Build to Serve or Build to Sell?

Funeral Service Retirement Challenges

The funeral industry is dynamic and one where often the directors “build to serve” and overlook the importance of “build to sell”. The authors here provide an overview of the valuation and consulting opportunities.

[su_pullquote align=”right”]Resources:

Transition Planning: The Good, The Bad, and The Ugly

Exit Planning Considerations for Family Businesses

Exit Option Analysis: Helping Your Clients Understand and Evaluate Ownership Transition Options

Family Business Succession

Financial Planning for Business Owners

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The Funeral Service Industry has been around for ages, perhaps the “second” oldest profession and will continue in some shape or form beyond our lifetimes.  It is both a fascinating and sobering industry while providing a vital service to many.

Although the transition and succession planning challenges are not unique to funeral services, it is one of the most personal service professions that has and continues to feel the weight of the age wave.  Entrepreneur, author, and Inc. Magazine columnist, Norm Brodsky, once postulated that business owners should, “Build to sell.  Even if you don’t plan to sell.”  He went on to write that with selling in mind, you learn to see your business more like a potential buyer would see it.  You can “eliminate the weaknesses and elevate the value of your business.”  His thoughts parallel those of John Warrillow (in Built to Sell: Creating a Business That Can Thrive Without You), among others.

Funeral service generally runs contrary to the “build to sell” mentality.  In our years of working with funeral homes, the fundamental focus for funeral firms is to either carry on the legacy of generations past and/or to minister to client-families at their time of need.  Instead of “build to sell,” many funeral directors “\build to serve” and ignore the selling part until later—much later.  Sometimes too late, waiting until their own health or other events forces the discussion.

Indeed, this calling to funeral service has been the duty for many would-be funeral home entrepreneurs.  The anathema toward the F.T.C. Funeral Rule 33 years ago originated from a belief that funeral service was being targeted despite the caring nature of those unquestionably dedicated to serving families.  How dare someone question the integrity and dedication of those providing this often-thankless service?

Yes, a few bad apples back then spoiled the mental image many in the profession held in the face of questionable selling tactics and rare price-gouging at an emotional time.  Even today, changing consumer attitudes also threaten long held beliefs of what funeral service means.  Funeral service has repeatedly been told that “profit” is not a dirty word—often to help convince practitioners that raising prices was not “unholy”.  Costs rise each year as in any other business necessitating price adjustments.  The funeral business is not a social service subsidized by any government.  The business side of funeral service demands that firms remain profitable or close their doors.  The issue of profit leads us back to business ownership and building to sell.

Without a doubt, the service side of funerals is the top priority.  Do not deliver superior service and see what happens—a funeral home will not sustain itself or grow.  However, superior service without profit will not work either.

Logically the business side of funeral service focuses on the typical entrepreneurial aspects—such as building value, equity, and wealth.  Eventually all owners face that task of exiting their business, perhaps to a son or daughter.  For many owners, a sale to a key employee or an outside buyer represents the rational exit strategy.  For a few, unfortunately their own funeral service will be their last call as an owner, frequently leaving no instructions for their survivors.  Yes, even in this business of helping the living take care of the dead, some owners will die without taking care of their own living.

If the business operates profitably, one should be able to build personal wealth through a combination of reasonable compensation, profit sharing programs, or through annual distributions.  Wealth is not a dirty word either.  Building value, personal, and business wealth is one of the responsible goals of ownership.  Preparing for the inevitable is at least as important as preparing for a funeral ceremony.  If business owners do not prepare well, the results are disastrous.  That old axiom holds so true here—failing to plan is planning to fail.

Unfortunately, we see too many cases where funeral home owners simply chose to earn a living, a minimal salary just enough to live a lifestyle that would be meager compared to other professions.  The focus on providing a personal touch by funeral service professionals is admirable, however failing to take care of one’s own business will not help if the services cannot continue.  In our work, we have seen countless cases where some firms, typically smaller firms, have not built value nor personal wealth.

We considered four sources in our research on this topic: a Government Accountability Office (GAO) report on low retirement savings, AARP Bulletin about funeral directors, industry studies pertaining to call volumes and ages, and our own internal client statistics.

First, the U.S. GAO report from 2015 included references to low retirement savings.  The report concluded that 52% of households age 55 and older have no retirement savings in an IRA or company retirement plan.  The report also stated that 30% of households age 55 and older have neither retirement savings nor a pension.  This certainly indicates that many Baby Boomers are ill-prepared for their golden years.  We have seen client files and discussed many funeral directors’ experience with Baby Boomers making funeral arrangements; you can attest that many have limited funds to pay for their own funeral or even a funeral for their parents.

