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Jake shares his valuable insights into funeral home mergers and acquisitions – and the higher-than-normal multiples that are being offered for the right funeral homes.
For more information about the Johnson Consulting Group, check out the website or contact Jake at jjohnson@johnsonconsulting.com or at 1-888-250-7747.
See the complete transcript here:
Rob Heppell:
Welcome back to the Funeral X podcast. I am Rob Heppell, and I’m joined by my Funeral Results business partner, Jake Johnson. Hey, Jake, how are you today?
Jake Johnson:
Hey, Rob. Good.
Rob Heppell:
Hey, Jake, it’s been good kind of going back. We’ve been telling the folks some of the background of our businesses and how we’ve come together to work together, but I’d like to kind of interject a topic that is quite timely right now with mergers and acquisitions. I know there are lots of things going on and who better to talk to than you about that. So maybe give just a very brief background of the experience between your dad and then yourself, and then maybe talk about today’s climate.
Jake Johnson:
Yes, absolutely. It started with M&A experience within my family started with my father back in at Pierce Brothers when they expanded Pierce Brothers, and then on to when my dad started his own acquisition company and spun that up and then sold and retired, but he gained a lot of experience in multistate funeral business ownership and acquisition analysis and multiples and things like that. And then for me, I followed in those footsteps and started in Tampa, Florida at Keystone Group and then got some boots on the ground experience but always with the finance and accounting background and interest. So then that’s what we brought to Johnson Consulting, and why we’re very popular as an M&A broker company in the funeral space.
Rob Heppell:
Great. Now let’s maybe talk about what’s happening right now because there has been some activity, quite a bit of activity lately. And then maybe then go through a little bit of what would you recommend for people who are thinking about maybe putting their funeral property on the market even though it may not be immediate. What are the things to kind of get ready for to make it as successful as possible?
Jake Johnson:
Absolutely. And the first thing is that most feel like it’s on the market if you will quote that it’s all for all to see, but in this space, it’s confidentiality. And privacy is very important because it can be very disruptive. And in this industry, profession has small ears or big ears and everybody hears about things. So the things to prepare for though, I’ll start off with just what we’re seeing. It’s definitely since… Let’s see. They had done it since the ’80s and then me since the mid-’90s. These multiples are as high as I’ve seen since maybe the late ’90s in funeral service. So I think what’s driving that is you got high call volume. It’s a transition time for small businesses with the next generation, the baby boomers looking to retirement. And then also the baby boomers, ironically, being also being part of that cycle of people passing that’s possibly a good cause of what the added case volume is, along with COVID, of course.
Rob Heppell:
So, Jake, you’re telling me that… Because I know that we’ve been hearing this for 10, 15 years about like the big death boom. The stories that were told to me were that some people predicted it way too early. But you’re saying now that we are finally here. We’re starting to see a little bit of that swell.
Jake Johnson:
Yes. We know it was coming, and I think we’re seeing a beginning of that swell. I don’t know how sustainable it is, but right now, it doesn’t seem to be slowing down. And they’d probably be… I’ve heard people speak of two waves of it, I think. This could be the beginning of the first wave of it. I don’t know, but there’s no doubt businesses are up. They’re busy. There are COVID-related cases but that busyness has… Here’s what it’s done to the value of businesses. You’ve got high call volume years. It’s hard to find staff. We all know that. So people are pretty beat up. They’re go really working there what’s off. And probably since COVID started in the early 2020, their focus has been on just handling all this, and it hasn’t been on the other things, the day-to-day stuff. For some, yes, but for most, it’s like just handling what they’ve got in front of them.
And so as it becomes more of a norm and more manageable for some, they’re saying, “Wow. I was thinking about doing something next three to five years. It’s very busy. I’m a little tired.” They always say to go out when you’re up. And so when you had all that together, so you had kind of pent-up demand from buyers wanting to buy funeral businesses, but nobody was really thinking… That wasn’t the first thing on their mind in 2020 during COVID, but now, they’re surfacing, and it’s on their mind, and they’re busy. And so it’s with the buyers sitting there waiting. They’re kind of fighting over businesses in a way, depending on where they’re located and the size of them. So it’s really driven up the value of these businesses.
Rob Heppell:
Well, hey, Jake, that’s great kind of background. I was just wondering just to find out because I’m sure other people are thinking that because I am. What were the multiples back in the ’90s that you were talking about, and what are they today? And I know there’s going to be differences but just a range for people’s curiosity.
