Financing

It is no secret that the credit markets are a mess right now and lending is difficult to obtain. The days of 100% bank financing are over, so buyers must have the ability to make a significant down payment, have good credit, and industry experience.

Lenders use a Debt Service Coverage Ratio (DSCR). Basically, this is a measure of how much money is available to make the debt payments after all other expenses have been paid. As an example, if at the end of the month there is $5000 available to make payments, but based on the purchase price the payment is $7000 the lender will obviously decline the loan. If, on the other hand there is $7000 and the payment is $5000 for a DSCR of 1.4, the lender will probably approve the loan.(Assuming all other lender requirements are met).

Further, since a funeral homes value is typically based on cash-flow, not real estate, the purchase price is often greater than the value of the real estate alone. This limits a buyer's options for financing. Banks that provide SBA loans, can and will, lend on the "Business Value", if it falls within their lending guidelines allowing some deals to get done. Assuming the buyer has good credit, no bankruptcies in their past, and can put down 10-20% of the purchase price. However, the current SBA loan limits under the 7(a) program come to $5 million. What if your funeral home is worth more than that?

There are specialty lenders that will lend in excess of $5 million. Again, the borrower must have good credit, significant industry experience, the ability to make a sizeable down-payment and the purchase price has to fall within their lending guidelines.

In addition we are seeing lenders demanding the seller carry back some of the purchase price as a non-compete agreement. This makes sense on many levels. First, the funeral business is a relationship based business. Families come to a funeral home based on reputation and prior service. If a seller decides after a short time that they miss the business and they open a new place there is a very high probability that the families will “follow” them to the new location. Second, a non-compete agreement provide the seller with a financial incentive to help the buyer succeed by assisting in the transition of relationships in the community. Third, the non-compete agreement provides piece of mind to the buyer (and lender) that if the seller becomes unhappy for any reason in the future, they will not bad-mouth the buyer. I think all of us in the industry have seen this happen, whether justified or not, and it can damage the business.

In summary, even though the lending environment is difficult right now, there is money available if the deal makes sense. We have existing relationships with both bank and specialty lenders. We have the industry experience that lenders require and the ability to make the required down-payment to get the deal done. Our principals also have a significant net-worth that we will be happy to prove, once we have executed non-disclosure agreements and a letter of intent. You can even talk to our lenders if you want to verify that we can get the money to close the deal.