How to Value a Funeral Home
Funeral homes provide a variety of services and products for those who are preparing for funerals. This includes funeral planning services, funeral merchandise, body preparation and burial, cremation, and transportation. An industry report on IBIS World notes that the funeral home industry generates over $3.8 billion in revenue each year. Moving forward, the industry will likely experience healthy growth. This is ideal if you are looking to buy, start, or expand a funeral home. However, this industry is extremely competitive. As such, it can be difficult to establish a successful funeral home. Whether you are entering or exiting the funeral home industry, it is helpful to understand how to value a funeral home.
The best way to learn how to value a funeral home is to obtain a business appraisal. During a business appraisal, a valuation analyst helps you understand the fair market value of a funeral home. Additionally, they may discuss the strengths and weaknesses of your funeral home. With this information, you can begin to increase the value of a funeral home you are buying or selling.
Peak Business Valuation, business appraiser, frequently works with funeral home owners. We are happy to provide you with a business valuation and discuss any questions you may have on how to value a funeral home. Get started today by scheduling a free consultation with Peak Business Valuation!
How to Value a Funeral Home
When deciding how to value a funeral home, business appraisers consider various valuation approaches. The most common business valuation approaches are the market approach and/or the income approach. Both methods are effective for valuing a funeral home, however, each method uses a different basis of valuation. During the valuation process, a valuation expert will determine which method is best for your funeral home. This often involves using a combination of valuation methods.
Valuing a Funeral Home Using the Market Approach
The market approach is common when valuing a funeral home. To understand the market approach, consider the real estate appraisal process. When valuing a property, real estate appraisers assess similar homes that recently sold in the area. This helps them accurately determine the value of a property. When a business appraiser values a funeral home using the market approach, they assess similar businesses that recently sold on the market. If the funeral home is a private business, the expert refers to private transaction databases for relevant information.
Multiples for a Funeral Home
Valuation multiples are a defining characteristic of the market approach. Multiples are financial ratios that assess value based on various financial metrics. These metrics often include cash flow, revenue, or earnings. To determine the proper valuation multiples for a funeral home, business appraisers apply the appropriate NAICS or SIC code. Below, we highlight the basic valuation multiples for a funeral home.
SDE (Seller’s Discretionary Earnings) Multiple for a Funeral Home
- The SDE multiple measures the value of a funeral home in relation to its seller’s discretionary earnings. This valuation multiple is common when valuing a funeral home.
EBITDA Multiples for a Funeral Home
- EBITDA multiples reflect a funeral home’s earnings before interest, taxes, depreciation, and amortization. This indicates the return on investment or ROI a funeral home can expect.
REVENUE or SALES Multiples for a Funeral Home
- REVENUE or SALES multiples measure the value of a funeral home based on the total amount of revenue it generates. This valuation multiple is less common when determining the value of a funeral home.
To learn more about how to value a funeral home using the market approach, see Valuation Multiples for a Funeral Home.
Valuing a Funeral Home Using the Income Approach
The income approach is another popular valuation method for valuing a funeral home. This valuation approach assesses the future income potential of a funeral home. In addition, the income approach considers any risks associated with buying or selling a funeral home. Below, we highlight a few common risks that a business appraiser may consider when valuing funeral homes.
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- Regulatory Compliance: Funeral homes are subject to numerous state and federal regulations. It is vital for funeral homes to be aware of and comply with these regulations to operate.
- Competition: The funeral home industry is very competitive. To succeed, operators must differentiate their services from other funeral homes.
- Machinery & Equipment: Funeral homes use a wide variety of machinery and equipment for funeral preparation. It is important to acquire reliable equipment to establish a successful funeral home. When valuing a funeral home, a machinery and equipment appraisal may also be important to obtain.
- Key Personnel: Funerals are special services and they can be complex. As such, it is vital to hire individuals who are skilled and experienced in the funeral home industry.
Methods to Value a Funeral Home Using the Income Approach
Under the income approach, there are two common valuation methods to value a funeral home. They are the capitalization of cash flow method and the discounted cash flow method. Both of these methods assess the value of a funeral home based on its future income potential. Below, we discuss how to value a funeral home using the capitalization of cash flow method and the discounted cash flow method.
Capitalization of Cash Flow Method
- The capitalization of cash flow method is generally used for funeral homes with long and stable histories. When using this income approach, business appraisers determine a reasonable amount of income for one period. The income is then divided by a capitalization rate which represents the rate of return that a business can expect. The capitalization of cash flow method also considers the risks associated with a funeral home.
Discounted Cash Flow Method
- The discounted cash flow method is best for funeral homes with strong financial histories and reliable forecasts. This method involves projecting future income over a 3-5 year period. The income is then divided by a discount rate which takes the time value of money into account. This method is less reliable due to the subjectiveness of forecasts. As such, the discounted cash flow method is less common when valuing a funeral home.
Summary
Business appraisers consider various valuation approaches when valuing a funeral home. At Peak Business Valuation, we often rely on the market approach and/or the income approach to value a funeral home. To understand which method is best for your funeral home, obtain a business appraisal. As part of a business appraisal, valuation experts assess the risks and opportunities of a funeral home. In addition, they will calculate the fair market value of a funeral home you are buying or selling.
Peak Business Valuation, business appraiser, values many funeral homes throughout the country. We are happy to provide you with a business valuation for a funeral home. In addition, Peak can answer any questions you may have on how to value a funeral home. Start today by scheduling a free consultation with Peak Business Valuation, business appraiser!
For more information see Valuing a Funeral Home, Valuation Multiples for a Funeral Home, and Value Drivers for a Funeral Home.