Jake Johnson:
Yes, absolutely. As you know, there are so many variables, so it’s all based on what we call EBITDA, earnings before interest, taxes, depreciation, amortization but it’s… What that’s meant to be, it’s meant to be such an important number because it’s meant to show the cash flow producing capabilities of a business, in this case, a funeral business, to be able to take on new debt. And so you come up with that number, and that’s the first variable. What is it looked like to you internally? What is it looked like to the buyer externally? We have to think about the fact that businesses can be more strategic for one buyer to another. And when you look for find and actively pursue a strategic buyer, there’s no doubt that their EBITDA is going to be different in to your benefit.
And so, you first consider the variations of EBITDA. And the buyers, whether they’re strategic or not and what they plan on doing with the business. But when you take all that consideration, if you want to normalize that out and take… Gosh, we’ve done, I believe, about 2 billion in transactions. And so if I were to normalize all those and use those EBITDAs as an example, I would say in the ’90s, you would consider six times, multiple six and a half would kind of get up there, seven. I believe that there were some deals I would see that were eight in my world as a buyer, appeared to be eight times EBITDA. And so when you… And that was just on any business, it didn’t matter. It seemed like big, small, what have you. And that it proved to be a little dangerous for our profession. And we went through some troubles there as the acquisition companies digested those or not or didn’t digest them and rather divested them and cleaned up some mess of the overspending, if you will.
So now you’ve got today. It is more discipline. It’s not like these big multiples are going for any business that’s out there, but these big multiples are going for the businesses that are strategic or good platforms in a market or good name recognition what have you. And so those multiples today now… Gosh. I mean, they could be as high as seven, eight and nine times for EBITDA. That’s very high for funeral profession when you consider that what always seemed to be a high multiple that you ever heard out there for businesses was like 10 times for a software company. So when you’re hearing eight, nine times for funeral business, that’s pretty high.
Rob Heppell:
For sure.
Jake Johnson:
That’s not to say every listener that here, this is going to get that type of multiple, but it’s out there, and it certainly would say that you’ve got something possible that wasn’t there before.
Rob Heppell:
Great. Now just a couple points there, Jake. One thing, could you just maybe describe the difference between just a regular valuation for someone who’s going to buy a company and then run it turnkey versus a strategic buyer? What would be an example of a strategic buyer?
Jake Johnson:
Correct. So you have all types of transfers, right? You’ve got in ways in which a business is bought and sold. So you have the most normal or regular one that you see where the business is bought with real estate. And then you have those that are bought where they lease the real estate or somewhere, they just buy the business and absorb that into the funeral, the competing funeral home and the real estate sold deed-restricted and sold as something else. So all of those bring different multiples, as a matter of fact, even in today’s market. The differences then if we go to the more typical evaluation that’s done where the real estate’s included, you then have… Is it being transferred to a family or a friend or a key employee? Is it going to be transferred to an outside buyer? And these are different ways to look at it because you’ve got one buyer that’s going to typically have the expenses of accounting and other administrative costs that may be rolled up to their corporate offices, and so the cash flow may be higher, but it just depends on who the buyer is.
Certainly, when it’s an internal transfer from one brother or sister to another brother, sister, or a key employee, there are going to be expenses in there that would not exist on a valuation that might be to an outside buyer.
And so, what we’ve done make sure that it’s all fair to both sides is that we really will run two budgets, if you will, two performers. You’ve got an internal one for the continuing owner that’s going to continue forward and what their expense structure looks like. And then you’ve got for the seller to see in the buyer for both to see what like a marketing performer would look like where you’d probably reduce more of the…
Or you would reduce more of the owner-related items and administrative expenses that might be outsourced to a bigger buyer. And we call it the two-column approach. And so when you put those two columns together, what you’re trying to do is…. What you want to do is you’re making both sides understand the other side’s perspective on how they’re going to be successful. One side wants to make sure they don’t sacrifice too much value for what they’re doing, and the other side wants to make sure they’re not buying something that they were not going to be able to run from an expense standpoint. And it offers a nice, fair approach, because as I always say, if the deal is done right, both sides should feel like they gave up something. And if one side got everything and the other side didn’t, it’s going to ruin Christmas in a minimum or the holidays. Or quite frankly could cause the business to fail because it’s just a different expense structure.
