Three funeral director friends Joe, Mike and Randy meet for a golf outing and end the day at the 19th hole. Each owns a funeral home. Approximately the same age (early 60’s), their talk soon turns to exit planning strategies.
They agree on several things:
- They love funeral service but also hope to slow down and take more time off.
- None have children or employees who are interested in buying them out.
- None have partners or co–owners.
- They each figure that they want to retire in 5 years and reap the greatest possible after-tax cash return.
They differ in one significant way:
- Joe owns a small rural funeral home serving between 110 and 120 families annually. He has one competitor who does about the same volume.
- Mike’s funeral business has two locations serving approximately 300 families in a community of 50,000. He has 3 competitors. He is the largest and serves approximately 1/3 more families than his closest competitor.
- Randy has a large premier funeral home located in a city of over 1,000,000. His firm serves some 900 families a year. He has 7 competitors. His firm and one other serve approximately the same number of families and the rest are significantly smaller.
Question: Do they all have the same options?
Clearly, Randy has the most options of anyone.
Joe lives in a community where both firms do a good job and both owners are well known and well liked. He experiences a phenomenon common in rural areas where the community likes them enough that the funeral homes split the business. For example, if the Smith family uses Joe for Cousin George this year, they later will use Joe’s competitor for Aunt Sally. Often, when the family uses one funeral home for the funeral service, they then will buy the monument from the other firm. This makes Joe’s exit planning options very limited. His business’s highest value is to his competitor. But, if his firm just closed, his competitor would get all his business any way. So the competitor’s motivation is marginal. If Joe sells to an “outsider”, the relationship bond he has built with the local community will be broken and likely 30% or more of Joe’s business will end up with the competitor. His best option is to find and groom a successor. His successor will have some time to become the “local” funeral director during the extended buy out period while Joe slowly retreats from the scene.
Joe would have been well advised to start this process in his late 40’s. By grooming a successor, he should expect a multiple of 4.5 to 5.5 times EBITDA.
Mike’s situation is considerably better. Even though he has built much of his business on personal relationships, the size of both his business and his community make him attractive to 3rd party buyers. Yet, his community is small enough that it is potentially risky to a larger consolidator. Again, he is worth more to a competitor than any one else. (Unfortunately, few competitors realize that they can well afford a premium investment for incremental calls). If he is within 20 to 30 minutes of a major national highway he will be of interest to a national consolidator. He definitely will be of more interest to a regional consolidator. He should expect a multiple of EBITDA ranging from 5.5 to 6.5.
Randy is in the “catbird” seat. As a large premier (nationally known) firm, his business is an attractive acquisition candidate for a major national firm. The size of his community indicates that one might already be operating in his area. If so, then as a “fold-in” Mike’s business is even more valuable. Multiples above 6.5 are possible.
Missing from the golf game was George who owns a firm serving 2,800 families in its funeral division and 3,670 interments in its cemetery division. George could be looking at a multiple of 10.
The above assumes that each of the firms is in good condition with steady to rising call volumes.