Q&A for M&A with Jake Johnson
A recent Q&A with Johnson Consulting’s President & CEO, Jake Johnson, appeared in the May, 2017 edition of Southern Funeral Director™
“Q” – It has been said that a funeral home is “more valuable yesterday than today.” Do you feel that a funeral home operation is less valuable each and passing year because of the rise in cremation and the decline in revenue?
Depends on the individual funeral home. Some more progressive funeral homes are taking advantage of the market and actually growing in revenues while at the same time streamlining their operations. Those firms are not losing value. Unfortunately that is the minority. The majority of funeral homes are feeling the rise in cremation as well as the decline in clients buying habits as they opt for lesser service and casket. These firms are definitely losing value year to year and the trend is not likely to stop. If the trend continues, and it will, it may be time to make some hard decisions.
“Q” – What is the realistic life span of a 70 call funeral home over the next 10+ years, as the cremation rate continues to rise and the traditional service continues to fall? Is there enough profitability for a 70 call firm to survive or will they need to merge or sell to other neighboring firms to have enough volume to survive?
As cremation continues to rise, it is the smaller funeral homes that will feel the impact the most just because they do not have the scale to adjust for this trend. This is especially true as most owners do not want to adjust their personal standard of living as profits continue to decline. The natural next step would be for smaller firms to merge to add some scale to their operation and keep labor at a reasonable level. Hard for some to do so but it does make sense.
“Q” – With bank regulations continuing to tighten down on lending guidelines, do you see private and regional consolidators reaching out to more venture capital partners to find flexible lending avenues?
Not sure. The regional consolidators we know are pretty solid and have banking relationships in place. The venture people will always be there but you have to give up a piece of the pie to use these guys and most are unwilling to do so. There are some venture folks out there currently that are being rather aggressive so we can wait and see how they progress.
“Q” – Have the larger public companies completely abandoned the “Main Street USA” businesses in favor of larger metropolitan cities where community relationships are less needed and higher prices are less notable than in small communities?
The larger consolidators certainly focus on the larger metropolitan cities but they will also look at independent firms that are in a geography where they currently have a presence. It appears that they are shying away from Main Street from a glance but I think there is still a market for many of these firms. However, they should not expect the same value multiples as the larger more metropolitan firms. As the years roll out, I believe the Main Street firms will provide a better opportunity for the regional consolidators to expand.
“Q” – How important, in your opinion, is it for any funeral business to have an active and proactive pre need program? What does that mean for future market share and revenue?
At this point in time in our industry, you need a solid pre need program to survive in the future. You can protect and expand your market by doing so and many times the at-need portion of your business will grow because of the pre-need activity taking place. It really needs to be an aggressive program if at all possible. Just writing up walk-ins you have served in the past is not the answer.
“Q” – With active firms trying to garner more market share, tell the readers how “The Johnson Consulting “Performance Tracker & Survey Program” can enhance your revenue and increase your market penetration in their perspective communities?
I encourage everybody to read our free analysis done on our survey and sales results. It is a must read to understand what the customer is saying and how you may want to consider marketing in the future. You can shoot me an email at jjohnson@johnsonconsulting.com and I will send the article. That said, the Performance Tracker is doing quite a few things. It is analyzing sales and averages by service type, arranger, location, company (and region if desired). I have a presentation I do showing the impacts on value when you compare one arranger’s average to the next. It certainly stresses the importance of training and being sure the staff and the owner are aligned in the importance of presentations to the family. The reports that result from the data are easy to follow and automated to quick review. The survey that is being performed is tracking the level of satisfaction for each service and can once again being broken down by service type, arranger, location, company (and region if desired). The survey is providing results on how the customer found you along with how well they would promote and their overall level of satisfaction. There are quite a few questions actually which are meant to draw out areas we can improve as operators. With the amount of data that we push through this system, it is very easy to identify whether you are performing at a high level or just average. We have some very high performing funeral homes that I use as benchmarks for my own funeral homes I own. We set the bar high for customer service and have hard data that proves that it is possible. You would not be able to quantify this type of goal without such a program.
“Q” – In a recent survey, the “Top 3” areas of focus that funeral directors chose were:
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Add new personalization options for funeral services;
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Incorporate more technology into memorial services;
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Enhance more technology into memorial services…
Can you give us 3 additional areas of focus and expound a little on each one?
The biggest one I can think of is to embrace social media. There are customers out there who search the web and other social media locations that will come to your funeral home if your web sites and your messaging is effective. Load up your past clients and reach out to them to assure they will return to your funeral home. Reach out to others in your area to entice them to you your firm. You can do this through mailing lists, etc. Then ask a questions, are you out in your community enough to sustain and increase your business. Many did so in the past but over the years have backed off a bit. May be a good time to re-energize and put yourself and staff back in front of your market.
“Q” – Have the multiples of cash flow (EBITDA) remained steady or have they declined due to buyers concern about shrinking margins due to rise in cremation? How much more of a multiple will the larger consolidators pay compared to the private or smaller regional consolidators?
Basically multiples have remained fairly constant except in the cases where large buyers are competing against each other. It is also fairly clear that a smaller firm in a remote area usually will (not always) obtain a smaller multiple for their business. To your last question, the multiples from regional consolidators does not differ that much from the larger consolidators except in cases where the larger consolidator really wants the firm. In those cases it can be difficult for the regional guys to compete.
“Q” – What advice can you give the independent funeral home owner to help him increase his profitability as well as increase the value for his business, so if and when the time comes for a sale, he or she can maximize top dollar?
Make sure you take a real look at the trend of the business. If calls are declining and/or the mix is declining, it has a dramatic effect on the business. That being said there are several things you can do to maximize the sale. If you do not have a successful pre need program, start one. It can help with the trend issue and better prepare for future business. Do not be afraid to raise prices as long as you are still in a comfortable range in your market. The biggest cost in most firms is labor. Take a good hard look at all of your personnel. If there is a way to downsize a bit yet maintain the quality of service you give it is time to do so. The rest is just common sense items. The number of cars used in the business, making sure your advertising and promotion is effective, making sure you are collecting your money up front, etc. etc. The key is to not wait too long to sell your business. Far too many funeral directors wait until their businesses are close to being distressed. In these cases, it can become very difficult to find qualified buyers.