So just have to be real careful. The one thing that that can be forgotten is that a lot of these businesses, they’ve been around a lot of years, and so their debt structure is a lot more minimal than a new buyer at a high multiple would put on there. And so it’s possible buy the business that way, but you got to be careful about what we call a fixed charge coverage. But certainly how much cash flow is going to be left after you’re paying this new debt, and are you used to running the company that way. So it’s just some things to think about.
Rob Heppell:
For sure. So how does it work when you have… Let’s just say we have a third-generation owner and then the fourth generation’s coming up and maybe wanting… The third generation’s going to retire and think of succeeding the business to the next generation. Is there ever an opportunity or a situation where if they’re thinking, “Oh, we want to do this in three or four years.” And if, let’s just say the fourth generation, they’ve got lots of energy, and they’re going to start to really work hard. They’ve taken over some of the reins of the business, so they can have a direct impact on the business. But if the actual sale doesn’t take place, say for three years, and then they’ve worked hard, and they’ve grown the business, and they’ve increased their averages, increased the market share, are they running the price upon themselves? And how do you have that discussion to make sure that they still try to continue the business? Although if it’s too successful, that fourth generation is going to be basically paying for their own success. Does that make sense?
Jake Johnson:
Absolutely. It does. I mean, I experienced it myself with Johnson Consulting Group. My father started the company out of retirement and wanted to stay retired. And so he brought me in and with the promised to transfer the business over, which he did. And it was when we still had to get evaluation done. And the valuation was largely built on a lot of hard work I’d put in to grow the business. And so, it stung a little at the time, but I also realized I was getting the business. It wasn’t mine. And this is not uncommon story that you see. And sometimes, you can do something about it, and I’ll mention some comments on how you can. And sometimes, it’s just the price of admission, if you will. And the other thing you could do is just not grow it, and then would you even want the business?
But I think the thing is from my own experience, if you’re going to jump into it, get some… The thing is it for me and probably for many others key employees or sons and daughters to their parents, I mean, their parents at some level walk on water or they look up to them and whatever they say, they’re just not used to debating. And that’s to be expected and respected for your parents but you’d need some…
My guidance would be is that you get some outside perspective on the situation to see if there’s an opportunity to either create like incentive-based, equity incentive bonus program or something in which case you can get that upside, maybe in a payout that you can use to buy the business, or that it’s called sweat equity that you would get in the business that there’s no cash-out component to it unless the whole business was sold, but it gives you a little bit of ownership over time based on certain measures if you hit those targets. And if you’d don’t, you don’t get that, but that would be expected. And then when it’s time to transfer the business, you buy it for what it was worth when you started.
So there’s things to put in there. And oftentimes, what happens is when you start thinking about that, maybe it’s in your twenties, maybe it’s in your thirties, maybe it’s in your forties, you’re not necessarily in a position of negotiation per se, but you can be without making it something that ruins the haul. This is what I’ll continue to say.
Rob Heppell:
Sure.
Jake Johnson:
And so I think it’s about sweat equity positions, having those discussions early. And it’s why I talk about succession planning being something that is never too early to start. And if you’re not working on it now, work on it now and review it every year as it takes time.
Rob Heppell:
And then would they… As an example, say, if we’re looking at a five-year period, it would be then good to draw a line in the sand, have an evaluation now. And then if there’s improvements on that, as you said, that then could become either sweat equity and at least that, in our example, that fourth generation, at least we’ll be getting some benefit if they were as good as they thought they were and have grown the business and have made it more valuable. So at least they’re not having to then pay for all the value that they brought to it.
Jake Johnson:
Absolutely. I think knowing that it’s kind of the golden rule, they who owned the gold rules. So you’ve got the owner, and they’re the ultimate decider, your own writer, whatever. And so the fact is if we were our… I always like put myself in… So if I put myself in my father’s position, I know he’d want to be empathetic and understanding and offer me that upside if I can grow it, but he’d like to participate in that as well because it’s his business unless I could completely prove it. But I think he’d still enjoy because he’s the one that owns the gold, if you will, that he could have some of that upside.
So I think as long as both sides are fair and reasonable and that sometimes really weighs on more, sometimes, on the buyer side, the kids understanding that, okay, the grass seems greener to me on the other side, but all things being said, burden in the hand. I’ve got this business here. It’s got my name on it. One day, I’ll be the owner. We can work something out. I know Mom and Dad will get a little upside but so do I. And we’ll do a sweat equity thing. And then, so when it’s time for me to buy it, I can show the bank that I already have some ownership equity, which has value that that’s going to be beneficial and definitely taken into consideration by the bank.
