5 Things You Don’t Want to Surprise You When Buying Another Funeral Home

Posted May 17, 2017

5 min read

You’re ready to start looking for another firm to acquire, or maybe you’ve even started conversations with other firms. Here are five things you don’t want to be surprised by during the process.

1. The information you’ll want to have readily available.

Some may be surprised with the amount of detail it takes to get a loan. Be prepared to present a business plan to the (potential) lender containing the following prequalification information:

  • Description of your business and the market area, including present and proposed competition and neighborhood/community demographics.
  • Present revenue breakdown and anticipated future revenues and trends. (This might involve revenues from direct cremation, cremation with service, merchandise sales, traditional service with burial, etc.)
  • Detailed list of how you would use the loan funds, including refinancing of existing loans, any renovations, working capital needs, purchase price details, etc.
  • List of proposed owners.
  • Federal tax returns for each borrower and for each outside business that might be considered controlled by each partner.
  • Credit reports (obtain online).
  • Description of who is currently managing the business and, if appropriate, who will be managing the new business.

While it may seem extensive, this information is what will help a lender quickly see your qualification for available financing, explains Tim Bridgers, General Manager at Live Oak Bank, one of the nation’s top originators of small business loans.

2. Types of loans and lenders.

Know the benefits of different types of financing—and different types of lenders. A cash flow lender can be beneficial because your lender will not be relying on collateral or real estate value to support the loan. What determines a bank’s ability to lend money is whether or not the business that is being purchased can support the debt being requested.

If it’s a fit for your business, research your lender. To avoid surprise, ask the following:

  • Does your bank have a specialty or experience in the funeral home space?
  • Do you lend capital based on the funeral home’s cash flow or simply on the real estate value alone?
  • What is included in the loan proceeds? What implications does this have on out-of-pocket costs that can be expected for the buyer and seller?
  • When do prepayment penalties exist?

The answers can help guide you towards a bank and financing options that are the best fit for your business.

3. The risk that comes with balloon payments.

“You may see that a potential borrower’s bank is offering an enticing rate; however, it is also offset by a balloon payment that will be due in five to seven years, typically. What this means is that you are making a payment on a 15 to 20 year term, but despite that payment, at Year 5, you will have to pay the bank that principal amount in full,” says Bridgers.

“In a large amount of these cases, much to a business owner’s surprise, you will have to go to another bank to refinance,” explains Bridgers. “Banks change, even year to year, and so there is always a risk accepting a balloon payment.”

Many funeral home owners aren’t fully aware of how they are exposed to market rate at the time of the refinance, as well as the expense of the closing cost. Come equipped to any discussion with all the research you can.

4. Loan covenants that impact how you run your business.

Another major surprise can be loan covenants. “The typical consumer does not understand loan covenants, but loan covenants are parameters that banks put on the borrower to maintain during the life of the loan,” says Bridgers.

For example, if a balance sheet item goes beyond a parameter the bank has set, the bank has the ability to call that loan, which means the customer would have to pay it in full.

“There are a lot of different examples of parameters they establish through loan covenants, but they all create another expense from an accounting standpoint. As we know, most small business owners, myself included, wouldn’t have time to focus on all these items, so they rely on accountants to help.” Look for a bank that doesn’t have loan covenants, when possible. At the very least, know what they are and the burden they’ll add to your business.

5. Transition risks.

Many times a funeral home owner is purchasing a funeral home in a different market, and they may not be as familiar with that area as their own market.

“This transition risk is related to that owner going into that market and becoming the face in that community,” explains Bridgers. Bridgers says that to avoid any major surprises or loss of market share, it’s a great idea to have a transition plan—much like you’d have a business plan. Your transition plan should capture components such as how you are going to impact the community, how you build your brand presence, how you will or will not change offerings, and other marketing strategy.

“An adaptive funeral home owner can maximize the opportunity versus having it negatively impact his or her bottom line. It’s about understanding the business you’re getting into as much as you can.”

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  • Automate your processes: contracts, forms, files, and more
  • Collaborate and stay on track: calendars, resource usage, to-dos, and beyond
  • Create visibility: e-whiteboard, SMS messaging, satisfaction surveys, etc.

We strive to be great at what we do, which is why we won’t lock you into a contract. We also want the entire staff to use the software every day, so we won’t charge you for individual users – even the office dog. To see how CRäKN streamlines and automates routine tasks to reduce costs, request a demo today.

About Live Oak Bank

Live Oak Bank started in 2008 in order to provide loans to small, independent businesses looking to expand, remodel, refinance and/or acquire existing practices.

With an expertise in the funeral industry, Live Oak Bank takes a personal approach and sees clients not as numbers, but as real people facing real-life opportunities and challenges. Live Oak is one of the largest originators of small business loans with one of the strongest loan portfolios in the country. Learn more about improving your cash flow and growing your business with Live Oak Bank here.

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