Common Mistakes Made in Succession Planning

Succession Planning sounds simple, but in all reality it needs to be a well thought out process. It is a once in a lifetime event that, in most cases, represents the largest asset of most funeral home owners. Here are some of the pitfalls that we have seen over the years.

It is not a spur of the moment event– Many funeral home owners simply put off the preparation of a succession plan. In many cases, some event takes place and the owner decides it is time to sell immediately. That should be far from the case. An owner needs to review pertinent facts such as their age, family members, employees, demographics, competitive landscape, your enjoyment as an owner, your future cash needs, your business trend, etc., etc. There are many factors to consider. For instance if you are 40 to 50 years old you may not be interested in doing a succession plan although some future planning should be considered. On the contrary if you are in your 60’s or 70’s and you have not prepared a succession plan you should consider doing so. It does not mean you have to implement your plan, but you should have one ready to go. Don’t wait until there is a major negative event that occurs which forces you to execute a transfer or outright sale.

Professional Assistance– Many owners try to prepare a succession plan on their own which is not the right way to go. Your local accountant and attorney can assist, but you should engage an industry expert to guide you through the process. Why? You need to have someone engaged that understands the dynamics of the funeral industry. Without that guidance you will be hard pressed to understand the true value of your firm. There are several options available to you that can provide the expertise. Be sure to reach out to one of them to optimize your experience.

Determine your value– Only an industry expert can truly determine the overall value of your funeral home holdings. Those that work in the profession on a regular basis can not only guide you through the process; they can give you the best determination of value. They will know the various benchmarks in the funeral business that determine value and can help you increase the value of your holdings prior to a transfer. That’s the planning part. Get an idea as to what your value is today and then put in process the strategies that can enhance your future value.

Determine your future financial needs– Some owners may want to maximize the cash received in a transfer while others may want a steady stream of cash flow into future years. It is really up to you. A large piece of the puzzle is to consider the tax ramifications of the transfer. You have probably heard “It is not what you sell for, it is what you put in your pocket.” All this really means is that your tax situation must be considered in any transfer of ownership. There has been many an owner that bypasses this piece of the puzzle and has had a negative result after the fact.

Family, Employee or outright sale– One question you will have to ask yourself is what type of succession plan you prefer. Family- An obvious succession plan would be to transfer to family members that are involved in the business. If you have family members that are interested, it makes sense to give them full consideration as part of your succession plan. In many cases, the family member(s) may not have the financial wherewithal to consummate the transfer. In these cases your local bank or an SBA lender can assist. In many cases you may have to assist personally in the financing via a subordinated note.

Employee– A key employee may also be a good alternative for your succession plan. Once again, financing may be an issue. However, the same options as in a family transfer, including a subordinated owner note, might be able to satisfy your financials needs. Outright sale- If there are no interested family members or a key employee that can muster the financial aspect of your plan, it is probably time to consider an outright sale. In most of these cases financing is not an issue as industry buyers have a cash arsenal to buy your firm. It then becomes a matter as to how much value you can generate and then try to align yourself with a buyer that is the best fit for your firm.

High expectations– Some of the owners we have encountered in the past have an unrealistic idea of the value of their firm. They remember the good old days when multiples were unrealistically high and apply them to their current situation. This creates a tough situation as a lot of work will take place and often times there is no result except for a possible disruption in their day to day business. You must find out what the true value of your firm is from an industry expert and then move forward from there.

Wait too long– This is probably the biggest mistake we see. Look at the current trend of your business, the number of families served each year, the mix of your business, the revenues and the free cash flow. If any of these aspects are declining, your business value is probably declining also. Look into the future and determine if there is anything you can do to correct this situation. Again an industry expert can assist. If not, it is time to do some serious planning. Negative trends are a hindrance to value. Buyers get concerned as they can’t predict just how far the decline will go. But one thing is for sure. As your business continues to suffer, so will your value.