And it’s going to make your debt less because of the… One of the big issues is taking a successful funeral business that’s operating on a smaller… Most are operating on smaller debt loads and new acquisition debt loads. And then making them operate on a new acquisition debt load. I mean, it’s a lot. And if it’s not done correctly, you can take a perfectly healthy funeral business and ruin it. So you have to be real careful.
Rob Heppell:
For sure. Now, Jake, one thing over the last year or so when we’ve been chatting on a regular basis that you had mentioned to me, and I hadn’t heard this before, but maybe explain with the situation regarding the real estate, and how that might look in the future since real estate continues to grow, especially in some places where it makes it almost impossible for someone to buy the entire business with the real estate because the real estate’s worth more than the operating business.
Jake Johnson:
Yes. I think what you’re going to see. And some states have been experienced this for years and some are just maybe starting to see this. But you have somewhere… Let’s say we use that normal process of where the real estate’s included and we value the business at 3 million, but the real estate’s worth 3 million or even the real estate’s worth two and a half. And now, what are we doing? And the question is what are the options? Can the business only be transferred to another entity plus buy? Would we even want that? And then can the real… What is the fair value of that real estate? So I think the first thing, because the decisions made off of it are permanent and very disruptive is, do we really have a good feel on exactly what that real estate’s worth? Exactly. And let’s not be bullish, let’s be fair because it can really change the dynamics of how a succession plan occurs or if one occurs at all.
And so the real estate, yes, it’s normally included in the transaction in these valuations, but as they get higher, then it can be a challenge. So I think as the real estate values continue to increase, you are either going to see businesses that might find more value in buying the business and preneeds only and letting the real estate just get sold as something else, or you might see more leases of buildings that you haven’t seen in the past. I think it will be a slow progress because it’s the real estate being included is a funding source for buying a business that is a large amount of goodwill, large amount associated with a person’s name on the sign. With that name on that sign still staying, there’s so much at stake and the multiple so high that not having that real estate to go to or if you’re going to lease it from that owner that they kicked you out and started running it again.
The good news about funeral businesses is that as a person in their sixties and seventies, even eighties, you can be very relevant in a funeral business. Your peers are turning out to be the immediate customers and a lot of people. And it’s all about the personal touch. And that’s a great part of funeral business that’s just fantastic, really is. I mean, you get to enjoy a profession for many years. That’s also the bad part of it because we could go into modernization of funeral businesses and technology and what have you and the reluctance at times for that based on what I’m saying. But I think the other part is that if you’re selling the business to a new buyer as opposed to like a restaurant where you put a two-year non-competer, one year, and what are you worrying about after that? I mean, they’ve moved on. They’re not even in the business, or they open up another restaurant that’s not even the same concept. It could even be next door to you. It wouldn’t matter.
In the funeral business, you can go through a 10-year non-compete. And if you’re still willing to do it, you can go out there with your name and cause an impact on that funeral business. So having the real estate, having the name, having the people involved, you really want all of it if you can, especially if you’re going to pay a lot. And that’s only way somebody’s going to sell. So it just kind of comes with it typically. But when that real estate gets close, then you got to start changing and getting creative in how that deal structure’s going to work.
Rob Heppell:
Sounds great. Now one thing that I remember, we’ve talked about the time that I met your dad there in San Francisco at Ron Hast’s event and to helped him out with some technical issues. Jake, this still sits with me. He was explaining about the valuation of funeral homes at that time and how you’ve been working on it. And he said, “Well, my son, Jake, we’ve got this list of criteria, this checklist. And there’s just like a little tick, a little tick up for this, a little tick down for this to really dial in that to get to the multiple that’s most beneficial and most valuable.” Do you want to explain a little bit about your valuation process, and how that works instead of just a very basic EBITDA times multiple equals the value, and how Johnson Consulting does it differently?
Jake Johnson:
Absolutely. So certainly, the financial analysis is very in-depth. We use benchmarks. We use our experience in understanding just what that, if you will, marketing EBITDA could look like to maximize value. I say this with a smile on my face. Buyers will argue if they think it’s too high, but they never argue with me if I’ve undervalued the firm. So we’re always making sure that we’ve maximized what that is and painted the story on just what the opportunities are, and what will appeal to somebody to make them see this as a strategic acquisition for them. That’s what really drives value. And so painting that story, of course, the process and confidentiality and nature of it.
