same gain. The alternative is to force the buyer to buy stock, which has liability and tax implications for the buyer.
- By owning the funeral home and cemetery in the same C-corporation and pushing a stock sale, the seller loses the ability to look for the best buyer for each business. Only a buyer willing to buy both businesses in a stock purchase can be considered.
- Owner owns highly-appreciated vacation property in the same C-corporation that owns business.
- Instead of paying tax on $150,000 gain from an earlier real estate sale, the owner re-invested the proceeds in property now worth $1 Million.
- Again, C-corporation means owner needs to sell stock, but that means vacation property would go to buyer. To get property out of corporation prior to sale, owner may have to pay tax on gain of nearly $1 Million just to keep property.
- Upon presentation of Letter of Intent, owner had to disclose that a distant relative by marriage had a longstanding, unresolved claim to a small percentage of the company. There was no buy-sell or other arrangement in place.
- Even if buyer was willing to buy less than 100%, most lenders would not finance the purchase without a security interest and mortgage in clear title.
All of these situations arose out of the owner’s being unaware of the future impact, or making a decision to save a few bucks now and “deal with it later.” Even where there is an unfavorable ownership structure, addressing the problem before embarking on the sale process may turn a negative structure into a Value Driver.
Start Now. The common denominator for all of these Value Drivers is that they require some degree of advance planning. In addition, they are all matters that should benefit an owner throughout his ownership, in addition to bringing increased sale value. To implement processes and systems that offer current benefits as well as increased sale value, consider working with a firm that has experience and expertise in both.
We understand that not every business is suitable for each of these systems, but especially in an uncertain market, it is more important than ever for an owner to focus on these and other Value Drivers to position himself for a premium price. If financing, tax rates and other fundamental remain favorable, the owner will achieve a premium price, in addition to the benefit of a good market. If fundamentals turn downward, the owner who needs to sell can still receive a premium by being a premier offering in a tight market.
This article does not constitute tax advice and no action should be taken based on the information provided without consulting a qualified tax advisor.
D. Brooks Cowles, Jr., Esq
Return to the May 2008 Newsletter
Do You Spend More Time Maintaining your Cars than your Business?
February 13, 2008
I have never met a funeral director who got in the profession because they were interested in management and accounting. Funeral professionals are there because they want to serve the families that need them. But good management and accounting systems not only pay off when an owner is ready to transfer, they enhance the ability to provide services to families. Most of us buy cars and trucks because we like or need to drive them, not because we like working on them, but we know that vehicles that are regularly serviced and well-maintained last longer and are worth more than those that aren’t. Even if a poorly maintained vehicle is “detailed” prior to sale, evidence of past neglect is easy for buyers to see.
Detailing and good marketing can help, but they are no substitute for regular maintenance. This article is a reminder that the same sort of regular maintenance and attention will increase the value of your business to you, as well as the next owner.
WORST Here is a common (and costly) process, especially for older owners:
- Decision to sell
- Approach possible purchasers;
- Set value, approach purchaser’s lender for financing;
- Lower price or re-evaluate goals, approach different purchasers;
- Repeat as necessary;
- Sale.
BETTER Any professional or advisor with experience in business sales and transfers winces at the above sequence. Once an owner has decided it is time to sell, a better sequence, in terms of time, disruption to business and value, is:
- Professional valuation of business, outline owner’s goals;
- Evaluate purchasers positioned to meet owner’s goals, identify financing sources;
- Confidential controlled auction to several qualified purchasers;
- Sale.
This process is more profitable and more predictable. But even in the properly sequenced sale something is missing. At this point, there is usually little time to remedy imbedded problems, such as below-market prices, excessive salaries and benefits, lack of management, lack of records or improper tax structure. What steps can an owner take throughout his ownership that will enhance the marketability and value of his business? . Effective management and accounting systems are accurate, timely and ef- ficient. For some owners, “off the shelf ” systems and software can get the job done, if the owner is willing to set them up, train themselves and stick with them on a long-term, consistent basis. Other owners may outsource these responsibilities completely, though lack of participation in the process sometimes leads to failure to pay attention to the results.
Do-it-yourselfers may even create their own systems, if they have the time and expertise to maintain and troubleshoot the systems. Increasingly, we have found many owners do best with systems managed by third parties (similar to a “silent board member”), who can keep them up to date and deal with the technical issues, while the owner remains engaged in the process of inputting and reviewing the results on a regular basis. Valuing a funeral home or cemetery with effective management and accounting systems invariably yields higher, more predictable values, with a wider range of suitable purchasers and willing lenders.
BEST If you think you will ever transfer ownership (and one way or another, you will), try working backward from the sale. Here is a timetable for any funeral home or cemetery who wants to maximize their value:
- Sale
- 1 month prior - buyer due diligence; lots of lawyers. Seller maintains business in ordinary course through systems in place;
- 2 months prior - sign letter of intent. Prepare for limited public knowledge;
- 3 months prior - deliver marketing package to prequalified buyers;
- 6 months-1 year prior - decision to sell. Prepare market package, sufficient also for bank/lender review;
- 1 year prior - review market value, tax effect, long - term projected income needs. Refine acceptable purchasers criteria for ability to pay, finance price;
- 3 – 5 years prior - efficient management and accounting systems that include: ability to generate timely, accurate accounting and fi- nancial reports throughout the year; holding expenses within budgeted ranges; periodic surveys of prices, competition and customer satisfaction; development of management capable employee(s); profit sharing or other incentive retirement plans; regulatory compliance; and employee training and oversight to enhance profitability. Obtain first appraisal. Initial consideration of acceptable successors, as well as owner’s post-sale role;
- Upon acquisition or founding of business, anytime – Review by professionals for correct legal formation, to protect assets, as well as facilitate eventual transfer. Begin establishment of management and accounting systems.
Consider Steps 6-8 like standard maintenance for your firm and you will be rewarded throughout your ownership, as well as upon transfer.
This article does not constitute legal or tax advice and no action should be taken based on the information provided without consulting a qualified advisor.
D. Brooks Cowles, Jr., Esq.