What you need to know when negotiating contracts with
By Daniel M. Isard
My casket salesman was the best man at my wedding and has been my best friend for 20 years. He even let me sleep on his couch during my divorce. Last week, he presented a new contract with what he said is “the best discount anyone can get.” But the contract terms and conditions bothered me, so I’m hoping you will tell me that I’m being paranoid. I am getting ready to get married again and hope I don’t have to look for a new best man.
Signed, Casket Contract Concerned in Calistoga
Casket companies are businesses, and like any good business, they hire top-notch people at all levels to try to be profitable. Those that are publicly held companies also have an obligation to maintain shareholders’ value.
Over time, funeral homes have been very reliant on their casket companies for more than just funeral merchandise. Casket companies help funeral homes with preneed, technology, education and more. Casket salesmen are great at communicating facts and rumors in various proportions as they make their way along their routes. I believe this business has three methods of transmitting data: telephone, telefax and tell a casket salesman.
Like any good company staffed by good people, casket companies want to have contracts with their purchasers. I see many of these contracts, and over time, they’ve all developed a similar theme. I don’t like some of the contract terms and conditions, but that is because I represent funeral homes. After reading my reply, I fear you may want to find another person to be your best man at your pending nuptials. The other option is to postpone your marriage.
Before entering contract negotiations, many directors get competitive quotes from the casket companies. This action may seem fraught with conflict, but it is much like being the only girl at an all-boys school three weeks before the prom. A competitive bid process starts by you telling the casket sales reps – all at the same time – what units you sell (your existing supplier will know). Also let them know that the best prices will get your contract if the company can guarantee its pricing in its proposal.
Pricing starts as a “gross” price. The Unicorn Casket, for example, is $1,200. However, the manufacturer will then offer you a discount as a percentage of that price. Let’s say this discount is 10% of the gross price. This casket, therefore, has a “net” price to you of $1,080.
Some companies offer other incentives to the casket price by offering “rebates,” and some ask you to guarantee the number of caskets you purchase in a year to get this rebate. Some may even divide up their merchandise by quality of casket, and you will have to sell a certain number of one type to get this rebate.
You might also have to pay your bills within 30 days and agree to other qualifying acts to generate this rebate. C4, you may be asked to have a casket truck as a limo as you whisk your bride to your honeymoon.
The rebate is also presented as a percentage. For the sake of example, let’s say the rebate is 5% of your cost of the Unicorn Casket. Your cost, after discount, is $1,080. At the end of the year, assuming you’ve met your quantity purchase requirement and paid your bills in a timely fashion, you would get a rebate check of $54 for the sale of Unicorn Caskets.
Therefore, this one unit with a price list of $1,200 has a net-net price of $1,026 ($1,200/$120/$54). The combined discount and rebate are about 14%. Of course, your friend is probably adding the two percentages together and telling you the total discount and rebate is 15%, which is a math lie.
Contract terms typically start with length of the contract. In many cases, casket companies want the length of the contract to be as long as possible. Typically, they want you to believe that a five-year contract is usual and customary. Some will tell you it’s three years.
If you follow my admonition, the length of the contract should be the length of the pricing guarantee. How can you be expected to sign a contract for five years and the manufacturer be obligated to promise a price for only one year? This is akin to your minister asking you to “have and to hold for a lifetime,” but she only has to be “faithful” for one year. That will lead to your third marriage very quickly!
Another unusual term of a casket company contract is the guarantee, in which the companies will ask you to guarantee the number of caskets you will purchase each year. There are three reasons you can’t and should not make this guarantee:
- You don’t control mortality. In smaller towns, the Law of Large Numbers, a mathematical axiom that made slide rules relevant, doesn’t apply. The mortality rate of eight deaths per 1,000 population is accurate if we study the population of North America. The smaller the group, the less it applies. We all know that when flipping a coin, the Law of Large Numbers tells us that the coin will land heads-up 50% of the time. But when we flip a coin 10 times, it doesn’t always turn out that way. In studying mortality, the same thing happens. The smaller the population sample the less likely we see the probability as the result.
- You don’t control the changing cremation rate. Why would any publicly traded company that has been in this business for decades assume you are going to be selling more or the same number of caskets each year?
- You may not have designated these caskets in your preneed arrangements. If 20% to 30% of your calls are prearranged with another company’s units, you’ll be hard-pressed to make these sales with the new manufacturer under its new contract.
Let’s assume you sell 100 caskets in a typical year and serve 25 preneeds a year. If the preneeds are casketed arrangements, at best you will be buying 75 units from the new manufacturer. You may be buying 25 units from the previous manufacturer.
Casket companies are smart. They see that funeral homes change hands. I can tell you that 1 out of 20 funeral homes will change ownership each year for the foreseeable future. Some casket companies now write in their contract a guarantee that anyone who buys your business is obligated to continue the contract. Well, this is just downright unconscionable.
There are two ways to buy a business. More than 90% of all businesses are sold by “asset sale.” There are many reasons for this, but the main one is to limit the liability of the buyer to have to deal with any problems that occurred during the previous owner’s ownership. The seller cannot obligate the buyer to use any casket company or other merchandise provider. If a seller demands it, they will remain a seller for a long time.
A recent client who sold his business had a five-year contract with a casket company. When the company was notified of the termination of the agreement due to the sale of the firm, the casket company asked for the rebates and discounts for the past four years to be given back. This amounted to more than $125,000! This just isn’t fair. It’s like a life insurance company charging a premium for filing a claim on your policy due to death.
How many lawyers do you have on your full-time staff? If it’s fewer than one, you can’t agree to settle any disputes in a state other than yours. The big casket companies employ lawyers in almost all states. They can agree to settle a difference in your state, but you can’t agree to settle a dispute out of state. You can’t afford it and you don’t know the laws in their state.
While justice may be blind, judges are not. Local companies usually have an advantage in state courts over out-of-state litigants. There is a reason they put this clause in their contract. C4, if you don’t care about this, then get married with a prenuptial agreement stating that your bride-to-be’s mother will arbitrate all problems.
For me, the only way to negotiate with casket companies is by dealing with an annually renewable contract. Most contracts say they automatically renew if you don’t notify them of a cancellation before the anniversary date. I have another client who canceled the contract with the casket company two months after the contract’s end because his firm wasn’t reminded of the end of the term until two months after the end of the contract. The casket company wanted $25,000 from him due to failure to cancel in a timely fashion. But the good news, the company reported, was that if the firm signed a new five-year contract, it would waive the penalty.
C4, I get the fact that you need to get gossip on a regular basis. I understand you have to have baseball tickets for opening day and don’t want to pay for them. I fully understand wanting a best friend, as do the other 120 funeral home owners on your buddy’s turf. I can only imagine how many of those people have slept on his couch.
Now is the time to be honest and straightforward with your sales rep. Tell him you’ve been seeing another casket salesman, that his gossip is more accurate, his baseball tickets are better and he only wants a one-year contract.
Dan Isard, MSFS, is president of The Foresight Companies, a Phoenix-based business and management consulting firm specializing in mergers and acquisitions, valuations, accounting, financing and consumer surveys. Isard can be reached at 800-426-0165 or email@example.com. For copies of this article and other educational information, visit theforesightcompanies.com.
Financial and tax advice contained in this article is for informational purposes only and may or may not apply to your individual position. Readers are strongly encouraged to seek the counsel of qualified advisors before undertaking any action based on this information