But the thing that we learned over time is certainly somebody would ask a multiple and I’d say, “Well, it’s all the variables of EBITDA and three 500 call firms that would call me. All of them have different values based on the trend of the calls.” So we came up with what we call the value matrix for Johnson Consulting. And so our analyst will use that as a piece of their review and figure out where in this multiple range that we’re seeing would this firm possibly lie and what or lay, if you will.
And so these are non-financial components like brand awareness and market. What is the age of your staff? Are you going to retire, and so is the rest of your staff? That’s not going to really cause a lot of high value in your firm as opposed to great management taking over. And the business was operating well without you. That’s another parameter. The path of progress of your real estate. Are you in a good path for the next five to 10 years, or do you need to be moving the functionality of the building? Are you busting at the seams of services, or is it really not set up well and inviting to the families that come in, and that’s going to be a problem. The mix of the business cremation versus burial at need. And that can go both ways from a value standpoint, depending on the strategic buyer.
So there’s all these outside variables that are not… They impact that all of them are kind of pushing and pulling on the EBITDA as an environment, if you will, but they’re not in the numbers per se. So it’s things that when we give those scores, we come up with a more finite way of determining what is going to be the success to get the higher range of the multiples for this business. And I have a list of what all of those value matrix questions and bullet points are. And I use that in presentations as well.
Rob Heppell:
Great. And we’ll make sure we make that available. One of the things that I’m excited about for 2022 is that you and I are going to be working on how does someone’s online presence adds to that value as well. So their website and all the things that they’ve done…
Jake Johnson:
Absolutely.
Rob Heppell:
… that are on the internet, especially for cremation arrangement websites since that’s its own little machine that generates revenue. Obviously, the logistics need to be fulfilled but for that to be working and how that’ll incorporate into the larger picture of the valuation of the company.
Jake Johnson:
Totally agree. And there really is a correlation here. It’s interesting.
Rob Heppell:
So, Jake, as we wrap up, any kind of final thoughts or suggestions of people who are thinking about this? What are their some of their things to maybe get together, just so that they’re prepared right before they give you and the team a call? What should they do in their due diligence before the due diligence part of getting prepared to make the initial step?
Jake Johnson:
Right. I think the immediate response is that if they’re thinking about doing something next three to five years, now maybe the time just based on what the multiples are like. So that’d be my first comment. But in preparing, it’s… Think about if you put yourself on an island, how would your operation run? Because that’s what you’re considering doing if you’re going to sell as an owner unless you were planning going forward, which is also very acceptable as well, by the way. So, do you want to continue forward or not? If you’re not continuing forward and want to retire and slow down, who’s going to man the helm of the ship, if you will, if you’re not around. And if there isn’t anybody, that could be a problem from a value standpoint.
So how does your staffing look, payroll? Who’s running things when you’re not there? How well are they doing? That payroll succession, if you will. And then above everything else, certainly, how is your financials being handled? Are they timely? Are they organized? Are they easy to follow? Are they consistent from year to year? And then your case count. The case count trend’s huge because if we’re looking at a solid case count trend or upwards, this is going to spell well for a nice value of the firm.
So I think those are the key things to focus on, but certainly, so that you know when the time is right, people should be doing a strategic plan on an annual basis. They’re easy to do. We do them for our clients. That just a great way to make that pull that trigger exactly when you want to pull it instead of knee jerk or what have you. Because the problem that arises that has always shielded or just blanketed by the action at hand and that being selling is just what things have been going on at the firm that is causing this value, and what things could they have been done, that could have been done at that firm that would’ve caused a greater value. And certainly, what was causing the value to be less now. And nobody ever looks at it that way. They just say, “Well, that’s the value of… Let’s go to mark.” So, yep.
Rob Heppell:
Well, hey, Jake, those are great things to consider. And again, I thought this was just a really… We have our little schedule that we’re going through the different topics we want to cover, but we jumped this one up to the top of the list so that we share this very timely information.
Jake Johnson:
Yep.
Rob Heppell:
Great. Well, I’d like to thank you for spending your time with us today. Our goal is to share our experiences and our insights and the hope that you will be able to, as funeral professionals, serve more client families and provide them with more meaningful services. Make sure you check back soon for another episode of the Funeral X podcast. Until the next episode, this has been Jake Johnson and Rob Heppell.
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