Secondly, an article in the January–February 2017 AARP Bulletin (10 Jobs Retirees Should Check Out) highlighted seven fields occupied by workers age 55+ as reported by Emsi, a labor market data firm.  At the top of the list with 42% of its workers 55 and older—you guessed it—morticians, undertakers, and funeral directors.  Tied for second place at 35% were museum technicians and conservators.

Thirdly, looking at recently published industry studies, we found that almost 50% of respondents were aged 55 and older.  Another general indicator of the age of those working in funeral service.

What is most interesting about the AARP article and published studies, is of course the age of those in funeral service.  However, what plans have those over 55 funeral service providers made related to their pending retirement?  The impact of retirement on funeral service itself is huge; there may very well be fewer experienced people to work.

Financial preparation for the actual retirement seems to be minimal from what we can see, following the lead of many Baby Boomers.

Finally, as you might expect, our own client study found that funeral firms at the top end of the volume spectrum tend to contribute higher amounts toward retirement and are more successful at building value.  Roughly 60% of firms in our study contributed more than $20,000 per year for retirement funding.  Of course, most of those served more than 400 calls annually.  This does not include the individual contributions made by employees/owners though, which could possibly double the total monies flowing into owner’s retirement plans.

However, on the other hand, our survey found that approximately 15% of all firms in our study recorded no expenditure for retirement funding.  Twenty-five percent (25%) of all firms expended $5,000 or less per year for corporate contributions.  Those firms serving less than 120 calls annually contributed $5,000 or less toward a company retirement plan.  According to the previously mentioned industry studies, we found that 50–60% of respondent firms served 150 calls or less, indicating a great number of respondents in the retirement funding trouble zone.

Our findings raise serious questions about the lack of exit or transition plans among current funeral business owners, especially those with lower call volume.  However, the lack of retirement funding inside a business raises questions about preparation for retirement and ability to transition, particularly when you consider that the net worth of most owners is wrapped up inside the businesses they own.  One industry observer speculated a few years ago that 85% or more of owner’s net worth is tied up in the after-tax value of their business.

It seems safe to say that many of the retirement-age funeral home owners will exit their business, either voluntarily or involuntarily, in the next ten years.  Unfortunately, some owners (especially, but not limited to, those serving less than 120 calls) may end up with retirement challenges.  A lack of retirement funds outside of the funeral business places more pressure on the sale of their business.  This can lead to unrealistic expectations, perhaps leading them to hold on to their businesses longer, well past their prime.

In our work with funeral directors, we see some amassing millions of dollars for retirement through building value and personal wealth.  We also see some who have little to nothing saved with limited options and retirement well off into the horizon, if at all.

These challenges are really not much different than those many small business owners face, regardless of industry.  When it comes to small, owner-led businesses, remember Norm Brodsky’s caution to build to sell.  The best of both worlds is to build to serve while building to sell.  The time to prepare for retirement and the ultimate transition is well before it has arrived.

Steven Egna has over 30 years of diversified financial leadership and management experience specializing in transition planning and valuation analysis of all sorts. He brings a practical, hands-on approach to all of his work. Mr. Egna is a Certified Business Appraiser™ (CBA™) accredited by the Institute of Business Appraisers™; a Certified Valuation Analyst® (CVA®) and Accredited in Business Appraisal Review™ (ABAR™) accredited by the National Association of Certified Valuators and Analysts™; he is also a Certified Merger and Acquisition Advisor (CM&AA®) accredited by the Alliance of Merger & Acquisition Advisors®.
Mr. Egna can be reached at segna@valuationresource.com or at (518) 479-1008.

David Nixon began working with funeral home owners in 1979. He is a Certified Management Consultant™ (CMC®), accredited by the Institute of Management Consultants, USA. Mr. Nixon is noted for his ‘Listening to Cremation’ annual cremation study, which was first published in 1995. In addition to his work on funeral home financial analysis, he also concentrates on strategic planning, FTC Funeral Rule Compliance, funeral home budgeting and pricing, as well as funeral business valuations. He also focuses on exit planning and the transition of funeral home owners with all the complexities involved in selling or buying a funeral home. Mr. Nixon holds a bachelor degree in speech communication from California University of Pennsylvania.
Mr. Nixon can be reached at david@nixonconsulting.com and (217) 483-7717.