Due to the changing market in the funeral home profession, there are currently many owners exploring the process of selling their funeral homes. This could be to another firm, a key long-time employee or succession planning for a family member. As an owner, the goal is to sell your funeral home for not only the proper real estate amount, but to also receive credit for the goodwill that comes with someone purchasing the business that you have worked so hard to grow. What’s the best way to achieve this?
- Establish a price: A rule of thumb for funeral home acquisitions is that a 4x to 6x multiple of EDBIDAR (Earnings Before Interest, Depreciation, Amortization and Rent) plus existing Officer’s Compensation is generally a good starting point for price negotiations. Another determining variable is how efficiently the Funeral Home has been operated historically as this too can influence the purchase price. The efficiency of the business is measured in part by the available funds to service all business and future debts. The EDBIDAR added to existing Officer’s Compensation divided by the revenue provides the Net Operating Margin (NOM), a percentage allowing compare and contrast among other firms, and benchmarks. Understanding efficiency levels is key to identifying areas for improvement prior to selling.
- Know your real estate value: Recent appraisals, even within the past three years, can help you determine what portion of your purchase price should be allocated toward real estate and what portion should be allocated toward furniture, fixtures and equipment and goodwill. Live Oak can lend based on the cash flow of the business with the newly proposed debt. Having a realistic idea of real estate value is important. It helps determine the loan term for the buyer and is instrumental in ensuring the sale process goes smoothly with no surprises during the closing process. Live Oak can justify using a 25-year term if the highest use of funds is allocated to the purchase of real estate.
- Prepare to carry a portion of the sales price: Live Oak needs a 25% equity injection when dealing with a transaction in which more than $500,000 of the purchase price will be allocated to goodwill. Many of your prospective buyers simply do not have that amount of cash to bring to the table. If you as the seller are prepared to hold 25% of the purchase price in the form of a seller carry note, this can satisfy the 25% equity injection. This will enable your buyer to get into the ownership of the business with minimal cash equity requirements. There are several pros to carrying back a portion of the purchase price, which includes:
- Implied lower capital gains tax due to the lower recorded sales price.
- When using a seller note for equity requirements, the note will need to be on standby for the first two years, but interest can accrue during this time.
- After the two-year hold period, you will begin to receive payments. If there is a balloon note structure set in the 5th year of the note and your buyer has made timely payments during years 3 and 4, then Live Oak can refinance that seller note and pay you completely off as long as your buyer is in a good standing with their bank loan.
- In summary, once the seller note is paid off, you will have realized more income from your sale than you would have otherwise received all at once. Therefore, the seller note can be viewed as an investment to complement receiving 75% of the price all at once at the initial closing.
- Strong financial statements are important: When selling the real estate and goodwill, it is imperative that your business’s financial statements accurately reflect the operations historically. Live Oak Bank lenders make their loan decisions based on the cash flow of the business with an investment mindset tailored to your potential buyer. It is important to identify areas of your business’s historical operations that may change or discontinue with new ownership. Identifying years that a one-time expense was incurred, such as putting on a new roof, redoing your parking lot or making improvements to your building that don’t reoccur every year, is also important.
- Prepare the potential buyer and staff for the sale: When possible, giving your potential buyer sufficient time to prepare for the sale can also make closing a more relaxed process. This will allow time for the buyer to engage with a lender early and start qualifying the deal based on a certain price point. Preparing your staff will help ensure that they will be comfortable working for the new owner. This will allow the buyer to plan for any necessary staffing changes and/or additions that need to be made. This will also keep the morale of the firm intact so that employees do not feel blindsided by the transition.
Live Oak Bank is committed to educating you and your potential buyer on these steps to make the process as smooth and stress-free as possible. Utilizing this knowledge will make your sale feel like a team effort and all parties will achieve their desired goals. Selling your business at the desired price point and helping the new owner step into the business successfully is our goal for every acquisition.
About the Author
Nick Padlo joined Live Oak Bank’s Funeral Home and Cemetery Lending team in August 2016 as a loan officer helping to drive new business relationships with customers. Nick started at the bank in 2014 as a member of the Business Advisory Group servicing Healthcare customers in the northeast. He then served as an underwriter for Live Oak’s Agriculture team. Nick attended St. Bonaventure University where he majored in Finance and minored in Economics.