MichelleCanerot-HeadShotby Michelle Canerot

There are many reasons why an owner or operator decides it is the right time to sell his or her small business, whether it be retirement, relocation or many other personal or financial reasons. And once that decision is made, there is often an expectation of what the purchase price should be – based on any number of sources, but in fact, the ultimate sale price will be based on a combination of asset values, annual revenues, multiples of earnings and/or other possible intangible considerations.
In order to maximize the company’s value and therefore achieve the highest possible sale price, a seller should begin planning long before going to market. An owner should be prepared to deliver the types of information and analyses needed for a potential buyer and his or her financial advisors to assess and validate the true economic results of the business. A broker or consultant with industry and financial experience can help set realistic expectations about the true value of the business and assist with financial statement preparation and analysis.

The following is a list of things a seller should review and consider:

Financial Statements
Buyers and their lenders will often ask for up to three (3) years of prior tax returns and/or audited financial statements, as well as interim statements from the beginning of the current fiscal year. Therefore, as a seller, you should assess what prior information is available and begin compiling copies. In addition, you should be prepared to produce interim statements if necessary, either internally or with an outside resource such as an accounting firm. Typically, the financial statements needed will include both a profit and loss statement and a balance sheet.

Buyers are obviously looking for stable and/or improving profits. Lenders are looking for the same in order to be assured that debt can be repaid. A seller should review his or her own historical statements and consider the following questions:

What are the trends in call volumes and revenues? You should have information readily available on historical call volumes and cremation rates by fiscal periods, and be able to explain fluctuations in sales and revenues. Death rates have an impact of course from one year to the next, but lenders will look at the trend line over the last 5-10 years. While your competitors’ call volumes may be unknown, be ready to discuss the similarities and differences among the firms in your immediate market.

Have costs been recorded consistently? Lenders look at both Cost of Goods Sold and Administrative Expenses as a percentage of revenues. Identify any unusual trends and be prepared to provide explanations.

Is your net operating margin increasing or decreasing? If it is decreasing, are there changes that can be made in advance of the sales process that will result in more positive trends?

Unusual or Non-recurring Expenses
Buyers will want to understand the cost structure of the business post-closing. Be prepared to provide documentation as to owner related expenses such as salaries, pension and life insurance or other expenses that will not be inherited by the buyer. If possible, keep track of unusual or one-time expenses that can be validated. This will give the buyer a better understanding of the funeral home’s overall expenses.

Asset Values
Sellers should assess the value of the inventory, furniture, equipment, automobiles and other business assets that will be transferred with the business. Furthermore, identify those assets that will not be sold. Lenders will want to know the value of all available collateral when underwriting the buyer’s loan.

The time between signing a Letter of Intent and Closing can take several months with real estate appraisals, environmental reports, surveys and title work. If real estate is being sold with the business, it is helpful to have copies of prior appraisals, tax assessments and/or other documentation ready to (1) support a basis for value, and (2) provide legal descriptions which identify the parcel(s) included in the sale. In addition, prior surveys can often be used by the title company – saving time and money.

Selling your funeral business is a major life event. By putting your “financial house” in order – in addition to preparing your operations and facilities for sale – you can increase the value of the company and insure a smooth and successful transaction. FBA

Michelle Canerot joined Live Oak Bank’s Funeral Home Lending team as an underwriter with over 16 years of experience in the death care and financial industries. As a CPA, Canerot utilizes her knowledge to better serve Live Oak Bank’s customers, who are funeral home owners. She previously served on the Board of Directors of the Cremation Association of North America (CANA) and currently sits on its finance committee. Canerot’s experience includes serving as the Vice President and Chief Financial Officer of Celebris Memorial Services, Inc. and as Director of Administration for Stewart Enterprises’ U.S. West Coast operations. She can be reached by phone at 877-890-5867 or by email at [email protected]