We have now learned about 3 key variables in arriving at a value for your funeral home:
- What a multiple is and where it comes from
- What is EBITDA and why do we use it
- How to “normalize” your financial statement presentation
Now we will pull all this together so you can begin to play around with your own numbers to calculate a “ballpark” guess (I use these words intentionally) of what your worth.
But first an aside. I want to thank all my readers and followers for your patience during my recent hiatus. I try to publish this commentary weekly but didn’t anticipate the amount of preparation necessary for the NFDA convention. My responsibilities as incoming Chairman for The Funeral Service Foundation, presenting at two sessions and other exhibit floor duties interfered with my commitment to you. I learned that all major conventions are attended in three phases (especially for those with other duties). Preparing for the convention, attending the convention and, finally, catching up on all the work you didn’t do while you were at the convention. Thanks for your patience.
Now back to our subject. The range of purchase multiples I hear most frequently today is 4 to 6.5 times EBITDA. For your amusement let’s assume that the neutral point or average multiple for a decent but unremarkable firm is a multiple of 5 times EBITDA. There are several factors that will move the needle either above this figure or below it. These factors are not interdependent and any given firm is likely to have a combination of both positive and negative factors.
Factors that move the needle up
- Strong management with non compete agreements in place who will stay on
- Dominant or near dominant market share that is stable
- Market share that has been consistently increasing over the past 5 years
- large volume size (probably greater than 300)
- Strong sales mix (burial vs. cremation)
- Located in mid to large city
- Strong local brand awareness
- Competitors with a consistent history of laziness
- Facilities and rolling stock which does not need urgent capital investment
Factors that move the needle down:
- Decrepit facilities and rolling stock
- Weak management that insists on staying on
- Strong management that will not sign a non compete agreement
- Declining market share
- Firms below 300 in volume
- High cremation rate or cremation rate increasing more rapidly than the national average
- Poor financial statements
- Unrealistic expectations or demands
- Preneed fraud
There are, of course other factors but these are the most common. If any of you readers can think of others throw them in the comment section and add to this conversation. Also, you should be aware that the multiple for what I call mega firms or regional consolidators can be much higher. The ceiling for these firms seems to be somewhere around 8.0 to 8.5 times EBITDA. I am not sure where the cutoff for this class is but I think it is safe to say it is probably in excess of $10,000,000 in revenue. (just guessing)
So, you have looked at your market factors and you feel the needle is probably above the average rather than below it. You have determined that your EBITDA is somewhere around 23% (I made that up but it should be between 20% and 30%). You serve 350 families a year with an average sale of $6,750 yielding net revenue (remember to ignore your cash advances) of $2,362,500. At 23% EBITDA is around $543,000. Let’s look at what would be a good “ballpark guess”.
EBITDA Multiple Value
$543,000 5.5 $2,988,563
$543,000 5.75 $3,122,250
$543,000 6.0 $3,258,000
Now throw the “Magic Valuation Dart” at our results and I bet you would agree that your firm is worth in the neighborhood of $3,000,000 (or more). Keep in mind this is the gross value. What you put in your pocket will be after you have at least paid off the long-term debt as well as the ubiquitous Mr. Tax Man. Also keep in mind that this price INCLUDES the physical assets of the firm (land, buildings, rolling stock, equipment, your antique car [just kidding]). If you prefer not to sell the real estate and, instead, lease it to the buyer that may have a material effect on the price. But now we are getting complicated and that is the reason that true and reliable (not guesses) valuations are done by professionals who have both experience AND comparables.
If you follow valuation theory or current writings on the subject you have encountered, from time to time ,experts who have devised nifty “multiple calculators” by giving weights to the various factors affecting the choice of multiples. I may, in fact, do this myself some day if I am exquisitely bored. They start with a base “safe” rate which is frequently (but not lately) the 10 year treasury bond rate and then add or subtract points to that. For instance: If you serve 700 families a year you might add a quarter point to the multiple. Conversely, if your market share showed consistent decline you might subtract half a point and so on. The problem with this approach is that it is really cloaking subjectivity in the garb of scientific accuracy. Like every individual, every business is different and a professional valuation is a combination of math and professional judgment and experience; with emphasis on the judgment part. If it were mathematically scientific then every expert would come up with exactly the same number every time. That’s my opinion and I am sure some valuation experts would resent my opening the kimono but that’s the way I see it. After all, even the valuation textbooks define value as “what a willing buyer will pay a willing seller.” Where is the science in that?
While I have experience in business valuation, I am not a Certified Business Appraiser. The explanation and comments contained herein are my own. After some extensive research I have chosen to affiliate with Johnson Consulting Group for these services. In my opinion, among those firms specializing in DeathCare, JCG is the premier business appraiser with the widest range of comparables and deepest level of experience. If you are interested in having a professional valuation done or just exploring your options you may contact me directly at 919.926.0688 to coordinate their service.