Value of Intangibles in a Funeral Home Sale

Tom Anderson
Funeral Director Daily

I happened to be watching a funeral industry podcast today and this question was asked of the “Expert” , “What value to the sale are pre-arrangement contracts that are not tied to the funeral home, but could be moved?”  The expert’s answer was something like this, “Absolutely nothing.  They can be moved to a competing funeral home so no new owner will pay anything for an asset that is not guaranteed to be there.”

I’m somewhat in disagreement with that premise.  We all know funeral homes sell on multiple of EBITDA, but how that multiple is determined – up or down from a standard number – has a lot to do with the intangibles that a selling owner can offer a new owner.

Let’s just say that a funeral home has an “adjusted” EBITDA of $150,000 and the standard EBIDTA multiple is 5, so in a very simple sale it would look like that funeral home has a value of $750,000.  Now, ask yourself is it logical that the sale number would move one way or another if we stated either of these two statements.  1)  We have never written a pre-need contract or 2)  We have $5 million dollars of insurance based pre-need we have written in the community.

My gut feeling is that if I was the potential buyer of the funeral home in question and #1 was stated to me, I would probably look to a little less than the $750,000 price to purchase because I would worry that my market share may go down if my competitor was actively doing pre-need.  Conversely, I would probably be willing to up the $750,000 offer if I knew the scope of the pre-need that had been done and considered it extraordinary for a funeral home of that size.  My thought process was that my market share is probably going to grow because it looks like we have been very aggressive in making friends thru pre-need sales.   For the sake of this discussion, we are not talking about “Guaranteed Pre-Need” contracts simply because that casts other financial implications over pricing into the future that we will not discuss today.

So, my take is everything, whether it is part of the balance sheet, income statement, or just an “intangible” has a value (up or down) to the sale price of a funeral home.  Here are just a couple simple ones that don’t show up on those financial sheets:

  • Are you in a growing or declining community?
  • How fast is the cremation rate growing?
  • What is the condition of your competitors?
  • What is the physical condition of the funeral home being acquired?

The answer to those questions, in my opinion, each move the dial a little bit over a pre-determined financial formula.  The best advisors in our business know how those numbers move and are worth having on your side in negotiations.

If you are going to be interested in selling in the next five years it is never too early to get an expert on your side.  There are some really good ones in our business and I’m guessing that whatever you pay them for their advice you will more than make up for in the sale of you asset.  It also pays to hire them about three years prior to your anticipated sale so they can help you with building a strategy for enhancing the sale prospect.

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  1. Daniel Isard on August 14, 2019 at 9:31 am

    Dear Tom,
    Interest approach. First, I hope I wasn’t the industry expert, even though I agree with the mathematical result of the answer, the reasoning was wrong. Preneed, in and of itself, has no value in the equation of computing value. Funeral homes do not bifurcate their books to show “Revenue and Expenses from Preneed” versus “Revenue and Expenses from At Need”. All income and all expenses are aggregated. However, any valuation expert worth their abacas knows that valuation is a range. Ultimately the experience of the appraiser narrows that range to one number. The average funeral home in America has a preneed backlog of 1.4 times Revenue. In studies we have done for some trials, we found that in the course of normal events, 97% of all preneeds are served by the writing funeral home. Therefore, if a funeral home is preneed equal to 3.0 or double the national average, that reduces the risk of lost patronage. Therefore, I would assess a value that is a higher side of the window than the average multiple of EBITDA. I recently was negotiating for a client to buy a 100 call funeral home. The seller had about $500,000 of preneed. He wanted an extra $500,000 above appraised value for his preneed. I told him to keep his preneed, and he would pay us the GPL price when each case matured. I told the proud seller to keep whatever was left after paying us. He didn’t accept that challenge. Last I heard, he was still waiting for the right buyer!

  2. David Adams on July 19, 2017 at 5:07 am

    Spot on Tom.

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