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.