The funeral home industry is unique in many ways. Perhaps one of its most distinctive attributes is that it is mainly composed of independently owned businesses – nearly 87 percent of funeral homes are family or privately owned. And many of these owner operators have growth and/or succession planning on their agenda.
Studies reveal, over the next five years, a trend toward consolidation of local and regional funeral homes because of employment and recruiting challenges, in addition to the high volume of generational transitions that are expected to occur. A recent National Funeral Directors Association survey found that 27% of owners planned to sell their business or retire within five years. This survey likely underestimates the reality of shifts taking place within the funeral industry. Many owner operators are evaluating options as the industry continues to evolve, including looking for opportunities to expand or acquire new locations, finding ways to reinvest in the business to better meet the needs of families, or succession planning and selling for retirement.
When planning for the future, funeral home owners and operators have a variety of financing options to consider. In addition to traditional bank financing and small business administration loans, alternative resources include a sale-leaseback. The sale-leaseback is commonly used across numerous industries, including the funeral industry, to allow for growth capital and/or liquidity. In fact, some estimates indicate that up to 6% of the funeral industry is currently operating on a lease.
This article examines relevant information about what, why, when, and how to use a sale-leaseback when seeking growth capital, succession planning, and other financing opportunities.
Sale-leasebacks are commonly used in many industries where owning real estate is not required in order to maintain 100% control of the business and operate freely. For example, banks, grocery stores, pharmacies (e.g., Walgreens), and many other big box retail establishments do not own the land, but instead enter into long-term leases. One notable profession that has embraced sale-leasebacks as a financial tool for growth and succession is veterinarians.
The concept is simple. For many companies, the real estate represents a significant cash value that could be redeployed to fund their core business operations and growth strategies. Through the “sale and leaseback” model (or sale-leaseback), a company sells its real estate to an investor for cash and simultaneously enters into a long-term lease with the new owner of the property. In doing so, the seller extracts 100% of the property’s value and converts an otherwise illiquid asset into working capital, while maintaining full operational control of the location. The “term” or length of the lease are generally long term (i.e., 10-20 years), with agreed upon extensions to ensure that the business can operate in perpetuity, commonly referred to as “forever leases.”
Benefits of a Sale-Leaseback
There are several benefits for funeral home owners to go the sale-leaseback route. For many owners, their real estate represents a significant cash value that could be redeployed to fund their core business operations and growth strategies. Through the sale-leaseback model, the owner can sell their real estate to an investor for cash and simultaneously enter into a long-term lease.
Here are several advantages of the sale-leaseback:
- Liquidity: Owners are able to access capital through the sale of the property. The proceeds can be used for any purpose, such as reinvesting in expansion to new locations, or the cash flow can be used for personal needs.
- Debt Elimination: A sale-leaseback improves a business’s debt-to-equity ratio and allows the owner to pay off existing debt. With high and rising interest rates, this can improve cash flow.
- Continuity: Owners maintain 100% control of the business operations.
- Less Documentation & Fewer Restrictions: Funeral home owners can extract 100 percent of equity from their real estate asset as compared with traditional mortgage financing, which often caps loans at 50-70% of the fair market value, along with personal guarantees and more onerous documentation.
- Increased Enterprise Value: A sale-leaseback transaction allows the owner to maximize the value of the real estate and the business.
What to Consider When Exploring a Sale-Leaseback
While the concept of a sale-leaseback is not new to the funeral home industry, there are limited investment firms that cater exclusively to the needs of funeral home owner operators. There are core consultants who can provide insight on how to sell or position to sell. Then there are firms on the buying side, with the primary function of finding locations to purchase. However, there are limited funding vehicles in which to actually conduct sale-leaseback programs.
When a funeral owner or group is considering a sale-leaseback, it is important to understand what a real estate investment firm is looking for in a property, along with what drives market pricing to maximize value.
According to funeral industry real estate investment company Big Sky Capital Partners, there are many different characteristics to consider when evaluating the real estate. These include the longevity of the business itself, clientele and families served, size and condition of the building, reputation and goodwill of the business, and more. Unlike many other industries, the funeral industry has a variety of variables and considerations that drive the market pricing. There is no magic formula or cookie-cutter approach to analyzing the property within the industry; this is truly a special circumstance.
Big Sky is an established real estate firm that is 100% focused on providing funeral home owners and operators with sale-leaseback as an option. As such, Big Sky deploys its capital exclusively within the funeral industry. In light of this mandate, there is a deep understanding of the traditions, customs, and operations of the industry, which allows for unique and personalized solutions tailored to each funeral home. Whether a funeral home owner is evaluating ways to partially monetize real estate, or they are interested in selling the real estate in tandem with their business, Big Sky could be a valuable resource.
Funeral home owners have a lot to consider when exploring growth and succession planning. For owners seeking a way to manage debt, expand into new locations, or create liquidity, a sale-leaseback could be a viable option worth exploring.