12 Mistakes Funeral Home Sellers Make
Selling a funeral home is a time-consuming and emotional process. A successful transaction requires careful planning, experienced advisors, knowledge of the industry, and an understanding of the negotiation process. Unfortunately, many funeral home owners try to sell their business without professional assistance, which can reduce proceeds to the owner and create seller’s remorse in the years after the sale.
The NewBridge Group has been advising family-owned funeral home owners in sale transactions for over 20 years.
The following is a list of common mistakes we have observed owners make when they attempt to sell the funeral home themselves:
1. Inadequate Understanding of the Market
A well-informed seller will have a deep understanding of the business transaction landscape. NewBridge knows who the potential buyers are, the different “personalities” of most potential suitors, and a basic understanding of how they will value your business. To avoid having unrealistic selling price expectations, the seller needs to understand how other similar businesses are being valued in the marketplace. If your competitors have sold for X multiple of earnings or revenue, you will need a compelling rationale for why you should be valued much higher.
2. Inadequate Presentation of the Business
Sellers often hand over copies of financials and other requested information and ask a buyer to make an offer – this is an ill-advised approach. Remember the adage that “first impressions count”? It’s much better to have a professionally prepared presentation that includes all the summary information a buyer needs to make an offer, which should include information on the historical profitability of the company as well as projections showing the adjusted profit of the business if it were operated to run as efficiently as possible.
Consider what adjustments could reasonably be made so that profits would be slightly higher than in the prior years. Be careful, however, about unreasonable projections that would adversely affect your credibility by being overly optimistic. It’s much more believable if you can show data to back up the adjustments and to also know industry standards for what’s realistic in each expense category. Expect to have questions about the projections, but if they’re realistic, a buyer should be willing to pay for some of these enhancements to profitability.
3. Not Financially Qualifying a Potential Buyer Before Entering Discussions
As an active industry M&A consultant, we often get calls from people wanting to buy a funeral home. The majority of these individuals, unfortunately, don’t pass our initial standards for actually being able to purchase a business. Companies are easier to research because they may own other funeral home locations, whereas individuals should be required to fill out a personal financial statement and provide additional documentation detailing their source of funds to complete the purchase.
4. Negotiating Without Tax Considerations
The tax structuring implications of a sale can significantly impact the net economic return to the owner. How much should you allocate to each asset class? What percentage should be paid in a non-compete vs. consulting agreement? Should any of the purchase price be allocated to goodwill? An advisor will guide you in asking the right questions.
5. Not Understanding the Negotiation Dynamics
All M&A negotiations require several compromises; going into negotiations expecting to win every point will almost always ensure that you end up with no deal. A successful negotiation process is like any relationship, it requires give and take, and both parties must remain flexible in finding solutions to challenges rather than demanding their way. Maybe you give in on a non-financial term in exchange for winning a point on price, or vice versa. Having a third party negotiator on your behalf helps take the emotion out of this process.
6. Neglecting Day-to-Day Operations During the M&A Process
The process of exploring a sale of a company can be distracting and time-consuming. As a business owner, you must keep daily operations running smoothly. If a sale isn’t consummated, you don’t want to return and realize the business was neglected. And you definitely don’t want operational problems to arise during the negotiations or due diligence with a buyer.
7. Focusing on the Total Sale Price
As a broker in the industry, I’ve advised numerous funeral home owners as they’ve gone through the process of selling their business. As I follow up with these former owners in the years after their sale, I have never heard a former owner say they wish they’d demanded more money from the buyer – but I have heard several say they wish they’d learned more about the buyer before selling.
If you’ve owned your funeral home for years, it’s likely a real part of your family. So, who the new owner is and how they will serve the community should be as important as anything when negotiating with potential buyers. Sometimes the best buyer isn’t the one offering the highest price.
8. Allowing Third Party Interference
If you’re a business owner, you should be able to decide when to sell it and under what structure. But many owners will succumb to guilt from a family member that doesn’t want them to sell. Some owners will allow an overzealous attorney or accountant to kill the deal rather than look for ways to help you find a reasonable and fair transaction. Everyone involved has their motives, and sometimes an accountant or attorney just doesn’t want to lose you as a client – they don’t have the same motivation as the owner to see a sale occur. Unfortunately, allowing these third-party individuals to kill the sale happens too often. Therefore, you need to communicate your desire to complete the transaction and that you only want their advice if they help move toward that goal.
9. Failing to Have a Well-Drafted Purchase Agreement
One key to a successful sale of a company is having a well-drafted acquisition agreement protecting the seller as much as possible. Here are some key provisions in an acquisition agreement:
• The conditions to closing (you may want a financing contingency that expires after a few weeks, so if the buyer can’t prove funding pretty quickly, you’re not bound to the agreement).
• The adjustments to the price (a seller will want to avoid formulas that adjust the sale price downward).
• The nature of the representations and warranties (a seller wants these qualified to the greatest extent possible with materiality and knowledge qualifiers).
• The scope of and exclusions to the indemnity (baskets, caps, carve-outs from the indemnity all being important issues).
• A timeline for closing that’s fair to the buyer but doesn’t string along a seller if the buyer doesn’t work quickly to close the transaction.
• Provisions for termination of the acquisition agreement
Many owners are friends with an attorney. However, an attorney who drafts wills, buy-sell agreements, and/or litigators and divorce attorneys, are different from a business transaction attorney. Make sure your attorney has experience in drafting and negotiating M&A transactions.
10. Neglecting the Timing
The longer a negotiation drags on, the higher the likelihood that the deal will not happen – or the terms will worsen. The seller and the seller’s attorney must have a sense of urgency in getting things done, responding to due diligence requests, and turning around markups of documents. One seller representative must also be delegated authority to make quick decisions on negotiating issues so that they can maintain momentum.
11. Inadequate Confidentiality Agreement
Before providing a potential buyer with information on your business, ensure you have a signed agreement where the potential buyer agrees not to disclose your information to anyone other than the people helping them review the opportunity. A well-drafted confidentiality agreement is essential to protect the privacy of your information, particularly when the potential buyer is also a competitor. This agreement should also prohibit the buyer from soliciting any employees of the seller if a deal is not consummated for a period of time.
12. Not Having an Experienced M&A Advisor
An experienced M&A Advisor should be able to lead you through the process of solidifying a sale and avoid all the mistakes listed here. You’ll want someone who has worked in the funeral industry for multiple years and has closed transactions with all types of individual, regional, and public buyers. An experienced advisor will help with the following:
- Providing information on comparable valuations of other similar businesses. Preparing an executive summary and confidential presentation on your business that shows the business operating at its highest potential.
- Identifying the potential buyers that likely would pay the highest price.
- Prequalifying potential buyers before disclosing information.
- Manage all prospective buyer communication.
- Coordinating meetings with potential buyers.
- Assist in reviewing all offers to determine which best fits the seller’s needs.
- Negotiate a letter of intent and purchase agreement so that
ythe seller can receive the highest possible price with full consideration of the tax liability. - Assist attorneys with final documentation preparation.
As an M&A Advisor to the funeral industry for more than 20 years, NewBridge Group has represented more than 300 funeral homes in the successful sale of their business. Please contact Todd Reich if you’d like to have a confidential conversation about your transition goals:
Co-Managing Partner
The NewBridge Group
404-542-9956