Succession Financing: What’s Required for a Successful Transition

By: The Live Oak Bank Funeral Home Lending Team

With the baby boomer generation approaching retirement, more and more funeral home owners are preparing to transfer their businesses to new leadership. Approximately 2,000-3,000 funeral home owners are looking to affect a sale or succession plan at any given time. This creates tremendous opportunity for the younger generation to become business owners, but proper planning is necessary for a smooth transition. It is imperative for both current and future owners to know what is involved in planning a succession as well as the financing options available.

Many banks do not understand the intricacies of the funeral space or how to structure the loan to best benefit the borrower, making it difficult for the two parties to complete the transition in ownership. Frequently, a seller finances his interest in the business to a family member or long time employee. This does not allow existing equity to be sold for cash, preventing the seller from achieving the liquidity to live out retirement as hoped. However, financing options do exist that will benefit both the current owner and the next generation.

Current Owner

Effectively preparing your business for the next owner will afford you the best possible purchase price. Executing a full succession plan can take several years, so it is important to think about the steps well in advance. During your planning, consider a) organizing financials and other documents, b) identifying and training the future owner, and c) preparing the business physically.

Financial documents will need to be available to the future owner and the lender. Financial statements including tax returns, profit and loss statements, and balance sheets will be necessary for the valuation of the business.

Gather documents in advance to expedite the lending process. Record revenues and costs as well as call volumes and cremation rates. To help the buyer and bank understand the cost of running the business, keep track of one-time expenses or owner related expenses that may not continue under new ownership.

Another key aspect of a succession plan is identifying a replacement to continue the success of the funeral home. It is vital that he or she understands the details of the business, how to run it, and the market it serves. Share financial details and insight with your successor; ensure the future owner has strong relationships with the staff and community. Training your replacement in both the business aspects and daily operations of the funeral home will result in a smooth transition and contribute to his or her success as an owner.

Preparing your funeral home for sale may include physical updates to the facilities and equipment. Improve tangible assets to attract potential owners and increase the value of your business.

Buyer/Future Owner

When purchasing a small business, there are several items to consider: a) trends in the industry and business, b) the financial status of the business in relation to your personal financial needs, and c) what is needed to secure succession financing.

Understanding the current trends in the funeral industry will help prepare you for ownership. How will the rise in cremation rates affect revenue? What are the preferences in your community? From more celebration based services to the use of technology to enable out-of-town friends and family to watch the service, you will want to know what your local market needs.

It is also critical to examine trends within the funeral home. How has call volume changed in recent years? Is the funeral home gaining or losing market share? How have operating margins changed over time?  Will the transition affect trends in staffing?

Before embarking on this business venture, analyze the financial status of the funeral business to make sure it adequately covers both the business and your personal needs. Have a clear understanding of the cost to run the funeral home, including your personal salary. A lender will need to know you are able to support your business and your lifestyle.

For the transition in ownership to occur, you must be able to secure financing. As the future owner, you need to understand the details of the business and how it is operated. You will need to understand the cash flow of the business as well as the value of the real estate and assets you are purchasing. You will also need to gather documents for the bank. Having a team of professionals, including a financial advisor and lawyer, can simplify the process. An advisor will value the business to ensure an accurate value and fair purchase price. The lender will also need to know your personal credit and financial responsibility to assess your ability to repay the loan. In preparation for owning the funeral business, you will need to have a sound business plan. Understanding your market, your market strategy, and the business financials will help you secure financing and execute your business plan.

In the current market, there is great opportunity for current and future funeral home owners to benefit from a well-executed succession plan. Work with a team of professionals who know the funeral industry to achieve a smooth transition and allow the funeral home to continue its legacy and success.


Download a copy of the Live Oak Financial Column. Posted with permission from American Funeral Director.