If everything goes as expected today, most people are looking for a 0.25% rise in the Federal Funds interest rate as set by the Federal Reserve Board.  There has been a lot of talk that the rate, which if raised today for a 4th time this year, has had something to do with the volatility that has hit the American stock markets in the last quarter of the year.  I think that the consensus is that rates will be raised today, but the Federal Reserve will position themselves for a “wait and see” attitude in 2019.

So, why should you be concerned with the Federal Reserve Board’s rates?  These rates, that are charged to banks, is where virtually all other interest rates – from credit cards payments to housing payments to business acquisition rates stem from.  Today, I just wanted to give a quick math class on why, if you own a funeral home and may be interested in selling at some time in the future, that interest rates at the time of the sale can really matter to you.

Let’s take a hypothetical funeral home that has a $100,000 annual EBITDA and say it was to be sold at a negotiated 8 times EBITDA multiple.  That would make the sale price $800,000 and for the purpose of our exercise the buyer is borrowing 100% of the sale price.  He goes to his local banker and gets terms at 5% for a 20 year amortization.  That would total a payment of principal and interest of $63,640 per year leaving him with about $36,ooo  ($100,000 EBITDA less the $63,640 payments) in profits if no other financial information changed.

Now, let’s say that the same sale price was negotiated but interest rates had risen.  Our buyer now negotiates an 8% loan from his banker and the annual P & I payments on that loan are $80,304.  So, in this case the new owner is profiting less than $20,000 if no other financial information has changed.  That 3% interest difference, that is going to the bank-not the seller,  has cost him about $17,000 annually.

My guess is that this buyer would try to lower the price so his payments would be less. . . and his profits more.  It is a pretty simple equation. . . as interest rates go up, sale price will come down.

Most sellers don’t even think of this – especially if they are receiving a full cash payout.  But selling to a solid credit worthy buyer can actually cause your price to go up, and you can benefit,  simply because that buyer may qualify for a pretty low interest rate that, in a competitive market, would allow him to pay more for the business.

That is why it is so imperative that you have a really good rapport with your banker in all aspects of funeral service — from buying cars to having credit line accounts. . . . interest rates matter and reflect real money.  It does not hurt to have two or three bankers who you visit with regularly.  If one is really fair, however, I’ve found that loyalty pays.

If you are in the thought process of selling your funeral home. . . .take a look at what the predictions are for interest rates over the next couple of years.  It is simple math that if you are fortunate to sell when interest rates are low, you can probably reap more in value from the business.  As a selling owner  — it just makes sense to try to get more to yourself and less to the banker, even if he is a nice and loyal guy.