For many, selling a funeral home feels like a victory lap — the culmination of decades of owning and operating a successful business. That said, an impending sale requires careful attention and planning. Failing to consider all the components of a successful sale can cause you to take an unfavorable deal.
To help you learn from the mistakes of others, here are the most common ways owners lose money in a sale.
Selling a funeral business requires careful consideration of tax implications. First and foremost, you’ll want to consider the capital gains tax. Since funeral homes are typically owned for many years, they often see a significant increase in value from the time of the initial purchase.
In 2021, the capital gains tax rate was between 15%-20% for most individuals. So if you purchased a funeral business for $100,000 and sold it for $800,000, you would owe between $105,000 and $140,000 in capital gains taxes.
Additionally, since most funeral businesses include real estate, you’ll also want to consider the depreciation recapture tax. If you’ve been deducting a percentage of your facilities’ values from regular wear and tear, then the IRS will collect taxes on the eventual profitable sale of said facilities. This tax will be the same as your income tax, which you’ll also want to consider.
2. Underestimating Your Funeral Home’s Value
You wouldn’t sell a house without first getting it appraised. In a similar way, you can’t sell your funeral home without obtaining a formal valuation. One of the biggest time wasters when selling funeral homes is failing to know the actual value of the business.
Underestimating the value of your funeral home can lead to the loss of hundreds of thousands of dollars. On the other hand, overestimating its value will likely prevent a sale altogether, as no qualified buyer would purchase a funeral home without seeing a valuation from an independent broker or accountant.
Obtaining a valuation will also let you know if you’re ready to sell. This is why a valuation should be conducted at least once per year. If your funeral home is valued lower than you’d anticipated, you might need to hold off on selling until you can improve and obtain a higher valuation.
3. Not Considering the Market
Naturally, you’ll want to sell your business when it’s at peak value. Beyond making internal changes that boost this value, you’ll also have to consider the greater market conditions. Similar to real estate, the market for funeral business is subject to peaks and valleys.
For example, during the pandemic, many funeral homes were hit hard by the inability of people to gather safely in person. As a result, the market for buying funeral homes slowed and this type of business was worth less than normal. So while savvy buyers could purchase a funeral business for a bargain, sellers got the short end of the stick during this time.
You’ll also want to consider the type of buyer you might appeal to. This will vary based on the size of your business, its location, and its profitability. Large corporations will rarely buy a funeral home with less than 250 yearly calls. In terms of location, you’ll also want to think about the population. If your business exists in a growing area, then this will point to favorable market conditions, as a higher population indicates the potential for more business.
4. Taking the DIY Method
To save money, many funeral home owners attempt to sell their businesses on their own. Unfortunately, this method is not only likely to fail, but –– in the event that you succeed –– you’ll likely lose out on money.
While an accountant or lawyer can likely help with the process, only an industry expert understands the specifics of funeral homes –– including how to handle legacy, heritage, staff, community, state regulations, preneed notification requirements, and more. An expert in the industry will already know these ins and outs and can get the most value out of your sale.
Why a Funeral Home Broker Is a MUST
From seeking out qualified buyers to negotiating a favorable deal, a funeral home broker plays an essential role in the sale of a death care business. While they do charge a commission, funeral home brokers are the best way to secure a fair sale in minimal time.
At Johnson Consulting Group, our brokers can help connect you with an expansive network of qualified buyers. Additionally, our accounting team can conduct a reliable valuation of your business. If the valuation comes back less than desired, our team can help guide you through the improvements you need to warrant an agreeable price tag.
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