Ask the Analyst: Don’t Get Caught Without a Plan

As we collaborate with our clients on their business operations, one of the components that we always factor in is creating a proper your succession plan early so that you are prepared well in advance of your transition out of the profession. Planning for your future now is vital. We asked Senior Associate, Jarod Bernat to share his insights on how the importance of a succession plan for a funeral home or cemetery business.

Question: I do not have a succession plan for my business created yet. Do I really need one?

Jarod Bernat: It often seems that within our profession, “planning for the future” takes on a different meaning than it does to the rest of the world. The funeral and cemetery profession is dominated by devoted servants to their communities who plan their lives and their businesses one year at a time. Since this line of work is 24/7, it is rare we ever get a chance to take a breath and plan our future out over a 5-10-year timeframe. This is exemplified by the fact that the average age of a funeral home owner is nearing 60 years old. Combine that with the fact that, per the NFDA Member Succession Planning Study, 46% of owners plan to sell or transition their business within the next five years, yet only 29% have a plan in place to do so. The remaining 71% of owners who plan to sell in the next five years fall somewhere between “I have a good idea of who can take over the business” to “The next owner of my business will be determined in my will”.

To give context to these percentages so you can understand how alarming this disconnect in planning truly is, SCI’s 2022 Investor Day Presentation estimates that there are approximately 22,000 funeral homes in North America (US & Canada) and 80% (17,600) are independently owned. Therefore, if 46% of these businesses are expecting to change hands in the next five years, it is implied that over 8,000 funeral homes will experience a change in ownership in that time (~1,600 per year). Then recall that only 2,300 of these 8,000 businesses have a plan in place to facilitate that transition of ownership. So, it is expected that 5,700 businesses are facing an uncertain future or are simply unprepared for the inevitable.

The only way to not find yourself in the group of the ill-prepared is to make a plan. Whether you are part of the 46% of owners that plan to sell in the next five years or not, creating a plan is key to securing your future. A plan should consist of the following key items:

1. A Business Valuation: This provides a benchmark for the current value of the assets you command and can transact to fund your retirement at a later date. Additionally, a valuation should give you an understanding of how the business currently operates in order to identify potential opportunities within the operations (levers to pull to increase revenue, expenses that are unnecessarily high, or expenses that do not provide the return you expected).
2. Your Personal Financial Analysis: By mapping out your expected financial needs in retirement (monthly expenses, vacation expenses, educational funding for children/grandchildren, etc.) you will garner a better understanding of the value you will eventually need to capture in the sale of your business to cover your anticipated lifestyle. This way, if your business valuation is significantly below your expected financial needs in retirement, you may need to seek out more aggressive growth opportunities like acquiring additional locations.
3. Key Employee(s): The employee who is key to business operations is also the key to your retirement. By not only identifying which of your employees is capable of managing the business post-sale, but by training them to do so BEFORE you retire, you will set yourself up for the greatest success. This gives you the opportunity to start slowly phasing yourself out of day-to-day operations and to start enjoying the fruits of your labor before fully retiring. Additionally, when the time finally comes to sell your business, having post-sale management already in place only increases your business value. And in many cases, this key employee might in fact be the successor of the business. Giving them the reigns to the business before they take ownership only increases their chance of success in the future, and in turn, ensures your legacy carries on for another generation.
4. Consideration of Potential Buyers: One of the final considerations you will need to make is who you choose as your successor. Choices are abundant, and they each present different pros and cons to your succession plan. Whether you look towards the public/national acquirers (SCI, Park Lawn Corporation, Carriage), large private acquirers (Everstory, Foundation Partners Group, NorthStar Memorial Group, Legacy Funeral Group), smaller regional consolidators, local independent buyers, or family members/employees, all of these options come with different benefits and limitations. Therefore, it is important to carefully consider who you plan to partner with and align your business with their acquisition criteria.
5. Professional Direction: And no, this is not a shameless attempt to plug Foresight’s succession planning services, but it is vitally important that when you layout the plan to secure your future, you seek professional guidance. A business consultant can assist you with the initial valuation of your business, help you strategically improve operations to build value in the years to come, and then eventually help you cash-in on the value you have built at the time of sale. Financial planning professionals can guide your retirement planning to help you determine what is truly needed in order to achieve financial independence. And lastly, attorneys can draft buy/sell agreements that set mechanisms in place to trigger the transition of ownership whether that is due to reaching a predetermined retirement age, becoming disabled, or passing away.

As the current generation of owners start to retire, statistically speaking, thousands of owners will find themselves in the group that is not prepared to transition their business properly. Being forced to sell your business abruptly without prior planning can have a detrimental impact on you mentally, physically, and financially. On top of that, this negative impact can permeate through to your heirs, employees, and the community you serve. So I challenge you to take action today. Do not delay the inevitable and become part of the negative statistics we see all too often plaguing our profession’s leaders. Secure your future, secure your retirement, and don’t get caught without a plan.