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					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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