What’s My Funeral Home Worth?
Experts will tell you that the market is the final arbiter of the worth of your company. This is true, but not helpful. Isn't there some method of estimating the value of your business that is a good predictor of the price a buyer will be willing to pay?
On this page we’ll show you some simple methods that are good predictors, so don’t run out and pay for an expensive valuation. It’s a waste of your time and money. Your potential buyer is going to do a valuation anyway.
Who is buying funeral homes today? It’s mostly individuals and small regional firms. Large corporations learned the hard way during the feeding frenzy of the 1990s not to overpay for acquisitions in the hopes of economies of scale and lower expenses to achieve better operating margins.
Multiples of revenue
The simplest method is to compare the size of your business to others in your industry and the valuation of those businesses.
Although corporations in the past have paid three times revenue for large funeral homes, those days are over. Today the strongest market is for individuals that are buying smaller funeral homes doing 75 to 100 calls per year. These buyers will pay up to 2.25 times net revenue.
Here is an example of a funeral home that is doing about 90 calls a year and producing $630,000 in revenue which translates into an estimate of $1.2 million.
Multiples of cash flow or seller’s discretionary earnings
From a financial point of view, what is a business? It is a set of assets that are organized to produce a stream of earnings or cash flow.
The right to this stream of earnings has a value. The way to think about this method of valuation is to ask yourself: “If an investor would be willing to purchase an asset that produced a given stream of cash flow, how much would that investor be willing to pay?”
Note: For this method you may need to ask your CPA to do an analysis of your cash flow.
In the funeral industry most businesses sell in a price range between four to six times Seller’s Discretionary Earnings (SDE). This price range typically includes all operating assets of the business. SDE or cash flow available to the owner is also expressed in terms like adjusted cash flow and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).
Here’s an example:
Another way to look at valuation is to ask how much the buyer can afford to pay. Individuals buying a funeral home are limited by how much they can borrow. Their ability to borrow is directly a function of the cash flow that the funeral home produces. This is the cash that will be used to service the debt.
The easiest way to find out how much debt your business can pay for?
- Ask your CPA to prepare an analysis of your cash flow to determine how much cash is available to service debt on an annual basis.
- Most lenders calculate a minimum debt coverage ratio. It's basically the cushion required by the lender for a given transaction. Let's say that ratio is 1.25.
- If your business produces an annual cash flow of $125,000 and the buyer's bank has a minimum debt coverage of 1.25, then the maximum debt payments that the buyer can afford to pay is $100,000, or $8,333/month.
- At an interest rate of 7% and a term of 16 years, the buyer could borrow $960,938 and cover the debt.
- If you assume 20% down payment, then the total price for the business based on debt coverage is $1,201,173.
Now that you have a few ways to estimate of the value of the business, you may be wondering how the process of a funeral home sale works. On the following page you'll find a description of the process.