Can you give us an overview of what you’ll be covering in the webinars?
Farmer: “One of the key concepts is preparation—getting organized and getting things done before the need arises. Statistics predict that more than half of the funeral homes in the United States will experience a change in ownership during the next 10 years. The population is getting of the age where more and more owners are looking toward transitioning into the next phase of their lives. And their children or key employees want to have a piece of the pie and begin building their futures. So there is going be a huge transition, whether the buyers are inside or outside the business.
“Tim and I have been talking for quite a while about doing a presentation on this. We both see the need for education to help both sellers and buyers. So when Sarah Pojanowski approached us about talking to Selected members, it was perfect timing.”
Bridgers: “Selling a funeral home is neither an easy decision nor a simple process. The seller has to not only be prepared for their part but also understand the steps the buyer will have to take to successfully purchase the business. Doing this sets proper expectations, and that’s a big part of what these webinars will be about. Especially for the seller, adequate preparation and proper expectations will help them determine purchase price, structure the sale and identify areas that must be reconciled in order for the transaction to happen.”
Is waiting too long to prepare
one of the biggest problems you see in this area?
Farmer: “It’s a big one, but we have to remember that many funeral home owners, especially the ones who have founded or directly shaped their business, view it in very personal terms. Serving families is their passion; they’ve grown up working 24/7, and they assume they will be actively leading the company their entire lives. While understandable, this isn’t the best way to look at it. If serving families is the most important thing, then having a good succession plan in place is best for the community as well as for the funeral home and its staff.”
Bridgers: “I shared some statistics during a breakout session about succession planning during the 2017 Annual Meeting in Chicago: 70% of small business owners in the U.S. plan to sell their company to fund their retirement. 60% hope to retire before the age of 65, yet 34% don’t have a retirement plan, and 72% don’t have an exit strategy. So funeral home owners are not alone in this, the majority of small business owners are making the same mistake.” [Statistics from Carter, Michael. If You Plan to Fund Your Retirement by Selling Your Business, This Is What You Need to Know. https://www.entrepreneur.com/article/298933?utm_source=HearstNewspapers&utm medium=related&utm_campaign=syndication#. August 2017.]
Farmer: “Another mistake is not being realistic about the current market. In the late 80’s and early 90’s, the conglomerates were buying up funeral homes as fast as they could. In some cases, all an owner had to do was put their firm on the market and get seven or eight times their EBITDA (earnings before interest, taxes, depreciation and amortization). Those days are long gone for the vast majority of owners, because buyers today are looking for value. And most owners are unprepared for the tough decisions required to position their firm as a good value.
“One of the areas Tim and I will be focusing on is how to get a business into good shape and make it attractive for sale, as a part of the succession planning process. Whether the plan is to sell to a family member, a key employee or an outside buyer; the company must be attractive to the bank, so it will loan money to the buyer. That process needs to start at least five years in advance of the sale. And owners need to understand what an attractive business looks like from the outside.”
Bridgers: “Approaching this whole process within a year of selling puts the owner at an enormous disadvantage. The thing to remember is that it is never too early to begin the succession planning process, so even new and younger owners should be incorporating this into their overall business strategy.
“One of the biggest mistakes I’ve seen happening is management not constantly monitoring business metrics and margins such as wages, cost of goods sold, operating cash flow, etc. It is very important to do this, because it helps compare current and previous years to see how the business is tracking. It also helps owners and managers respond to changes in the market and in consumer preferences. Without monitoring the margins very closely, informed decisions about the business just cannot be made.”
Farmer: “Another thing we often see is when owners get a buddy who’s a lawyer to handle the sale. The friend may have done some local real estate transactions but may not be familiar with funeral home valuation. They might say, ‘The business is worth X because we added five times EBITDA plus the property plus the real estate value.’ But that’s not how it works. The business is worthless without the real estate; it’s a package deal. So choosing knowledgeable advisors will save a lot of time and headaches.”
