Mexican funeral firm alleges fraud against U.S. company in purchase

 

 

Disagreements can be a part of any transaction.  Today I’ll touch on a lawsuit that was filed last week that once again shows the importance of due diligence being necessary in any transaction.

 

Last week we learned through this Wall Street Journal article that Mexican funeral service provider Servicios Funerarios had filed a civil fraud lawsuit, in a U.S. Federal court, against United States private equity company Advent International over the purchase/sale of funeral service provider Grupo Gayosso in 2021.  Servicios Funerarios purchased the company for US$ 224.7 million at that time according to the article.

 

While we don’t know the totality of the lawsuit, one account that we read reported that Servicios Funerarios alleged that Advent understated accounts payable and also was questionable in their accounting of “pre-need” costs that would be incurred later.

 

As to the defense of Advent International, an Advent spokesman was quoted as saying, “the entirely meritless lawsuit is the latest attempt by Servicios Funerarious GC to reopen a two-year-old deal that was heavily negotiated”.

 

Here’s another article from Bloomberg which gives more detail (Editors Note:  Some readers may run into a paywall in accessing this article).  This article also mentions that Servicios Funerarios has retained high-powered American attorney, David Boies, to handle the case for them.  Boies’ credentials include representing Vice-President Al Gore in his 2000 election showdown with then Texas Governor George W. Bush in the Florida Presidential election case.

David Boies – Wikipedia

 

Funeral Director Daily take:  It certainly would not be right of me to opine on the pros and cons of this case without knowing more about it.  However, I think it is a timely case and may provide a lesson that can be learned for all funeral homes who are thinking about buying additional funeral homes or transferring ownership through a sale.

 

Tom Anderson
Funeral Director Daily

From my point of view, especially if you are going to be buying a funeral home, is to get the ability to look over all the books of the potential acquisition funeral home and drill down, more than likely with the help of a consultant and accountant, the numbers you are provided.  You can never be too careful.

 

And, one of the areas that is especially important is that of the company’s preneed numbers.  Just knowing the sales and cumulative volume of preneed on the books does not tell the whole story.

 

Funeral homes, in most states, have the ability to handle their preneed on a “Guaranteed” on “Non-guaranteed” basis.  For the purpose of this article we will define “Guaranteed” preneed as money deposited in some vehicle that “Guarantees” the consumer client the services and merchandise selected at the time of the preneed contract to be available to them at the time of death in the future at no additional cost.

 

In contrast, we will define a “Non-guaranteed” preneed as a “bag of money” set-aside to offset the cost of merchandise and services picked out at the time of the preneed or at the time of death.  This “bag of money” that will grow to some extent is not meant to “Guarantee” all merchandise and services selected.  It may or it may not cover those selections based on the interest earned over time and the price of the services at the time of death.  But, the only guarantee is that this money will grow at a rate provided in the contract.  It does not guarantee that the money held will cover the costs of the desired funeral at a later point in time.

 

Personally, I have always been leery of “Guaranteed” preneed funeral contracts.  In my opinion, whenever your costs of business outgrow the pace of interest or growth offered by the bank or insurance company you risk being upside down on the sale of your products and services.  For instance, if your insurance company pays a 3% growth but your overhead is increasing 5% annually, then every year you are losing margin on that future death call with a “Guaranteed” contract.

 

On the other hand, when using “Non-guaranteed” preneed funeral contracts you spread that risk to the consumer also.  If your costs go up, you can raise your price to the customer.

 

There is no real answer to which of these styles is best.  While there is an argument of financial risk with “Guaranteed” preneed contracts, those that advocate for them will argue that the “locked in price” for the consumer may very well make up for that risk by a growth in market share because of this guarantee.  That is just one way to look at it.

 

My point with today’s article is not to tout one concept over the other.  The point is that when making an acquisition, make sure you know what type of preneed accounts you are purchasing.  It’s absolutely inherent that you do.  If you are buying a funeral home with “Guaranteed” preneed you need to know if there might be financial shortfalls on these deaths in the future.

 

It’s just another reason why I advocate so strongly for professional representation when you are in the position of buying or selling a death care business.

 

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