Where to Start: What to Know Before Buying Another Funeral Home
Posted June 21, 2017
6 min read
Has your funeral home ever considered acquiring another firm?
The goal may be to earn additional market share, invest in a firm that can offer more diverse offerings to families, or simply buy out a competing firm. Whatever the goal may be, Tim Bridgers, General Manager at Live Oak Bank, says that he commonly sees opportunity for funeral homes to continue building through “flanker branding.”
As one of the nation’s top originators of small business loans, Live Oak Bank has a dedicated Funeral Home and Cemetery Product Lending Team that understands the funeral space and what funeral home owners need to succeed.
Bridgers explains that the end goal with a flanker brand strategy is to build a strong brand presence in a community and to earn larger market share within a certain region. “It’s about building quality across the board,” explains Tim. “Just like with Hilton, a company that uses a flanker branding strategy, this allows funeral homes to offer different price points depending on what families want in specific locations.”
We sat down with Bridgers to talk about what funeral home professionals should consider and how they can prepare for acquiring another firm. Here’s what we learned.
1. Examine the state of the business you’re looking at buying.
When it comes to funeral home acquisitions, Bridgers says Live Oak sees two common scenarios: a key employee purchases the funeral home where he or she currently works, or a current funeral home owner or director purchases an outside funeral home.
“Deciding which option is best for you greatly depends on your current circumstances and opportunities,” says Bridgers. Examine the call and revenue trends, operations (and how that connects with market trends) to get a clearer picture of your opportunity.
As some starter questions, Bridgers recommends asking and evaluating:
- Is the business growing? If not, can you identify and implement improvements?
- Will the business support your current lifestyle ? The business will be your source of income.
- Is the business located in a place where you will be happy living, if you would need to move there?
- Understand the current leadership style and philosophy of the current owner? What else can you learn about the culture of the other firm?
- Is there proper staffing to accommodate your vision?
2. Examine and evaluate marketplace trends.
Among other things to research, make sure you look into marketplace trends or shifts—and that should really be as specific to that location as much as possible. “Many of the business trends will be driven by market trends, so it is important to understand the demographics in the area as well as trends in funeral service that are likely to impact your business,” says Bridgers.
Just a few of the questions that should be answered include:
- What are the demographics of the area?
- What competition do you face in your local community?
- Is the local population growing?
- What is the cremation rate? How quickly is it rising?
“Understanding the revenue versus the call volume trends, for example, identifies the current direction of the business,” says Bridgers. Don’t be afraid to inquire or to do research on the impact cremation has had on the business, how they’ve responded and why. “It is simple, but you would be surprised at how often this overlooked.”
3. Know what’s involved with your purchase price.
Once conversations have started between buyer and seller, seek to understand all that is involved in the purchase price. “It’s important to understand what is included in the price and to have an understanding of purchase price allocation among goodwill and real estate.
For example, if it were a $2 million purchase price, you would want to know, of that $2 million, how much the real estate is worth. “That’s going to determine the available term and, consequently, the cash flow available to service debt.
Put simply, the longer the term, the less the debt service per year. The shorter the term, the greater the debt service, and risk to shifts in death rate. “It’s very important in an acquisition to understand the components of the purchase price.”
4. Uncover realistic potential cost savings.
You’ll also want to have a great deal of information about what kind of cost savings will result when taking over the target funeral home. What expenses will bereduced? How much will those expenses be reduced? Are there any expenses that could drastically increase as a result of your vision for the business?
“Maybe the current owner is outsourcing embalming, but you anticipate cutting that expense by performing this service in-house with the current facilities. In short, understanding the potential cost savings as a result of the acquisition is very important for a lender in order to have a clear picture of the future cash flow.”
5. Take a deep look at pre-need.
It may surprise many funeral home owners to hear that lenders are interested in learning about pre-need programs. Those who are well-informed know that a strong pre-need program translates to future market share, preservation of traditional service charge, and evidence of a strong operator who believes in investing in the future of his or her business
6. Speak with a lender with expertise in the funeral home space.
Many funeral homes aren’t sure where to begin or aren’t sure they have the ability to acquire another firm. Bridgers says that it is very important for individuals to understand that just because they don’t have a lot of liquidity doesn’t mean they would not qualify for financing.
“There are equity requirements based on the portion of goodwill and real estate in each loan, but in the event that there’s not enough equity available from the borrower, we do have options depending on the situation.”
The lesson for funeral home owners is not to make assumptions before speaking with a lender.
Many people perceive that the loan terms for buying a funeral home are the same as in the residential market, but that’s not the case; it’s worth talking to an expert to understand the options.
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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 has clients across America, but still sees each one as an individual entrepreneur who deserves undivided attention. With this philosophy, Live Oak is now 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.
We help funeral professionals save time, prevent duplicate work & reduce errors. Focus on the family, let us focus on helping you. Request a demo today!