Published in Metropolitan Funeral Directors Association Official newsletter August 2009 Exit Planning for Funeral Home Owners: The Sooner You Begin, The Better! By Michael Oleksak With nine out of ten of the 21,000 the business’s ownership? If you Michael Oleksak is a funeral homes in the U.S. privately have saved and invested well, you principal at Trek Consulting or family owned, decisions about may have more options. LLC, which helps business succession, control and ownership Generally the owner has three owners focus on the dual occur all the time. As the funeral courses of action: 1) an external challenges of building and home owner moves into traditional transfer: sell to a third party, realizing the maximum value retirement age, options should either a strategic buyer (corporate of their life's work. be evaluated and preparations entity or competitor), a financial www.trekconsulting.com made early to ensure continuity buyer (private equity/rollup) or an of business value and transfer of individual buyer 2) execute a the wealth currently tied up in the management buyout to key strategic buyer, may yield the business. The sooner you begin employees, called an internal highest gross price because of the process, the better prepared transfer or 3) transfer ownership the perceived synergies and you’ll be financially and to the next generation of the cost savings from combining emotionally when you decide family via gifting or other forms operations that are similar. Some to transfer ownership. of share transfer, also an internal appraisal firms specialize in First and foremost, every owner transfer. valuing funeral home real estate, should have a will in place today ongoing business, furnishings and In all three cases, the future equipment to give you an idea of and always kept up to date in case success of the funeral home will of unforeseen events. Stories the business value in negotiating a depend on maintaining relations sale to a third party. Owners abound of estates and families with families who have had a devastated by poor preparation should be prepared to take “seller good experience using the funeral paper” (a promissory note from and planning. home in the past; other important the buyer) to complete the amount How do you start the planning relationships are with religious of the sale. A good rule of thumb process for ownership transfer? and community leaders and these days in the industry for the First, identify your goals. What do sometimes hospice workers total sale amount is: 1⁄3 cash from you want to be doing in five and other care givers who may buyers, 1⁄3 bank financing, and 1⁄3 years? Do you still want to be influence first-time decisions. seller paper. involved in the business? Who do Selling to a third party often you want to own the business When considering your brings the highest proceeds of any options, remember to look at after you? How much will you transaction. A sale to an owner need to live on after transferring the amount to be retained after already in the industry, called a the transaction, after deducting © Copyright 2009 Michael Oleksak. All rights reserved. projected taxes and fees. This is The risk is that the owner is well because the valuation will be especially important if you use dependent on the management lower than if sold to a third party. professionals like business team’s ability to run the business Gifting will inevitably bring up brokers to sell the business. Have successfully in order to get paid issues of what is fair to relatives your accountant estimate the beyond the initial closing amount. in the next generation. Questions expected taxes to be paid. It’s not The benefit is that the owner may must be asked about who has about the sale price—it’s about stay involved and on the payroll worked in the business effectively how much you get to keep in some capacity for a smoother and who is capable of running it afterwards. transition. The owner could profitably for years into the Private equity groups and negotiate an extension of payment future. corporations may acquire funeral of certain expenses that had been This transition exercise is a good homes in a roll-up plan to covered for the owner previously time to take an objective look at combine ownership of many as a financial component of the the business through the eyes of funeral homes. The success of the transaction. an acquirer. Find out exactly what roll up depends on the ability of Employee stock ownership plans, acquirers look for when buying the investors’ professional or ESOPs, have significant tax a funeral home business, then management to reduce costs advantages for selling owners in start taking steps to improve your through efficiencies of scale and some industries but ESOPs also operation to meet those qualities. good management. Rollups generally have minimum size The exit planning process and are not as active today as the requirements in terms of revenues the demographics of retiring baby conglomerates are busy or number of employees who boomers mean that there are integrating the funeral homes must participate. Few funeral professionals who now specialize into the corporate system. homes will meet these minimum in helping business owners If the funeral home has size requirements to qualify. prepare for ownership transition. experienced and capable The third option is to transfer The earlier the planning process management, you could sell to ownership to the next generation. begins, the better chance for a them. This will likely require If the owner’s son/daughter or a smooth transition and fulfillment bank financing for a large part of combination of relatives have had of the owner’s goals. the payment secured by the assets experience and want to continue of the business plus personal the business, this may be an guarantees of the managers. The option. Gifting of the shares bank loan will be paid out of can be a way of effectively cash flow from the funeral home transferring ownership, while operations. As with the sale to the the owner maintains voting third party, the bank loan will be and operational control to be paid first each month. Any left- transferred over time. over cash flow may then be paid Gifting may mean the lowest toward the owner’s seller note financial payout to the owner, or agreed earn-out based on although the owner can stay on performance. The total amount the payroll as an employee and for a purchase in a sale to continue to receive salary and management will likely be less benefits. This can be an effective than if sold to a third party. way to minimize tax exposure as © Copyright 2009 Michael Oleksak. All rights reserved.
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