“Q & A” on “M & A” with Jake Johnson (Johnson Consulting Group)

1.) Independent firms are increasingly approached by consolidators (big and small), what are the top 3 considerations when contemplating the sale of a generational, family owned firm?

A. Don’t do it alone. Get an industry expert to lead you through the process. It is money well spent. If not, oftentimes hundreds of thousands of dollars are left on the table
B. Get your house in order before you start the process. Not only the physical location but financially make sure your books are in good order.
C. Don’t wait too long. In some cases, sellers come to us with declining case volume and revenues. Makes for a tough sale. If you are thinking of selling, the best time to do so is when the firm is doing well and with a bright future!

2.) Why is it so important for a funeral business or any business to keep impeccable, up to date “Profit & Loss” statements? Does paying the government more taxes on your tax return guarantee a higher sales price if one decides to sell in the next 5 years?

I was just assisting a buyer out West where the prospect had a very nice firm but the records were awful. This firm should have been purchased but without knowing the financial aspects of the firm, our advice was to not buy until the seller had better financial records. What one pays in taxes has no effect on the value of the funeral home.

3.) How effective or accountable are “Non Competes” in any sale or change of business ownership?

It is always a matter of contention in a deal, but it is usually worked out. The fact of the matter is that in funeral service, the goodwill of the owner is critical to the success of the location. Without a non-compete, very few transactions would take place. There needs to be a decent financial remuneration as part of the non-compete and the scope should not be too large.

4.) Are you seeing less and less of the next generation taking over the family business? And why has this shifted from 25-50 years ago when it was a given that son or daughter would be the successor to the family business?

This has been decreasing through time. I think some of it has to do with the next generation seeing the amount of work that the parents commit to the funeral business. Sometimes getting up from the dinner table to make a first call, etc.

5.) With interest rates at an all-time low, and banks paying bare minimums on CD’s and other secured investment options, how can one get his equity out and still live through retirement on the low interest without going in to the principle?

Depends on the size of the transaction for one thing. There are still some decent investments out there, just not what they used to be. The seller could also take a portion of the deal in the form of a note which could pay higher than investment rates. A little risk here, but not all that much if the buyer is qualified and the note is well secured.

6.) Do you expect to see more sales of business or internal changes of ownership in the next 10 years compared to the previous 10 years, and why?

I think there will definitely be more sales of businesses. It is not getting easier to make money in funeral service. The cremation rate continues to rise and many of those still opting for burial are selecting lesser service and casket options. More and more funeral home owners are opting to sell because of this. Some will wait too long when all the value is gone except for real estate.

7.) SCI, Carriage Services and StoneMor Partners are the last of the 3 publicly traded funeral home/cemetery companies. Do you for see any of these companies selling to another funeral/cemetery company or outside investment company in the near future?

You never know but the past would tell us that it very well could happen. We are also seeing more venture backed firms investigating the industry. I would not doubt if one or two of these get very active in the not so distant future.

8.) Other small consolidators seem to be purchasing the businesses that are too small for the publicly traded companies to acquire. Are these cluster of 50-150 call firms a liability to the small consolidator. For example, if cremation continues to rise, then a 100 call location would theoretically have a little less revenue every year. How can less revenue increase profitability and value?

On the contrary I like this type of deals. Especially if there are significant synergies that can take place as part of the transaction. We must remember that there is one price that is paid for these type of firms. However, when rolled up into a bigger package, there is much more interest and the multiples rise significantly.