The Process of Buying a Funeral Home
Buying a funeral home business is a two pronged process. On the one hand you are looking for an asset that you can afford to buy and grow over time. On the other hand you are selling yourself to the business owner and lender—your credit worthiness, your capacity as a borrower and your ability to operate the business.
Align yourself with the expert resources you will need. A buyer is always in a stronger position with solid legal, financial and tax advice. Buyers that go it alone often pay the price in terms of poorly designed legal agreements with inadequate seller reps and warranties, poorly designed transaction structures with heavy tax consequences and overly burdensome financing structures with unfavorable terms.
Be honest with yourself about your ability to buy a funeral home business. You not only need to be prepared to operate your own funeral home business, you will most likely need financing to make the purchase. Do you have a positive credit history? Have you saved enough for a down payment?
Search for a seller and a lender
Good funeral home businesses for sale are not easy to find. Most sellers do not advertise they are for sale and prefer to go through the transaction confidentially without the staff or community knowing the business is being sold. Sellers also know that most prospective buyers may not be prepared financially to get a loan to make the purchase. Given this, many sellers will be skeptical of a buyer until the buyer can demonstrate his or her financial ability to make the purchase.
Developing a personal network is one of the best ways to find out which owners may be considering a sale. Remember the importance of confidentiality and be discrete in your communications. Most sales representatives call on a large number of funeral homes and are often a great source of potential leads. I would caution you about discussing your lead follow-up openly as the funeral industry tends to be a small community and you don’t want to derail your own opportunity. Also remember that if a salesperson is telling you about a potential lead, chances are someone else may know about it as well.
When evaluating the business, don’t be afraid to ask why the seller is considering a sale. Make sure the business is priced at a level that will allow you to operate successfully. Make sure the business, customers and community are a good fit for you and your family. This fit will be the key to effectively transferring the current owner’s customer relationships.
Before entering into negotiations to buy a funeral home, define your goals and develop a strategy for achieving those goals. Make sure you can support what you are negotiating for. If you want pay a million dollars for the business and real estate, make sure that you can show the seller why that price is what you can afford to pay. Make sure you can show how your financing will be structured and how much cash flow there will be available to service your debt. The general rule is that if you are asking for something you need to be able to back-up what you are asking for with valid supporting information.
Negotiations are a process of give and take. You and the seller will be approaching the table from different positions on price and terms. You are more likely to secure a deal if you keep your eyes on the goals, understand the seller’s needs and look for a win-win solution.
Your negotiations will conclude with a letter of intent to purchase the funeral home business and real estate. The letter of intent is commonly called the LOI and it is your purchase offer based on the information you’ve received from the seller. Once your offer has been accepted, conduct your due diligence to verify or investigate the information you’ve been given.
Your lender will want complete copies of the seller’s tax returns and your CPA can assist you in reviewing the financial information and potential tax effects. You may want to view the actual signed funeral contracts to confirm the amounts and types of revenues being generated by the funeral home business. Your attorney can help you prepare the formal purchase agreements, review the company’s corporate documents, legal standing and any potential litigation issues. You’ll also want to review the facilities, management and staff to make sure there are no outstanding maintenance or personnel issues that need to be addressed.
Once you’ve completed due diligence, it’s time to formalize the purchase agreement. This agreement covers the price, terms and structure of the deal. Unlike the letter of intent, the purchase agreement is legally binding. The purchase agreement is often drafted by the buyer. This is for your protection and gives you opportunity to make sure the appropriate seller reps and warranties are included in the language.
The purchase agreements may take several rounds of review by you and the seller before the final draft is ready for execution. This is normal and you need to be patient during this process as the final agreements need to be drafted with care since they are the only binding source of commitment between buyer and seller.
The closing is the actual event where the transaction is concluded. It usually occurs at the office of an escrow or title company but can be held at an attorney’s office as well. All documents are executed, the title, deed, stock, etc. are exchanged, the mortgage is signed and funds are transferred.
At closing, the seller and lender will be there along with the attorneys for both sides. As the buyer, you are normally responsible for coordinating the documentation and the sequence of events. Be sure that all closing documents are negotiated, reviewed and approved prior to the close. The seller’s attorney will make sure the seller brings all the necessary records, including stock certificates, articles of incorporation, corporate minute book and tax records.
At the close you are not only executing the documents, the seller is transferring the entire business to you. Your attorney will help you become familiar with all the documents and obligations to complete the close successfully. Most acquisitions are cash transactions along with promissory notes to the seller. The funds from you and your lender will be wired electronically to the seller. In addition, all payments to intermediaries are made at this time. The closing document from the escrow company will specify all these payments.
You will likely find this to be a very stressful day. It’s the culmination of a long and arduous process. But you are also likely to experience an exhilaration of finally reaching your goal to own a business. Congratulations!