Benefits of Partnering with a Larger Firm

By: Todd Reich, Director of Client Relations NewBridge Group
Sunday, June 11, 2023

Do you remember the Smucker’s-sponsored happy birthday wishes to Americans turning 100 years old? While still a milestone for any community member, the frequency with which we see congratulatory Facebook posts and newspaper ads for centenarians has undoubtedly increased. New studies support that Americans are living longer: according to the World Economic Forum (WEF), today’s 20-year-olds can expect to live to 100, and 10-year-olds can expect to live to 103.

So what does living longer mean? Though Americans could work a few years longer, the reality is that longer lifespans mean many more years in retirement, putting pressure on business owners to have a lucrative succession plan.

NewBridge recognizes multiple options for transitioning the ownership of your funeral home. These include:

Passing it down to the next generation
• Selling to one of your employees or a local competitor
• Selling to a larger, proven funeral home operator
• The first two options have historically been the preference of most funeral home owners. However, we are seeing a shift away from this for several reasons.
• Benefits of partnering with a larger company include:
• Diversify Your Monetary Assets: Most private, independent funeral home owners have the majority of their net worth tied up in the business. Selling to a larger company will allow you to “take some risk off the table.” Creating a liquidity event through a
sale will enable you to diversify your family assets into a much safer and more liquid mix of securities, including stock holdings, bonds, cash, real estate, and alternative assets or other investment opportunities.
• Ability to Take Your Business to the Next Level: Even if you are a relatively young owner, partnering with a buyer who has deep pockets can allow you to free up working capital to expand and improve your current locations. Additionally, most larger companies have resources and connections to help find qualified staff to help support the business even further.
• Flexibility: Partnering allows selling owners to focus on “working on the business” vs. “working in the business,” eliminating many common ownership headaches, such as payroll and human resources. Many of our buyers’ long-term goals are to provide their partners more freedom and a work-life balance. We constantly hear that one of the most valuable benefits of working with a larger company is that it allows for fewer nights and weekends and more opportunities to visit kids and grandkids who live out of the area.
• Financial Peace: Besides diversifying your assets, the industry standard is to have a component of the purchase price consideration paid over several years. Knowing you will get paid in the future regardless of your health or business performance
brings personal peace. This also helps with the tax burden. Finally, the peace of mind that larger companies afford is a significant benefit over the risk of “holding paper” from an individual buyer.
• Freedom for Next Generations: One of the biggest concerns we hear from sellers about selling to the next generation is that they don’t want their children to have the same stresses from the business they have dealt with over the years. Securing their
financial future while allowing them to pursue their passion without a huge debt burden has been very rewarding for many sellers.

Update on the M&A and Lending Markets:
2023 merger & acquisition activity has slowed due to higher interest rates - rates that have increased the cost of capital for buyers and increased seller’s costs due to inflation. This results in lower profit margins. However, M&A has not come to a halt. We are seeing more baby boomer owners shift into retirement age, resulting in more considering a sale. If you have a quality
funeral home, we believe now could be an ideal time to consider a sale because fewer sellers are on the market. It’s easier to stand out in a void than a crowd, and many private equity-backed buyers have money they need to put to work.

• As of February 16, 2023, Raymond James & Associates is maintaining their “outperform” rating on shares of SCI (NYSE: SCI), stating, “we continue to like SCI long-term as a stable compounder.”
• However, they are modeling a 4.0% decline in funeral volumes for 2023 and a 1% growth in 2024. One way to combat lower volumes is to grow through acquisitions, so we predict SCI to remain a proactive buyer in 2023.
• Carriage Services (NYSE: CSV) EVP Steven Metzger stated on February 2, 2023, that they are focused on three key areas: paying down debt, focusing on integrating recent acquisitions, and focusing on organic growth. As a result, we do not foresee them being a relatively active buyer in 2023.
• Park Lawn Corporation (TSX: PLC) continues to be an active buyer with whom NewBridge has a strong relationship. Parklawn invested $135MM, $73MM, and $126MM in 2019-2021, respectively into acquisitions, and anticipated investing $75-$125MM in 2022.

While technically a Canadian company, ParkLawn has its U.S. headquarters in Houston and switched its reporting currency from CAD to USD on January 1, 2022, to better reflect its majority presence in the U.S. In their most recent earnings call, Parklawn CFO Dan Millett states, “We have an estimated $90MM balance on our credit facility which is readily available… we believe the best use of this capital to reach our 2026 goals is through acquisitions.”

According to GF Data, which tracks U.S. Middle Market Private Equity M&A transactions, “quality deals continue to be completed at good multiples with 68% of the 2022 deals fitting GF Data’s above-average financials standard compared to 54% of the deals in 2020.” NewBridge also sees more demand for higher- quality funeral homes (ones with above-average consumer-perceived service, reflected in online reviews and financial results). These funeral homes trade at higher multiples.

Lending Environment
As a result of the global pandemic and recessionary economic headwinds, U.S. Federal interest rates have risen. The current Effective Federal Funds Rate is 4.83%. Minutes from the Federal Open Market Committee’s March 23rd, 2023 meeting stated that “some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently
restrictive to return inflation to 2 percent over time.”

Despite these mild headwinds, NewBridge is confident that quality transactions will continue to close in 2023. If you are interested in getting out ahead of the curve or just interested in a casual conversation as to what life might look like by partnering with a larger group, feel free to call or email me any time:
 

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