Selling your funeral home is a monumental decision. The timing must be optimal to ensure a smooth transition. This means taking a closer look at the market, examining the financial outlook of your business, and planning the finer points of your exit strategy.
While each of these aspects fluctuates over time, keeping track of their statuses will position you for a favorable sale. Start by asking yourself the following questions.
What Does the Market Look Like?
When looking to sell your funeral business, your first consideration should be the overall state of the market. For example, during the pandemic, many directors decided to sell their funeral homes and exit the industry altogether; however, in most cases, selling a business during a period in which profits were low caused them to accept prices that were less than ideal.
Currently, with the American economy rebounding and in-person gatherings once again being safe, the market is a lot more favorable to those looking to sell a business.
Similar to the real estate market, the business market experiences periods that are beneficial to either buyers or sellers. While a variety of factors contribute to these circumstances––including industry-specific projections––one way to look at this is through the lens of supply and demand.
If there is a period during which many funeral homes are up for sale, as we saw through quarantine times, then the market will favor the buyers who can be more selective and garner lower asking prices. Conversely, if fewer funeral businesses are for sale, then the market will likely favor the sellers. Ideally, you’ll be able to sell during the latter scenario.
Examine Your Competition
Unless you’re the sole funeral home in the region, the state of nearby funeral homes will also play a role in determining the value of your business. If a competitor generates higher revenue than your business or holds other advantages––on-site cremation facilities, for example––then your business will garner a lower price.
A big part of selling your funeral home will be to demonstrate how it is positioned to thrive against other funeral homes. One way to demonstrate this is through a fully fleshed-out backlog of preneed sales, a key indicator of family loyalty and trust in your services.
Are Your Valuations Where You Want Them to Be?
Ultimately, the market conditions will weigh heavily into the value of your funeral home. While the value of your business can fluctuate–both from internal workings and outside conditions–by learning the current value of your funeral home, you’ll get a rough idea of how much it may sell for today.
One of the most common challenges of selling a funeral business is getting a low valuation. This is why it’s important to obtain a valuation long before you plan to sell. While a low valuation immediately before your exit leaves you little room to adapt, one conducted long before your planned exit gives you the chance to correct course and increase the value of your business.
In most cases, prior to the sale of a business, a potential buyer will conduct an independent valuation of your funeral home. The goal of this will be to determine a fair price for your business. That said, there are several types of valuations, each of which assessing value in a different manner:
- Times revenue: One of the more simplistic ways of valuating a business, the times revenue method involves taking the revenue over a period of time and multiplying it by a fixed number. This multiplier will depend on the industry. In the world of funeral homes, the multiplier is generally four to six times the seller’s discretionary revenue.
- Earnings multiplier: Similar to the times revenue method, the earnings multiplier valuation consists of taking a fixed number and multiplying it; however, rather than using revenue, the earnings multiplier measures net profits.
- Discounted cash flow (DCF): Rather than relying on revenue or profit multiplication, DCF uses projections of future cash flow to determine the current value. This method also takes inflation into account.
- Liquidation value: As the name implies, a liquidation valuation consists of the potential net cash from the tangible assets of a funeral home, including real estate, facilities, and liabilities.
What Do Taxes Look Like?
To determine the ideal time to sell your funeral home, you’ll also want to look at the broader picture in terms of taxation. While we’re all familiar with yearly income taxes, many are surprised by the taxation surrounding the sale of a business, that is, capital gains taxes.
When selling a funeral home, you’ll encounter three primary tax-related issues:
- If proceeds from your sale are taxed as income or capital gains
- Whether your sale is an all-cash deal or one that requires payment installations
- If the sale involves multiple companies and can be treated as a tax-free merger
Making matters more complicated, the tax code is always subject to change. Currently, taxes on long-term capital gains and income are about 20%; however, a proposed federal tax increase could raise this number to 39.6%. Because funeral homes tend to be longstanding institutions, the entailed capital gains can be huge, therefor, it would behoove any funeral director approaching retirement to consider an imminent sale, potentially saving tens of thousands (or more) in taxes.
Naturally, rising taxes do not mean every funeral director should jump ship; rather, it indicates the importance of considering taxes when exploring a sale. Doing so can help you determine the ideal time to put your funeral home on the market.
Do You Have a Succession Plan in Place?
Unlike selling a home, selling a funeral home is much more than turning over the keys. When a person purchases a funeral home, they not only take ownership of the facilities, but they also could become the leader of your team and day-to-day operations. Because of this, most funeral home sales include provisions for a gradual transition.
Whether you are passing down the business to a family member or selling it to an experienced funeral professional, you’ll want to train them in the inner workings of your funeral home. In some cases, these transition periods can last for months, and they usually require the prior owner to stay on in a limited capacity. While the particulars of this agreement will vary by the buyer, you’ll want to consider the broad strokes of your exit strategy. Make sure to consider:
- If and how you’ll continue to make money after your departure.
- What will happen to the business once you’ve left.
- How long you will ideally assist the new owner.
- If anyone within your team could feasibly take over the funeral home.
- In addition to ability, you’ll also have to consider the financial component of this query.
Get the Answers You Need
For all of these questions, it’s important to have solid answers to truly know if it’s the right time to put your funeral home up for sale. But the answers to these questions can be hard to pin down. Planning to sell your funeral home is a tough topic to tackle alone, and it often requires an in-depth understanding of both the funeral profession and the greater ecosystem of small businesses. In most cases, it’s best to have the support of experts.
The team at Johnson Consulting Group has all the skills and experience needed to help you decide if selling your funeral home is the right move. From consulting to valuation and financial management, their varied professionals will help your business prepare for an eventual sale and you plan for your future.
Additionally, their in-house brokerage team can find you a buyer and negotiate the terms of a sale. While generic business brokers are a dime a dozen, the team at Johnson Consulting Group specializes in death care, meaning they’ll understand the intricacies of your funeral home and exactly what it takes to sell it successfully.
Get all the Answers