In the UK and Ireland, a majority of independent funeral homes are handed down to the next generation of the family or purchased by larger funeral chains for investment purposes.
Due to the nature of the business, the funeral industry will always be a reliable investment as there is a consistent stream of potential clients and income to be made. The funeral business is largely unaffected by the financial climate unlike the majority of other industries which see their income ebb and flow with global economic trends. As with most financial investments, buying a funeral home (whether it is pre-existing acquisition of a home or starting up a new one) relies on a long term commitment to both legacy and new clientele.
The post will predominantly angle towards the acquisition of an existing funeral home rather than a new startup business. Most commonly, these acquisitions are made by another funeral home director looking to expand their portfolio or a current employee at the home being sold who is keen to take ownership. The article below examines how best to go about buying a funeral business, what are the key factors in how to do so and also what are the potential pitfalls that some new investors to the industry may face. However, this is not intended to provide financial advice for an investment and you should not rely solely on the advice provided in this post before making any important business decisions.
Research Research Research
For a prospective buyer of any type of business, it is important that extensive research is undertaken before jumping into an investment. Market research is critical before making a purchase in the funeral industry as the location of the home is a key factor in the success of the investment. The primary concerns of any investor into the funeral industry should be researching the following factors:
- Locality - This is very important for the purposes of reviewing the population demographics of the surrounding areas. A good location for the business will unlock the potential for new client growth whereas on the flip side, a poor location leaves the business lagging behind the competition. Nowadays clients are looking for convenience in everything they purchase, from the locality of the branch to the ease of planning the funeral itself. A Competition and Markets Authority (CMA) study of the funeral industry consumers found that 1 in 7 respondents chose their funeral director because (as they saw it) it was the only home available locally.
- Profit Margin vs Local Going Rates - The locality of the branch is important on a smaller scale i.e. in the high street vs the outskirts of the town. However, in the bigger picture, the geographic location of the business will determine the local going rates and profit margins available to the funeral home. For example, the cost of a funeral in Central London will be very different to one organised in the North of England. Whilst the local business rates and rent may be higher, the margins for profit available on the funeral extras is likely to be significantly more too. New investors will have to ask themselves several questions that juxtapose the financial benefits of the location - Is this funeral home in a location that i’m happy to live and work? Will this fit in with my existing lifestyle? Does the area (or the existing home set up) have the proper staffing required to expand the future vision of the business? If you run a successful funeral home, you will already have good knowledge of the profit margins available to you for funerals and extras. However, it is imperative to know the local going rates as they could differ drastically to the market that you currently operate in.
- Existing customer base - When acquiring a funeral home, it is important to establish the nature of the existing customer base and examine the home’s annual income/profit margins. As with any trade acquisition this should be transparent in the accounts of the existing business. Reputation is everything in the funeral industry, hence why so many independent and family run homes have been running for many years. The CMA consumer survey also found that those with a choice of funeral director tended to use one already known to them (57%) and/or recommended to them by a personal contact (19%). Around 1 in 12 (8%) of the respondents had found out about their funeral director through local knowledge or word of mouth. These figures emphasise the importance of the home’s existing reputation and client base as a measure of the future business potential.
- Competition - Analysing the local competition is essential to understand what percentage of the market the home shares. Knowing what the competition does and doesn't do well within that market allows for greater understanding of the potential to expand the business. If a local market is already saturated with several funeral homes and the local population levels do not correlate with the demand for the business, that is a significant red flag for the investment. If as a current funeral director you are looking to expand your chain of homes, consider the potential cannibalisation of future sales following the purchase. Review the locality of the new branch with your existing branches because you may end up competing against yourself in a given catchment area. Is the demand in that particular local market enough to increase sales incrementally or are you just providing more competition between your own branches?
- Cremation vs Burial ratio - To better understand the business, it is important to review the cremation vs burial ratio in the local area. Burials are traditionally more expensive funerals and thus can be more profitable for funeral directors with so many more extras available to the client. To understand the future of the business it is important to evaluate the trends of the cremation rate and how quickly it is rising in that area. If you are already a funeral director, compare your home’s existing data available to you with that of the prospective business. For example, the cost of cremation fees differs vastly from £1070 in Beckenham, Kent to £392 in Belfast. Here is a league table provided by cremation.org.uk indicating the differing cremation fees by area in the UK.
- What do you get for the price - It is important to understand exactly what the deal includes when it comes to the home takeover. For example, does the price of the takeover involve the real estate too? Or is it just leased to the business? When reviewing the cost of the purchase, it is important to account for the digital assets of the business too. Some funeral directors will have already invested into digital marketing, promoting the business across various digital platforms. They may already have a trademarked logo, domain for their website and excellent ranking on local search engine results. Contrary to that, a business that has not modernised their marketing for many years will require a significant digital investment to compete with more digitally advanced competitors. Don’t just focus on the physical assets of the business, ensure you check the digital assets that are part of the deal too.
- Realise potential and cost savings - In addition to ways of expanding clientele and increasing the income mentioned above, identifying potential cost savings in the business is a sure fire way to boost profits. Many funeral homes have been run in a traditional way, with legacy systems in place that are very inefficient and a new investor can identify these opportunities to improve the business immediately. By making immediate changes in how the day to day operations are run - introducing a more modern funeral management system such as Obit for example, will streamline processes and create immediate efficiency savings for the funeral director.
- Outstanding prepaid funeral plans - When reviewing the accounts of any business prior to a takeover, any potential debt that comes along with the company can be a dealbreaker. In the funeral industry the most forgotten “debt” that will be transferred to the new owner is that of the prepaid funeral plans. In this instance, the money has already been received by the company but the new owner acquires the liability of a funeral in the future without the income. When negotiating the price of the acquisition, ensure that there is full transparency on how many prepaid plans exist within the company. Consider deducting a figure from the asking price, based on the expenses of arranging these funerals in the future. However, it is also worth checking if the funeral home has an escrow account in which they have accrued the funds from the prepaid plans. A financially stable operation is more likely to already have this in place but it is important to establish how the prepaid plans have been accounted for in the business accounts. Escrow accounts may be held by the funeral home itself or be provided through a third party company such as Golden Charter or life insurance companies such as Aviva. In these cases, the prepaid plans can be considered as assets for a potential buyer as they will provide guaranteed income for the future.
So where do we begin to look for a prospective funeral home to purchase? Check the newsletters and websites of the leading funeral associations in the UK and Ireland, quite often they will provide an insight into which funeral businesses are currently for sale. There are no specific funeral home brokers in the UK currently dedicated solely to sales in this industry. There are however, a number of websites dedicated to the purchasing of businesses of all sizes in all industries. These include:
The acquisition of a funeral home can be a great investment, particularly for an existing funeral director that knows how to run a successful business in this industry. Those who have the time and funding to invest may find success in overhauling the antiquated operations in a particular home. Other investors may want to invest in a modernised business that only needs a few tweaks in their operations to improve the home’s success. There are some great investments to be made, it is important to account for all of the research points listed above to find the right fit for you.