Author: Alan Creedy

First, it is important to say that ignoring the current social media trend is akin to ignoring the increasingly vital need to have a viable website. Second, one of my concerns (but not the subject of this article) is that being active in social media like Facebook and Twitter has the potential to mislead many funeral directors relative to actual effectiveness, at least at this stage of its development. Here is why: the standard FD Litmus test for advertising effectiveness is having friends and family say, “I saw your ad.” Of course, if they say, “I liked your ad.” Then you can be sure it will become a favorite. The problem is that your family and friends don’t die that often and they were going to use you anyway…hopefully.   My personal Litmus test for advertising is whether it makes the phone ring. And, to be sure, more than a few funeral directors have told me that they have gotten calls and / or preneeds from their Facebook page. So, with those disclaimers in mind:

I have been on Facebook now for almost 2 years. Facebook tells me I have 268 “friends.” I don’t know many of these people because I didn’t know in the beginning that it was not considered impolite to refuse someone’s friend request. I have Facebook linked to my smart phone so while I am waiting in the doctor’s office or in the airport I thumb through the updates. I admit I am charmed by Arvin Starret’s quips and intrigued by the seemingly free spirit life of Brad Speaks.  But those are the exception. I find it inane to know whether someone is or is not at work… A little strange to learn that someone is flipping pancakes at the Rotary breakfast or taking their kids to McDonalds. On the other hand I do like the funeral homes that announce that they are “Honored to be serving the Smith Family today”.

What I dislike the most is those who use social media for advertising. I joined the NFDA discussion group hoping for some real discussion. After 4 months I unsubscribed. In all that time there was only one viable discussion question. All the rest were fringe promoters trying to hawk their product, service or “world-changing” idea. I, for one, will be glad when the Kate-Boylston seminar is over. I am sure it has helped them build attendance and I don’t blame them for it. But enough already, it’s starting to feel like the political advertising that we are all so glad to have behind us.   Harry Beckwith in his excellent book, “What Client’s Love,” observes that “You cannot intrude in  customers lives.  The more you intrude the more you annoy.”

To my point: Why is Social Media kinda like wearing your underpants on the outside?

Because it makes the SENDER more important than the RECIPIENT. It’s all about me and not enough about them. If, in fact, it is a new way to build your business then how does it communicate what’s in it for the buyer? What compelling value proposition is there? Other than the fact that you are out there, what differentiates you from the pack?

I am anticipating strong response to this article. Help us all figure this out. How can we make social media more about the recipient than the sender?

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.

Final Thought:

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?

Disclaimer

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.