Q & A with Jake Johnson

Q: There seems to be a division between the publicly traded companies and regional and local acquirers. Can you expound on the strategy and target markets for the public traded companies vs. middle range private equity funded companies and the small regional and local buyers? 

A: Publicly traded companies, as you think of them, don’t necessarily have to be nationwide (and maybe even in Canada). When you’re spread out like that, compared to being a regional acquirer, you need more infrastructure in place and face higher risks due to less direct oversight. So, the smaller the markets you enter, the higher the risk, especially if you’re this big Wall Street firm in Batesville, Indiana for example, compared to a regional acquirer who can be more hands-on and personally visit businesses. There’s more of a personal touch of sorts.

   Regional acquirers have the advantage of being closer to their target markets, which can be appealing to sellers. But publicly traded firms nowadays have created systems where they can really manage well from afar, where it’s really hands off and the business can do fine. So what it always comes down to is the systems that are in place, and the people that are in the business, specifically the management that’s running the business. We’ve seen many funeral businesses owned by pub licly traded firms that are successful because they have good management in place at the firms.

   VC firms are just looking to get into our space. They will look at anything, but they know that they need the systems in place right away. VC firms, on the other hand, are eager to enter the market and may offer competitive prices, although they may lack established systems initially. Depending on their stage of acquisition, VC firms may offer comparable or higher prices than regional acquirers. The publicly traded firms are more spread out. It’s great to have systems in place to be able to monitor things. But, you know, some public government com panies have gotten to a point where they’ve done a good job, those systems can also be very beneficial on the training side and resources or what have you. all of them have their kind of different takes on things.

Q: With the continued rise in cremation, how will funeral home owners serving under 100 families a year need to survive, especially with calls and revenue potentially declining?

A: The rise in cremation isn’t something that happens overnight. But also jumping out of an airplane is not how you die. It’s when you hit the ground. So, as cremation continues to rise, it is doing it more or less at a pace where funeral businesses will continue to adjust. And it may get to a point where they have to merge with their competitor, their next competitor or the next closest funeral home. The bigger problem that we’re all facing is help. And so with rising cremation, it’s still a very viable business. But when you have lower volume of calls, your fixed costs, especially in payroll get very high, especially with payroll now. It’s hard to find help unless you’re willing to pay the very high price, and labor cost is up at least 20%. So the challenge is not just the rising cremation, it’s the rising cremation and the labor issues that are going to cause firms to merge or think differently on how to service their families. 

Q: What multiples of “revenue” and/or “cash flow” do you see for corporate buyers vs. small or single acquirers?

A: Multiples of revenue and EBITDA are the same for both private and corporate. Where the issue comes in is how much equity each as a corporate/large acquirer just has more cash to buy a place and have different banking relationships as opposed to single or private, funeral home organizations. However, if the single private acquirer is given the flexibility to create a structure that a seller is willing to entertain, a private buyer can actually create a higher multiple through creative structures. It just may not involve all cash upfront.

   But with today’s interest rates, there are some appealing structures that private buyers can offer that allows them to compete, I believe, with the big companies depending on the flexibility of the seller. If the seller wants out once cash and doesn’t want to worry about it, then it makes it very tough for the next generation key employee or private buyer at times, not always. 

Q: It appears that there are significantly more SBA lenders to the funeral profession as well as a number of the Pre need/Insurance companies providing financing/funding for acquisitions. Have you seen a rise in potential buyers due to these additional funding options?

A: There are more lending options, which is good for our space. And we’re seeing more preneed insurance companies get into the space and do lending. I’ve seen that since 2004 with the entrance of brick credit Corp, who was an insurance company doing lending. Is it bringing forth more buyers? No. What it’s bringing forth is more options for buyers who are looking for financing.

Q: What are the advantages and disadvantages to seller financing in the industry? Do you recommend it to any of your clients?

A: Advantages: Seller financing is one of those structures I mentioned in an earlier question that can help private buyers be competitive because the interest rates are high right now. A seller can lock in a high interest rate for a buyer to pay for the business and will provide a nice steady income for the seller. It has some tax advantages, it creates a steady income on your investment. And the other advantages, if done correctly, it also can get you a first position on the real estate in case the buyer defaults in which case you can get your real estate and your business back.

   Disadvantages: If you’ve put the buyer in a position where the structure was not correct, and the buyer gets into a position where they can no longer afford to pay that and now you’re struggling, you’re dealing with a buyer who may consider filing bankruptcy or is not paying you while you are counting on that money in retirement. So the important part in seller financing is creating a correct structure based on tools that banks have which sellers can have too, such as fixed charge coverage ratios and using those for correct financing and creating structures and maybe balloon payments and other handy tools that can get you nice seller financing no but reduce the risk. 

Q: How important is a funeral home’s book of preneed accounts when valuing a business. Is it more of a liability or asset?