Is there a key point you hope participants take away from the webinars?
Bridgers: “I hope they gain an understanding of what the buyer has to go through to achieve financing today. In particular, loans guaranteed by the Small Business Administration (SBA) provide a lot of flexibility for young, aspiring business owners. But they require understanding by both the buyer and the seller of the components, the guidelines and the roles of these types of loans. Conventional loans today can require significant equity and cash. Some opportunities offer solutions to that, while others don’t. The seller’s awareness of these points can really aid the entire process.”
Farmer: “And I hope they truly understand that preparing for a sale needs to begin at least five years in advance. That’s something most people scoff at, but it’s absolutely essential. Trying to rush and do all the work at the last minute will not achieve the desired results. If it’s July, and the owner decides he wants to sell by Christmas, changes made to enhance the value of the business likely will not show up on the books until far later. Buyers want to see consistency. If, instead, they see a lot of changes during the last couple of months, that doesn’t necessarily mean anything to them, because they’re not sure how those changes are going to play out in the long run. Owners really need to make sure they can show a consistent EBITDA during the last three to five years.”
What other advice can you give to funeral home owners?
Farmer: “One of the things I’ve seen done successfully, if they’re selling to a family member or key employee, is starting the transition five years out—making sure the buyer is invested in the business. They start by selling a piece of it. Then, over time, they sell a bit more in phases. This helps everyone on taxes, too, because they can be spread out over time.”
Bridgers: “To follow up on my previous comment about monitoring business metrics, I encourage owners to work with their accountant or financial advisor to get a good feel for the company’s operating cash flow for at least a three-year period. What was the average operational cash flow number? What was the trend during three years? That number means a lot, but even more important is the operational cash flow margin. Industry benchmarks show that, on average, the operational cash flow margin should be around 19.5 to 20%, not including officers’ compensation. So, again, I encourage Selected members to get a gauge on their operational margin as a percentage of their revenue. Selected’s Management Comparative Program, selectedfuneralhomes.org/mcp, is a great way to do this.”
Farmer: “It’s important to remember that the things an owner needs to do to increase value and make the business attractive to buyers—trimming fat, getting the EBITDA up, etc.—are all good for the business right now. Even if the owner doesn’t plan to sell for five or ten years, the business can be healthier, more efficient and make more money. Ownership succession planning should not be viewed as a white flag. If nothing else, it’s a really a good checkup for the business.”
Will you be sharing actual success stories?
Farmer: “Yes, but they will be in the form of composites or situations drawn from several similar scenarios but all based on real-world events.”
Bridgers: “We do a lot of work at Live Oak Bank with succession plans, and most of our recent funding has been related to acquisitions. So, we have a lot of good examples to share. But, as Chris said, we base the stories on situations or outcomes, not on specific firms. Much of our recent work has helped key employees buy the business they worked in for five, 10, sometimes 20 years. And it’s really great to see them able to purchase the business they are passionate about and invested in.
“It’s rewarding to walk the buyer and seller through a process that, in many cases, neither of them has been through before. We lay out the options and help both parties achieve their goals. Sending the seller off into retirement with good liquidity for the future and peace of mind, knowing the buyer can run the business successfully and continue the legacy, is a gratifying experience. And we often see the seller playing a huge role in making the transaction successful, whether it’s willingness to hold subordinate debt or modify the purchase agreement to help the buyer.
“There has to be a lot of flexibility in a process like this, and the seller must ideally see themselves as a team player. If decisions and expectations are established too early, that’s when things go wrong. But if expectations are based in terms of what the business realistically can and cannot do, then everyone has a better experience and everyone wins.”
The one-hour succession planning webinars on January 17, February 21 and March 8, 2018, will begin at 1:00 p.m. Eastern. Their formal announcement and registration information are coming soon. Visit selectedfuneralhomes.org/webinars for the latest details.