Within the last month Death Care marketing expert Glenn Gould contributed to a Funeral Director Daily article with this comment, “There are too many funeral homes.  NFDA estimated 15,500 firms in 2023; 30% do fewer than 100 cases annually’, 68% do fewer than 200.  Very small firms should be seeking mergers.”

And then about ten days ago I saw Mr. Gould co-author, with Jake Johnson, an article that appeared in NFDA’s Memorial Business Journal titled, “Why Bundling Devalues Your Exit Strategy“.  The article dealt with the realization that for many smaller firms, they may have more to the existing owner value if the real estate was sold separately from the funeral home operating business.

Glenn Gould

Gould and Johnson make several good points including this one, “Many small-volume funeral homes are in highly desirable metro business districts or along main street corridors, making their real estate valuable for various alternate uses.”  They also make this point, “. . .  small-volume firms might fall below the acquisition thresholds of major consolidators. As a result, these businesses are more likely to be acquired by local competitors or left to wind down. Unfortunately, in these cases, owners often fail to realize the true market value of their business, primarily because the value of the real estate eclipses that of the operation and the two are bundled together in one transaction.”

I think that they are exactly right in their assumptions and it is great advice for selling funeral home operators.  They go on to point out that is is also great advice for those funeral business operators buying these businesses.  Meaning that the continuing business can, more than likely, increase their profits greatly by consolidating an acquired business into their existing facility rather than operating two separate facilities.

Think about it. . . . you will save by only having one property tax payment instead of two, only one yard and facility to maintain instead of two, only one one utility bill to pay instead of two, having only one receptionist instead of two. . . and on and on.  Johnson and Gould also point out that a funeral home’s EBITDA will increase with more calls under one roof and that increase will lead to an increased value of your business.  Here’s a chart that they prepared on that based on annual calls under one roof and potential EBITDA and Sale Value:

The two also mention in their article that “The late Tom Johnson (Jake’s father), a pioneer in funeral home consolidation, drove the growth of Pierce Brothers in the 1980s by acquiring funeral businesses without the associated real estate. The goal was simple:  Increase case volume without incurring unnecessary capital tied up in property. Between 1980 and 1987, Los Angeles, California, saw a drop in the number of mortuaries from more than 220 to around 180. This model of separating operations from property contributed significantly to the creation of long-term value and scalability.”

Jake Johnson
CEO
Johnson Consulting Group

In a somewhat ironic twist to that statement, Tom Johnson was a mentor of mine and one whom I used as a consultant in my business dealings.  In 2006 I had the opportunity to buy out a competitor in my community.  When I did the math with two facilities – and the potential acquired facility was on a beautiful stoplight controlled intersection corner in the center of our community – and two staffs, I did not see a great return for the investment I was about to make.  However, when I did the pro-forma with buying only the business assets and not the real estate the potential return was enormous. . . . . .if I could continue to do the same numbers for that firm in a different (my existing)  location.

Of course, I called Tom Johnson.  Tom told me this same Pierce Brothers Los Angeles story.  He convinced me that even if I lost some of that firm’s business in a different location the numbers were still very good.

I moved forward only offering to buy the funeral business assets with the caveat that a “deed restriction” prohibiting the use for Death Care purposes, be inserted in the funeral home’s property deed.  I never had to deal with the real estate but a beautiful new bank building sits on that piece of property today.

And, you might not believe this, but Gould and Johnson are exactly correct — when I sold seven years later I believe that the investment I put into that acquisition, on its own, returned a 10x increment to me.  Going from 225 calls in our existing facility to 325 calls in that same facility overnight greatly increased the EBITDA which in turn greatly increased the business value.

Johnson and Gould also state in their article, “In 2023, NFDA predicted that half of all independent funeral home owners would either sell or retire within five years. Recent years saw acquisitions, but elevated interest rates have cooled activity. With interest rates expected to fall in the coming months, a renewed surge in consolidation is likely.”

So, I would advise, if you are a potential seller make sure you know what the “de-coupled” value of your assets are. . . . . And, if you are a buyer make sure you take a look at how a new acquisition will work out financially in its present facility and how it will work out financially if you only buy the “business assets” and choose to move the business into your existing facility.

And, if you are not a numbers person or simply want some help in figuring this out a call to the good people at Johnson Consulting Group would probably make a lot of sense.

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Funeral Director Daily does a good job of notifying our readers when the large corporate companies acquire new funeral homes.  It appears that these transacations are a consistent regular occurrence, although there are some ebbs and flows to the pipeline of deals.  We also know that large corporate consolidators and their purchases are not the only place that acquisitions and mergers are taking place in the funeral home space.

When I peruse the internet for articles that would interest Funeral Director Daily readers I notice mergers, acquisitions, and bolt-on purchases for hub and spoke firms happening often.  There is a lot of that happening around the United States in our profession.  It is just not something that we bring to our readers every day because the interest in the individual transactions is truly local and maybe regional in scope, but not national news in our profession.

What is “National” in scope about these transactions is that they are happening.  It’s been said for a long time in our business that there will be a large amount of funeral home owners wanting to retire with no family interested in following in their footsteps as the world of funeral home ownership changes.. . . . . . .From what I read and hear, I think that time is upon us.

Here are a couple of articles that I recently came upon that show some of the different types of transactions that are going on. . .

Funeral Director Daily take:  Charles Dickens wrote his classic “A Tale of Two Cities” in 1859. . . that’s a long time ago.  However, I think about that story when I read about funeral homes being bought and sold.  You see, I think the “Tale or story of your funeral home” might be the deciding factor in who will acquire it if you decide to sell and retire.

Tom Anderson
Funeral Director Daily

What matters to the different potential buyers is if you are located in a metropolitan city, or a suburban city, or a growing regional center. . . . or are you in a small isolated community with not much growth potential?  Wherever your funeral home is located the case can be made that when put it up for sale you will, more than likely be a target for some company. . . . but the tale, or story, of your funeral home will determine who that company is.

Metropolitan, suburban and regional center funeral homes in growing areas probably have great value and bring in multiple offers, but a single funeral home in a one fuenral home community that is holding its own with population stability will, more than likely, have some value to a neighboring community funeral home as well.

It appears to me that the companies that operate as “multiple funeral home” owners are continuously looking for more locations to ramp their economies of scale.  Every owner wants, for eonomies of scale, to have a situation where their case load per director is growing. . . And, I think as preneed sales become increasingly more important to funeral homes that will move firms to grow even faster to ramp up their numbers.

However, on the other hand, I’ve noticed some operators stop acquisitions for acquisitions sake. . . .These type of operators are making sure that each and every location that they purchase can carry profitability on its own.  That’s important too. . . especially as fixed costs are rising and one does not want to get caught with a business with high fixed-costs where the average retail sale is going down — especially if the business is not adding volume.

Anyway, I’m seeing businesses change hands.  And, the transactions are probably more complicated than they were ten years ago.   What’s at stake — especially if one makes a purchase mistake — is also larger and could be business and life altering if going-forward assumptions are wrong.  If I was looking to buy or sell I’d make sure that I had an expert such as Johnson Consulting Group in my corner.  They should be your first call when looking to expand or retire.

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