Selling Your Funeral Home to Insiders? The Pros & Cons, Explained
Posted January 6, 2021
6 min read
Roughly half of small business owners would prefer to sell their business to family or staff.
But that’s not always a simple process in the funeral profession (or in any industry for that matter).
We interviewed Alan Creedy—the go-to funeral home consultant for exit planning, valuations, and business advisory services—about the practical and emotional complexities of selling to insiders. With more than 35 years in the profession, Alan has a wealth of experience in helping clients find the best fit and the best price for their funeral home. Additionally, he equips owners to transition the business on their terms so that they can begin to write a new story for themselves and their family.
One thing Alan explains is that selling to insiders like family or staff can often seem more challenging than a straight third-party sale. “In reality, both have nuances that are equally stressful. It is important you know there are no challenges that can’t be overcome with careful planning and preparation.”
Let’s first look at the general types of business transfers and then the pros and cons of an insider sale.
Every Entrepreneur Exits
Alan points out that every entrepreneur is going to exit. “When and how are the only two options. How to finish well is the question,” he says.
Generally, there are two types of business transfers (not counting liquidation). There are insider transfers which can be to children or to key employees, and there can be third party transfers. Third party transfers would include those not currently employed by you or other business entities such as another funeral home, a private consolidator, or a public company, explains Alan.
“Each comes with its own pros and cons, twists and turns,” adds Alan.
The Benefits of an Insider Transfer
There are numerous benefits to a transition that involves children or key employees. These include:
It’s a known successor. One of the major benefits is simply that it’s a known successor. Many business owners have greater peace of mind knowing the community will continue to be served as they would want. They can also have greater certainty that the mission and values of the company will be carried forward.
It can align with your legacy goals. “As with an individual life, owning a business is linked to a powerful story—a story about you, your family, your customers and, of course, your staff. These are stories of hard work, sacrifice, risks, fortune and misfortune,” says Alan. In other words, it’s also about legacy. An insider transfer helps ensure the legacy an owner has built over a lifetime, in many cases, is preserved and carried on.
It can mean a more hands-on transition process. Closely related to this is how many business owners enjoy the fact they will be able to work with children and/or key employees during and after the sale. So not only can that next generation enjoy the benefits of ownership, but owners can be more “hands on” in this process, when desired, which is often the case. Put simply, the retiring owner can be involved on his/her own terms, which is seen as a benefit to most.
It provides greater flexibility in structure and planning. Yet another key benefit is greater flexibility and control of the transfer process. “There are also some tax mechanisms available to help minimize the tax bite. Many sellers are concerned about losing a steady stream of income for the future, and insider transactions can employ some options that will resolve that issue,” says Alan.
It gives the owner more control over timing. “If you are not yet ready to leave the business, a transfer can be structured to take place over 5 to 10 years. Delayed departures give you time to slow down and prepare yourself for ‘life after the sale,’” says Alan. It also gives you time to properly develop your successors as desired.
The Cons of Insider Transfers
From greater flexibility, to a more appealing retirement structure, to potential tax savings—there are many benefits that can happen with careful planning and preparation with an insider transfer.
But there tends to be several common challenges that Alan also sees when transitioning the business to family members/key employees. Those can include:
A lack of financial security. Alan says more often than not, these potential successors do not have the money required for the deal to happen. “As a consequence, any structure will require a combination of bank and seller financing,” he says, although that’s not always a disadvantage, either.
Alan points out two things to remember as a result. First, you should not give up control until your payment is fully secure. Second, it may be to your financial and tax advantage to help finance some of the deal, but probably not all of it.
The length of time it will take for the transition to happen. Due to the work it will take for the transition to happen (structure-wise and financially), don’t expect this type of transition to happen quickly. That might not be a downside for some, but for others, this can be disappointing to learn. Realistically, you will probably not be paid out in less than several years. Additionally, taking advantage of tax minimization strategies takes a great deal of planning and time to coordinate and setup.
The potential for personal financial stress. There can be risk involved, and for some, the risks can be intense, especially due to the fact this can involve family members.
The potential for family dysfunction. Family dynamics can be complex and require maturity, clearly designated roles, responsibilities, authority, and mutual respect, explains Alan. A lot of challenging conversations are sure to come with such a transition.
In short, if children don’t get along at home, it’s unlikely they’ll get along at work, explains Alan. This kind of a transition can worsen family dynamics if they are already tension-filled or problematic.
Potential lack of leadership from the successor. If you have uncertainty or doubt regarding the potential successor, ask yourself if others will follow their lead. Do you believe they are capable—or can grow into a place where they will be capable? Alan also says it’s important to ask if you really want them to stay in the business. It may also require them to develop a new, additional set of skills in order to be successful in the business.
It’s Never too Soon to Start Planning
To find the best fit and to transfer the business on the best terms possible, start planning as early as possible and start having candid conversations early, too. It’s nearly impossible to start planning or talking about a transition too early. After all, your exit is going to happen, it’s just a matter of time.
Come back and read our next article with Alan that features what you need to consider as you plan and take the “next steps” for an insider transfer.
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