Funeral Home Valuation

Are you in need of a funeral home valuation? As an industry that deals with one of the two guarantees in life, the funeral home business seems at a glance to be separate from the cycles and fluctuations endured by the rest of the business world. Reality is far different: this industry endures volatility and reorganization just like any other. And the companies that find a way to stand out from the rest of the competition can create tremendous value.

Funeral home business owners all look to build the value of their businesses – and the more value they add, the more options they afford themselves when they prepare to leave it. As business valuators that have worked with many funeral homes in over twenty years, we aim to help owners understand that value, grow the value, and “cash out” on that value when they are ready.

The Basics of Funeral Home Valuation

Trying to appraise the value of a funeral home is a tricky balance of art and science—you are determining the market price of your business without actually taking it to the market. In the business valuation world analysts rely on three lenses that we can apply to any business to get a sense of what an independent party would pay for the company.

The methodologies that they use all stem from one of the three approaches that follow:

• Income Approach: The most common for funeral home valuations, this method looks at the income generated by the business and projects how much would be generated in the future for an acquirer.
• Asset Approach: When the assets of your practice count towards a significant portion of your its value, this perspective is commonly employed.
• Market Approach: This approach focuses on comparing your funeral home to similar homes that have been sold in the recent past. Compiling good data for the comparisons can be difficult in some areas.

Almost every business owner in America has some number in their head that they think or hope their business is worth. We wanted to see if their numbers were accurate compared to our calculations. Our 2010 study found only one in ten owners accurately estimated (within 5%) their company’s value. The median error was 58.9% and one owner was off by 1,000%!¹

How would you react if your stock portfolio or retirement fund was actually 50% less – or more – than you expected? When it comes to what may be your largest asset, misjudging the value of your business by 50 or 60% can have a huge effect on your plans for the future.

Bear in mind that knowing the value of your funeral home helps with more than selling your funeral home. Knowing your number assists in:

• Retirement planning;
• Transferring a business to a family member or key employee;
• Estate tax and gift tax planning; and
• Identifying weak points in your business you can improve on;
• Etc.

Key Value Indicators for Funeral Home Valuation

What are the value drivers and success factors that influence funeral home valuation?

Value Drivers²

• Demographics: The number of adults 65 years or older near your place of business is a key figure. With this portion of the population expected to increase nationally from 13% in 2011 to 15% in 2016, demand for services is expected to increase.
• Number of Deaths: The annual rate of death is expected to increase at an average annual rate of 1.2% over the next five years. A funeral home in an area with above average numbers stemming from natural disasters, disease, and other agents of death may be able to expect above-average earnings.
• Number of Cremations: The percentage of cremation services for both your business and your area plays a significant role. The low profit margin for this increasingly accepted alternative to traditional burial services may affect your value.
• Reputation: Having a good reputation is essential to your success as it is often a deciding factor in a customer’s decision. An established funeral home with an excellent reputation in the community will carry a lot of value to an outside buyer.
• Location: A visible location with significant passing traffic is a major value factor for a funeral home.
• Cost Controls: As an industry with high labor input, effective cost controls can help ensure profitability and make your business appear significantly more appealing to prospective buyers.
• Markets: Having access or specially catering to niche markets with ethnic or religious-based services and other specialized services may ensure a steady flow of clients and profits.

Every funeral home appraisal should be especially mindful of these elements and countless other specifics that play a role in determining the value of your business. Analyzing them objectively from the perspective of third party buyer may prove difficult for owners who have involved themselves heavily in their business over many years.

Funeral Home Valuation Rules of Thumb

While useful for supplying you with a general idea regarding the value of your business, these industry multiples are rarely precise enough to be used for any real business decisions.³

Funeral Home Valuation Rules of Thumb

• 200% of annual sales (includes inventory and real estate)
• 5x Seller’s Discretionary Income (includes inventory and real estate)
• Multiples of EBITDA (Earnings before interest, taxes, depreciation, and amortization)
  • Under 75 funerals per year: 3-4x EBITDA
  • 75 to 150 funerals: 4-5x EBITDA
  • 150+ funerals: 4.5 to 6x EBITDA

Keep in mind that these figures assume your funeral home is exactly the same as your competitor’s, save for one variable (sales, EBITDA, etc.) and ignore all differentiating aspects of your business.

Looking Forward

With increased merger and acquisition activities from key industry players, a growing number of adults 65 and older, and increased acceptance of cremation among the population, understanding your business’ value is more important than ever.²

An increasingly aging population holds promise for the industry, but the recent recession has brought a shift in consumer mentality. With the increased social acceptance of cremations and consumers who now question the practicality of spending money on expensive services. Retailers such as Wal-Mart and Costco have become players in the industry, offering coffins and other merchandise that decreases revenues and profits from funeral homes that were once the only providers.

Recent consolidation of the industry through mergers and acquisitions has changed the dynamics of how funeral homes change hands. Giants like Service Corporation International and Stewart Enterprises have purchased many independent homes in recent years and may look to continue that trend in the future. Optimizing your funeral home today increases sale prospects for the future.

Choose A Valuation You Can Trust

Your funeral home is more than a collection of assets. Your business is an extension of you, your employees, and those that you have helped over the years. Using an experienced and credentialed valuation firm will ensure that all the unique aspects of your business factor into the valuation analysis so that you can get a precise figure you can rely on.

Just as you have helped guide countless individuals in your community through trying times, a Value Advisor can help you understand your situation and walk you through the options that lay ahead.

To learn about your options, set up a free consultation with a Value Advisor. You can also call
(800) 895-4100 and we can schedule the consultation as is convenient for you.

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1 Unpublished survey of SPARDATA’s business owner clients in 2010
2 IBISWorld. (2011, April). Funeral Homes in the US. Retrieved from IBISWorld Industry Market Research database.
3 West, Thomas L. 2010 Business Reference Guide: the Essential Guide to Pricing Businesses and Franchises. [Worcester, MA]: Business Brokerage, 2010.
4 IBISWorld (2011 April) Funeral Homes in the US