A: Preneeds, accounting-wise, are a liability or deferred revenue until they’re until the person dies and it becomes a preneed turned at need contract. Preneed business is very important to a funeral business. It is a very logical and understood product to be offered out in the community. Preneed sales are really part of your marketing budget. And if you’re not doing it you can assume your competitor is. They are taking customers who wanted to take care of their plans for their funeral now, so you need to be doing it. There are benchmarks and measures to determine easily whether it’s a successful program for you. I see preneeds as an asset, You value the printed book of business by what comes in. So, if we were to assume 35% of your business’s preneeds that are turning at need, that then falls to the bottom line and that contract. Cash flow is the value of the premium book of business. 

Q: For owners that have a funeral home and cemetery combination, how much value is placed on the cemetery, especially in today’s rising cremation rate?

A: I’m under the belief that unless it’s in a very large established cemetery serving over 400 to 500 families a year that the cemetery is more of a benefit to the funeral home and creating a higher burial mix within the funeral home. Cemeteries are valuable but they’re a different monster and they require capital to continue to build the inventory, and really more successful if you have a very good active cemetery sales program, lots of land and a construction budget or development budget. It’s this sales construction our sales and development motor that has to keep running on your cemetery and you have to develop heritage. If a cemetery is in a 50 to 300 internment range, it’s probably more helping the funeral home out. Once you get to bigger sizes, you could start seeing cemeteries as more contributors. It just depends on what’s been developed on it and how much maintenance will be involved and how the Accounting has been done to account for the cemetery sales and receivables. Funeral homes take care of families, cemeteries are a sales and development engine.

Q: Are you seeing less and less of the next generation taking over the family business? And why has this trend shifted from where it was 25-50 years ago when it was a given that the next generation would take over the family business?

A: Yes, I’m seeing less and less of the next generation take over the family business. I think it’s a matter of what’s available to people nowadays for a career. You see social media, you look at influencers, you think of the ability to be an outside contractor and determine your own schedule. People nowadays, and more than ever, with all the information out there understand the mortality of their life and are looking for balance for their own health, creating experiences in their life, and consider the impacts of stress on their health.

   As I’ve gotten older, the definition, to me, of stress is doing things that you don’t want to do that you don’t have any control over not doing. If you think about that as a definition, and then you think about funeral service, where you don’t know when you’re going to be called by a family to take care of them, it’s stressful. It could be this morning, it could be at 5PM, it could be during your son or daughter’s birthday. It could be on your birthday, it could be on your anniversary. That is the definition of stress. And people don’t want it anymore.

   I’m seeing businesses that try to sell it to the next generation that are capable of continuing it, but they just don’t want to deal with it. They work for somebody else, and that way they have their hours set and they can forget about it and go do something else. Those that understand how to mitigate that stress through outsourcing and creating succession plans within their payroll, they can have their cake and eat it too. However, you have to be willing to put the plan together and find a way to basically accomplish that through contractors and outsourcing.

Q: While every situation is different, on average, what is the optimal time frame to begin planning for succession or a sale?

A: So, you have to have to do succession planning now, or yesterday, as I always say. There’s two routes you can go, both are viable. The first one is that you need to create years of successful trends that show what your business is since valuations are based on trends. If your trend is going up, you should expect a good value. If your trend is showing all the improvements you’ve done, and well-detailed financial results and great success in your payroll, your value is going to be good. It’s trend-correlated to identify the likelihood of results continuing in the future. So you’ll look at not just the last day or the last month or the last six months or last year, you look at the last three years to see if you can see something consistent out of the results. That’s one way to ensure you maximize your value.

   The other way is to hire a company to represent you to create a presentation to any interested parties that shows what the results can be with lots of detail and footnotes. Basically a very well-detailed marketing presentation of your business that can yield the same results without doing all the work. If you want to have the best of both worlds, you start now and create three-year trends within a marketing package, then you’ll really maximize the value of your business.

Q: Is it more difficult or easier to sell an operation that has ancillary businesses (e.g., on-site crematory, pet funeral, monument business)?

A: It’s not more difficult. It’s not easy, necessarily. It just is what it is if you’re selling ancillary businesses on your funeral business, the important part is to identify how each ancillary business contributes to the cash flow of the business. Some ancillary businesses that are sold within a funeral business, if they are sold on their own they would not drive anywhere close to the multiple of cashflow that a funeral business drives. So you can get an artificially high valuation for ancillary businesses if you include them with the funeral home, but you have to be careful of just what that value is that you’re creating. Is it impacting the value of your funeral business negatively? That’d be a problem. Or is that business on its own actually worth more without the funeral home? You just have to kind of weigh all the options and then decide whether they should be included or not. Typically, if they’re part of the heartbeat of that business, they really just need to be included. So, it depends.